Forget midcap momentum, bet on IT largecaps: Jani | Economic Times

Many of these midcaps are quoting at 15-20-25% higher valuations. It makes more sense to really be selective there because these are high beta names and might see a bit of a correction come through depending upon their performances, says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL. Last year both IT packs, especially the midcap IT names really powered ahead. A massive momentum was seen over and it was on account of the fact that we had seen very strong guidance. Almost everyone guided that FY22 is looking great with expected double digit growth. But is all of this already pencilled in, especially in IT midcaps?Yes. We have seen a massive outperformance across the midcap names in the last six months or so. The focus could shift back to the largecap names and we are already price action in TCS and some of the other largecap names like Infosys and HCL Tech. So though people would want to participate in the midcap names because of the momentum, in terms of valuations and in terms of risk adjusted returns, we think that HCL Tech and Infosys are better placed. Many of these midcaps are quoting at 15-20-25% higher valuations. It makes more sense to really be selective there because these are high beta names and might see a bit of a correction come through depending upon their performances. We continue to be very positive on the IT pack because of the deal wins and the kind of scenario that we are in but it makes more sense to be large cap focussed at this point of time. Does it make sense for anyone to buy Maruti now? Its peak margins are down because of high commodity prices. Production is lower because of chip shortage. The market is punishing the stock as if from tomorrow morning cars will not be sold!Two factors are playing out. One, the issues of rising raw material prices and the semiconductor shortage are hurting the production and overall growth for companies like Maruti and Tata Motors even globally. That is something that the market was not expecting and the semiconductor issue is taking a far longer time to get resolved. Managements also are not sounding confident. We are at the stage of the market where any disappointment won’t be tolerated because of the kind of run up that we have seen. From a structural growth point of view, Maruti offers far better visibility and even better margins compared to two-wheeler names where the numbers have not been that great and we are not very confident about the growth going into the next three or four quarters. So if one sees some correction and if one has a medium to long term outlook, Maruti is the best play in terms of auto along with some of the names like Mahindra & Mahindra and even Tata Motors. But with the incremental investment in electric vehicle capacity and the kind of products that they are planning to roll out, Tata Motor would also be a big beneficiary of that. We have a positive outlook on these names. But in this quarter, there have been downgrades and the semiconductor issue will have some impact on the near term performance. Why has pharma disappointed so much? Is this a value buy or a structural change that Lupin, Aurobindo Pharma or Dr Reddy’s are going through?It is true that the pharma index has been flat in the last three months whereas the Nifty has gone up by almost about 12% and there has been a disappointment for some of the companies. Lupin particularly has been a laggard for a long time. Apart from that, Aurobindo had pain points from the US business and the pricing pressure. There was also the issue of capital allocation related concerns for Aurobindo. I think a) the sector is witnessing some headwinds in terms of US business and margin pressure; and b) company specific issues for some names but within the sector, companies like Sun Pharma, Cipla, Solara, Gland Pharma have delivered good performances and they continue to remain quite resilient. The time has come for people to be far more selective about what they are getting into on the basis of their performance and the outlook going forward rather than getting into something which has been corrected but where there is not much clarity about the triggers for the earnings growth over the next two or three quarters.