Bullish on 4 banks; still avoiding OMCs and gas stocks: Hemang Jani

“When crude comes back to sub $100 or commodity prices retrace back to a certain level. I do not think you will be able to buy some of these franchises at these price points or valuations. Of course, nobody knows the bottom yet but these are the price points at which it would make a lot of sense to enter into these names,” says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL.

Yesterday, gas stocks made a solid comeback. Both IGL and MGL saw some breakout moves. Are you bullish on this pocket?
Yes, finally we saw some pullback in the market and what was interesting to see is that some of these beaten down names, particularly banks, some of the gas companies and even to some extent cement and auto names saw a bit of a pullback. Since the correction was so steep, particularly for metal users, automobile, oil marketing companies, gas companies and cement, at some point one may see some technical pullback or some sort of a value buying.

But when it comes to picking the pockets, we would be comfortable in some of the banks and IT names. We would still not venture out to buy some of the oil marketing companies or gas companies just because they have taken a price increase and we really need to see what sort of price increase is required to be taken and what sort of margin impact they may have to bear if that is not enough to cover the input cost increase.

It’s a bit tricky situation and that is why we would be more comfortable moving into some of the large private sector banks like ICICI Bank and HDFC Bank or technology names which have also corrected in the last two or three months.

This morning I can see a note from Motilal Oswal recommending buying into the weakness and HDFC Bank specifically is your top pick there. Is it a solo buy within a banking names, especially private banks or is it an add to the existing banking portfolio?
Basically our stance on the banking sector is positive and a large part of the weakness that we are seeing, let us say the Bank Nifty, would have dropped almost about 18% to 20% from the top and is driven more by the selling by FIIs because these are the liquid names and this would be the top holding for majority of the FIIs. In terms of the earnings or the macro situation, we do not think so far things have really turned worse.

We would definitely be comfortable buying in HDFC Bank where we think the bank has underperformed and the stock has corrected a lot. So for people who are looking out to to buy into dips, this could be a good name to look at. Apart from that, we continue to have a positive bias in even ICICI Bank and we think that it was one of the best performing banks in terms of last three to four quarterly numbers. So, HDFC Bank, may be an ICICI Bank and may be some of the smaller banks like AU Bank or Federal Bank would be on our buying list.

Bajaj Finance is down Rs 2,000 from its high that – about a 20% correction. It is a stock where the business has recovered very smartly from the Covid fall. Between HDFC Bank and Bajaj Finance, what should one buy if one cannot buy both the stocks?
We definitely think that both in terms of valuation comfort and in terms of stability and upside, HDFC Bank is better placed. In banking, one has two-three large names where people would really want to look at whether they want to buy HDFC Bank or ICICI Bank or even Axis Bank and State Bank of India.

But when it comes to NBFCs, people would probably not have too many options in terms of the very large names. That is where Bajaj Finance would score but from a retail investor perspective, who does not really bother whether it is a bank or NBFCs and wants to really buy because the market has corrected. We definitely think HDFC Bank presents a great opportunity because the stock has underperformed the Bank Nifty and because of what we have seen in the last three months, there is further correction. At this price point, one will rarely find some of these companies and it presents a great opportunity for retail investors.

Bajaj Finance is still trading at four-five times book. We know that there will be a pinch of high inflation and high commodity prices on demand. If demand slows down and if globally banking is coming under pressure, if because of slow demand and high inflation NPA could be a concern. Why should HDFC Bank or Bajaj Finance qualify as buys just because the stocks have fallen ?
It is because we feel that at the earnings level or in terms of the broader macro data points, things are not looking that bad. Look at the way HDFC Bank has expanded into the semi-urban, rural areas and the kind of market share that they are enjoying across the digital channels. Their asset quality is looking good and most importantly, the kind of growth that one is looking at in the retail side because after almost three to four years, we are seeing loan growth coming back. That is the backbone of the overall operating matrices for the financials.

So I think that across these parameters things are looking good and the stock has corrected a lot and when sentiment is bad and prices are down, that is where you will get better opportunities to enter. When crude comes back to sub $100 or commodity prices retrace back to a certain level. I do not think you will be able to buy some of these franchises at these price points or valuations. Of course, nobody knows the bottom yet but these are the price points at which it would make a lot of sense to enter into these names.

Auto stocks are down 20% to 30% from their recent highs. What is really happening in this pack? How could one approach it if at all?
Auto is one sector with multiple headwinds – be it commodity price inflation, be it the geopolitical crisis. Some ,companies which have exposure to the EU and other parts will also have some uncertainty and challenges. Most importantly, as we are bracing for a very significant price hike when it comes to petrol and diesel, there is going to be some impact because of that. So this is one sector which is grappling with multiple negative data points and we think that it is going to be the fourth to fifth downgrade that we have seen across the auto names.

So though we feel that the prices have corrected, but because of the uncertainty around multiple factors. we would stay away from it, particularly for the traders. So if you are an investor and if you find that Ashok Leyland has corrected 25-30%, maybe there is another 10% cut and it makes sense to buy, as an investor yes one could take that approach. But these are all cyclical names and active traders should really go with the trend. When one sees reversal in some of the names which are high beta in nature, that is the time to really try to enter into it rather than just buying because there is a certain amount of correction.