stocks to buy: buy the dips? Gurmeet Chadha took over shares in these 4 sectors

“Creating a cart in auto. I have a few OEMs like M&M and . Also look at some of the auto ancillary players like Minda where the kit value is steadily increasing. Also some of the ethanol related parts can be done through Praj. A basket approach is preferable to selective stock picking,” says Gurmeet ChadhaCo-founder & CEO, Full Circle Consultants.


Does the market make you smile?
Yes, we should celebrate volatility. Unfortunately, that’s not the case, but the volatility should be celebrated by seasoned investors.

If crude was at $120, no one would have smiled. Did you use this decline? Have you reduced your cash levels substantially?
We deployed liquidity sequentially on each decline. Luckily for us, because we had launched the PMS strategy about 50 days ago, we had good inflows and we put it to use. We are currently still at about 35% odd cash levels. We used the dips to buy and we bought private sector banks. They were available at a very reasonable price. The risk reward was quite favorable in many large private sector banks and a few PSUs, including

.

We also bought selectively in IT. I am confident that this is a multi-year trend in IT and programs will be reprioritized and there will be no slowdown in IT spending. We also looked at some automotive games as a basket including OEMs and accessories and we were buying energy names playing the broader energy basket.

How do you read this foray into electric vehicles for M&M? Where is your preference? Are you very picky about the automotive space due to the kind of troubled times we’ve had lately?
Yes, you’re right. It’s quite constructive as far as M&M is concerned but we have to be careful what he has been running, especially in the last three-four months. Over the past year, the return is almost 50% with the stock now at Rs 1,100 plus levels.

Back to recommendation stories

This, I think, would be the pattern. Previously it was Tata Motors, then M&M created an EV subsidiary. This business requires accelerated investments over a long period. I’m not comparing it to Tesla but how the model is posed and this current model of leveraging the whole M&M ecosystem, their asset pace, their sourcing ecosystem, their dealer system funding, everything is a decent model because it would take a lot of synergies there. Also, M&M in fiscal 2015, had an SUV market share of almost 35-36% which they lost and it fell to around 14-15% a year ago. I think they are right. According to the SIAM report, the top selling segment is now clearly SUV and UV and by 2027 they expect it to be over 55% and M&M is clearly a leader there.

They did the product ranking very well. It starts at around Rs 12-13 lakh, goes up to Rs 25 lakh. In the D-segment they have Scorpion, and then there’s this rugged segment, where they have Thar, and then the whole XUV series. Even today, in the second half of the year, the agricultural equipment business should be doing well, but keep in mind that the stock has soared.

So, create a shopping cart. I have a few OEMs like M&M and Tata Motors. Also look at some of the automotive auxiliary players where the kit value is steadily increasing. Minda, for example, only had a kit value of Rs 3,000-4,000 per car, which only includes very selective components like switches, and they now aspire to a kit value of around Rs 35,000 at Rs 40,000 comprising a host of components including EV components.

Also, some of the related games like ethanol games are there because there is clear visibility of the 20% ethanol blend creating a demand of at least Rs 20,000 to 25,000 crore from new ethanol plants. both first and second generation ethanol. So something like Praj can be played via a basket approach rather than picking one selectively.

What about some of the QSRs and discretionary space stocks like , and ?
We are quite constructive on QSR.

has its share of management outings, including the recent arrival of Mr. Kohli and I think the title releasing SSG numbers took the streets by surprise. But we see some stability coming with the new CEO. I call it a consumer tech company in the food space. If you see the way they pivoted the business around the delivery model during Covid, reducing their reliance on catering is commendable.

Over 50% of orders still arrive on their own app. They use some of the best advanced data analytics and so reliance on aggregators is less and they come up with new store formats so usually the best on SSG. We continue to love Devyani International with continued growth as well as store sales in both KFC, Pizza Hut and Costa.

We also like a part of home consumption that resembles a Tata consumer, where premiumisation plays out across food products. It is not limited only to tea, coffee. We are seeing that in pulses, spices, dried fruits and that premiumization is clearly playing out and hopefully Starbucks also had positive EBITDA last quarter and should start contributing to the bottom line.

So we like a combination of a few names, but we just have to be a little careful with valuations because in a market like this, when the 10-year government bond is at 7.5%, the rate of discount increases and this is the time when you have to be a little careful about the risk-reward thing. So unless you have some good deals and hold them, that’s fine, but in terms of new additions, there are better opportunities.

Meanwhile, in the banking space, what are you writing regarding the Q1 FY23 numbers?
You have to be selective. Large private sector banks offer better rewards for risk. From FY15-16,

the retail loan portfolio has grown from 34% to almost 55-56%. They have made the book granular and as retail lending increases so does fee revenue.

A bank generally has three incomes which are – net interest income, commission income and cash income. ICICI is doing very well. Even last year, their credit growth was 17-18%, with the retail portfolio doing 20%. Their cost of funds is the lowest in the industry at 3.7%. It is almost comparable or better than

. The asset quality has improved which is again a function of the granularity of the book and they leveraged the technology very well.

I was seeing the percentage of digitally sourced PL cards. Their numbers are pretty good. I am also very impressed with the InstaBIZ app. This is a bank that will continue to do well. It’s a great turnaround story that we’ve seen over the last three, four years.

Even for SBI, the home loan book is Rs 5.5 lakh crore with a CASA mix of 44-45%. If you have a high CASA book, lower cost of funds, loans are largely tied to external referrals. In the case of ICICI Bank, 72% of loans are linked to repo and MCLR and external references, which means that loan prices are reset and the cost of funds does not increase. So we will see an expansion.

There may be advantageous purchases at the lower end at banks with NR ledgers. Following recent RBI standards relaxing some of the provisions around NRE deposits and interest rate caps, banks with strong NR books would also be in focus. But stick to the big names. We can also look at some of the other financiers like

for example or some of the names like .

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