4 sectors to buy into in mkt correction: Pankaj Pandey | Economic Times

The Head Research, ICICIdirect.com says besides IT and pharma, banking and telecom are what one has to look at. Capital intensive sectors or commodity oriented sectors must be avoided. Where would you scout for opportunities to buy and wait it out because you do not know where this correction is headed?Our sense is that typically the defensive is the only pack where the earning disruption is the least, especially IT and pharma. We believe any kind of a correction should be used as an opportunity to buy in these sectors. Besides that, probably banking looks quite attractive, especially private banks because our sense is that the price correction is largely done. What is still not clear is whether we will see a 5% kind of restructuring or a 8% kind of restructuring. If we were to see a 5% kind of restructuring, the overall credit cost could be about 50 bps for the industry but for private banks, it will be a lot less which means that private banks, especially HDFC Bank and Kotak Bank should do a lot better. Besides telecom also has seen a decent amount of crack. Going forward, we would see a better pricing scenario and that is positive for a stock like Bharti. So IT and pharma besides and banking and telecom are what one has to look at. Capital intensive sectors or commodity oriented sectors must be avoided, especially from the investment perspective. Among IT names that have been standing out, HCL has been partially news driven followed by some of the midcaps as well. How would you stack IT names in terms of preference?In IT, the last quarter has been pretty good and you will see larger IT spends going forward but the only challenge is that the markets have priced in that particular aspect for most of the stocks. For example, in TCS, the multiples have gone up from nearly 21 times to 26 times. For something like HCL Tech and Wipro, it has gone up from 12 to 17 odd times. The quantification of the virtualisation of business and the higher IT spends is yet to come. But if we see the crack in any of these tier I and tier II names, those are the ones one has to look at because if the companies are able to deliver higher growth, then IT is here to stay or is expected to keep doing better. So whether it is TCS post correction or Infy post correction, all these stocks or tier I, tier II names can be looked at. The only challenge is that the markets have already priced in. In case we get a correction in the next few days, all your tier I and tier II names make a good case. At this point of time, all of them look fully valued given the fact that rerating on the PE multiple side has already happened. If somebody has to make a portfolio of only five stocks for the next three years, which are the two, three must-have stocks in that five- stock portfolio?Again it depends on the overall kind of opportunity but the defensives are going to witness the least amount of earnings disruption and this the bulk of the names have to come from IT and pharma. For example, in pharma, you have an entire gamut of opportunities which are looking attractive but what is something structural is say for example, the contract manufacturing side, where most of the companies are now trading at 10x of sales on a forward basis. Syngene is a classic example for a good CRAMS or CDMO play. Our view is that globally companies in this domain command a lot more higher multiples and this is where something like Syngene or Suven Pharma look attractive. In IT, the tier one names like CS and Infosys are looking good because of virtualisation of businesses while there has been some bit of a rerating but on any kind of a correction in IT is an opportunity to buy these stocks. Besides that in telecom, Bharti looks quite attractive given the correction it has already seen. Our sense is we will see a better pricing scenario going forward and these would be the four, five names which are likely to do well. Overall sectorally, there are a lot more names. One can talk about that but a lot depends on what customers are looking for or what investors are looking at. In case of Bharti, where is the concern? Is it over-ownership or the inability to increase price? One of the concerns for Bharti is that Jio is probably slightly ahead in terms of 5G infrastructure or the kind of spend that they can do, but our sense is that from a medium-term perspective, we would be more hopeful of recovery in pricing. This is largely because the kind of money which has been attracted in Jio, for that money to become remunerative, a price hike needs to happen and that will benefit Bharti also. Near term, we have seen a decent amount of crack but that is a decent opportunity to buy. It is still not clear what kind of impact Vodafone would have in this scenario and I think Bharti makes a good case and with the correction, the risk reward is quite favourable. Would you also say that Aurobindo Pharma is a preferred pick because most of the others seem to be well discovered stories?Dr Reddy’s had already run up and Cipla looks quite attractive to us, given the fact that it is a slightly more balanced portfolio compared to Aurobindo, which is largely US-based. Cipla is not making right moves in terms of moving out from tender businesses and they are beefing up the pipeline for the US business. That looks more attractive to us and we have a target price of Rs 900. But in pharma, the structural story is with the CRAMS player wherein Divi’s, Syngene, Suven Pharma and some bits of Laurus Lab are structurally more positive.