January 9, 2024 | Posted in News
Pramod Amthe says: “We have been very selective. The only IT stock which we are specifically putting in high conviction is Tech Mahindra which is the result of a management effort to turn around and normalize their profitability and bring back the sales growth post that in the next couple of quarters.” Pramod Amthe, Head Of Institutional Equity Research, InCred Capital, says that “in the case of IT, a substantial amount of BFSI-related work is moving towards in-sourcing and that remains a headwind for FY25 as cost-related issues continue to be a challenge for global banks that spend on the BFSI space. Hence still the confidence is still not coming through for IT because that specific segment forms a substantial part of the overall IT spend. Hence, we have been very selective. The only stock which we are specifically putting in high conviction is Tech Mahindra.”
You have made the changes in your high conviction ideas for January. It seems to be a lot more tilted towards largecap names versus midcap etc. What is the rationale behind that and what is the outlook on the markets right now?
Pramod Amthe: We have been constructing the markets. The runup in the last two and a half months has been pretty steep at around 15%. We expect some consolidation to happen in the coming weeks. Having said that, we look at 2024 with a positive inclination as the macro factors are continuing to play out positively.
Even though our full-year target has been achieved ahead of time at around 21,000, we expect the bull case to play out as the GDP growth upgrades are coming through, inflation is under control, oil price is again at a relatively comfortable position. I think we are still looking at around 5% upside from the current levels by March of this year.
Any specific sectors that you would like to look at or you find very, very attractive in the current market?
Pramod Amthe: We were more inclined towards largecaps which have relatively underperformed versus the mid and smallcaps that is where our relative comfort lies in. In terms of our high conviction, we are definitely adding in our high conviction list in the last two months. If you look at more on finance names, State Bank of India, relatively risk reward looks favourable to us. We have added Shriram Finance.
The recent change has been the smallcap for Som Distilleries.
I want to make it a bit more stock specific and correct me if I am wrong, but I do see that you have added Som Distilleries to your list while you have deleted BCL, which is a quasi-play on ethanol and sugar at this point of time. What makes you that bullish on Som Distilleries and what is the take on the entire Alcobev industry because today Sula Vineyards is also on fire clearly?
Pramod Amthe: In case of Som Distilleries, the stock has corrected and clearly we feel that the market is not fully factoring in its market share gain in the large beer state like Karnataka. And hence in that context, we clearly see that the risk reward is favourable to Som. Having said that, the other name which we have in high conviction is Global Spirits, which is a beneficiary of the recent revision in the ethanol prices.
As for BCL, we feel that post run-up, the raw material cost pressure because of inflation is relatively higher and hence the risk reward does not seem better. We exited BCL on high conviction and we introduced Som on a relative basis.
You have picked Cyient DLM out of the smallcaps. A lot of action is happening on that EMS side and we can see traction in Cyient DLM. What are your thoughts on this EMS industry?
Pramod Amthe: There have been a lot of IPOs and fundraising and action in the EMS space per se. Where we would like to look at it is we would, within that space, look at a high entry barrier business, which fits into Cyient DLM. That is where we are relatively comfortable in Cyient DLM as it has been bagging new orders internationally and has been able to execute some of the orders as we go forward, especially from the Israel conflict and that should give them a better exposure there. We are trying to play within the space.
In this space, after the Cyient DLM, we also like Kaynes, which again has made an entry into the high entry barrier semiconductor space and hence that gives us some more comfort. We would be looking at superior margins in high entry barrier businesses to support the high valuation which the sector enjoys as compared to the mass market assemblers.
One sector which is missing from your entire list of high conviction is actually real estate. Are you not having a FOMO feeling given the kind of run-up that we have seen last year? Even now, in a matter of this week itself, that index is up, 10-12%, or at least 6, 7%.
Pramod Amthe: We are structurally very positive on real estate or housing-related activity. We do not have coverage on the real estate names specifically, but the way we would like to play out is within the high conviction, we have KEI Industries, which gives us some comfort. Otherwise, we have recently upgraded Century in that space, which gives us proxy to both the new home sales and the renovation of the existing home sales which are happening. That is how we would like to position that versus the overall real estate developers.
In terms of earnings, people were not expecting too much from IT in Q3. The question is in FY25, will the double-digit revenue growth return because while the deal bookings have been strong, clients have been curbing their spends. Do you see that reversing anytime soon?
Pramod Amthe: You are right, the clients are closing some of the deals especially in November. Having said that, the larger space which is the BFSI-related work for IT is still a substantial amount is moving towards in-sourcing and that remains a headwind for FY25 as cost-related issues continue to be a challenge for global banks which spend on the BFSI space and hence still the confidence is not coming through for IT because that specific segment forms a substantial part of the overall IT spend.
Hence, we have been very selective. The only stock which we are specifically putting in high conviction is Tech Mahindra which is a management effort to turn around and normalize their profitability and bring back the sales growth post that in the next couple of quarters.