Also Read: 4 cap goods stocks that have lost favour with Quant
Also, the Q2 numbers show that the results have been polarised within a given sector between stocks, she says. She believes that for sometime more it will continue to be a stock pickers market.
She continues to remain bullish on stocks IT like Tech Mahindra . It has reported a compounded quarterly growth rate (CQGR) revenue 4.6 percent in dollar terms in the last six quarters, which is excellent. She is also positive on the metals space.
Manish Sonthalia, Motilal Oswal AMC, on the other hand believes the entire premise of the capital goods rally is hope and sentiment change. Markets are trying to read a change in the investment cycle post the incorporation of a new government and most people are by and large expecting that there will be a change of guard at the Center. He says the company would take a call on whether it wants to increase its exposure to the capital good space or not after December 8.
At the moment, the company is sticking to midcaps that are already a part of its portfolio. It is continuing to buy Eicher Motors even at current prices. One of our stocks which was lagging behind was Voltas , it has started moving up. He is basically betting on quality names, with unlevered balance sheets, good managements, growth visibility of at least 15-18 percent over the next two-three years.
Below is the verbatim transcript of Sanju Verma & Manish Sonthalia's views:
Capital good rally
Sanju Verma: The rally in capital goods has been overdone for instance, example: Voltas, which has had a brilliant rally. But I would be very wary of trying to accumulate the stock at current levels of Rs 111 because it is ridiculously expensive at around 11.5 times EV to EBITDA and a price to earnings of somewhere between 14-15 times.
September quarter numbers were excellent with net profit growth coming in at more than 40 percent year on year, but the point is some of these structural problems for the capital goods space will continue to remain. Voltas really got legs on the rally when there was an announcement a couple of weeks back that it had announced acquisition of overseas orders to the tune of Rs 1,000 crore from some of the Middle Easter markets. But what people fail to understand and realize is that the rally will sustain going forward only if the order book inflow translates into execution. Even today a large part of the international order book with respect to Voltas is low end low margins, back-ended and the execution cycle is very slow. So its obvious what is happening in the larger capital goods space - be it Larsen and Toubro ( L&T ), Bharat Heavy Electricals ( BHEL ) or Voltas.
It is one thing to acquire orders, have a good order inflow and it is another thing to execute them. Order book to sales for most capital goods companies has always been pretty healthy at anywhere between 2.5-3 times revenues. But the working capital cycle is still under tremendous strain; for instance look at BHEL , we have seen so many brokerage reports from competition saying this is a buy. Why would you want to buy a company like BHEL which has Rs 20,000 crore plus in terms of receivables and Rs 8,000 crore of debt on its books and the cash is increasingly deteriorating from Rs 6,000 crore a year back to less than Rs 4,000 crore now.
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