Shankar Sharma, Global Trading Strategist, First Global, says that this is not the time to be defensive and that the current environment is actually an opportunity for Indian investors to buy into quality stocks. He said that while the current environment was not good enough to take a huge amount of risk, it was as good a time as any to buy a good stock which has corrected 20%-30% without a major cut in the fundamentals.
Shankar Sharma identified his favourite stocks. He reiterated his earlier stock picks and said that autos were his number one bet was autos and that Bajaj Auto and Tata Motors were his favourite stocks. He pointed out that despite all the pessimism, auto sales have still been quite good. In spite of minus 5% IIP; the commercial vehicle sales in the month of October and November have been up 5% and 6%. Two wheeler sales should not have been up 17%-18% if situation was so bad, but the fact is that they are. He said he was quite optimistic about autos.
Shankar Sharma further explained that India was under penetrated market in autos and that the overall vehicle population in India, including two wheelers was 15 crore at the highest which is just a 10% penetration.
He said that out of this, two wheelers were about 80% which was only about one or two crore cars by way of population on the roads. That is like 1% or 2% car penetration in India and 12%-13% two wheeler penetration in India. He said that India was still a long away from even reaching standards of other third world countries. One should be looking at a 30 crore vehicle population a few years from now. One had only to take a bet on which companies would constitute most of this growth.
Shankar Sharma also explained why he preferred Tata Motors over Maruti. He pointed out that Maruti had its problems of labour issue as well as one of the bigger problems of having a high market share. Since Maruti had 50% market share, it was easy to lose that rather than gaining from that. He also explained that while Maruti was a sound company and would not go down 30% or so and it was a very efficient company and at Rs 900 or Rs 950 it was a reasonable bet to take on, he was bullish on Tata Motors.
He explained that he was on Tata Motors because of their JLR business and not because of the passenger cars or trucks they are making. He said that Tata Motors had no real edge in the domestic car market and that it was not such a good idea. He said Tata Motors had a very good Commercial Vehicles business and an amazing luxury vehicle business. If one kept just these two, Tata Motors was an “absolute rocket” making Rs 8,000-10,000 crores of profits even after keeping the domestic car business. Shankar Sharma said that looking at the JLR numbers the way they are shaping up, a case could be made out for the stock to be a lot higher than where it is now.
He pointed out that the JLR vehicles had started out with almost no penetration in the global luxury market space. When one begins with 1% or 2% or 3% of the global market share and starts building distribution in key markets as Tata Motors has been doing in the US, China, and India, the numbers can become very dramatic. He explained that in India, JLR had six or eight dealerships last year and will scale up to 15-20 in the next year or two. Despite fewer dealers they have sold 2000 vehicles in India and with more scaling up Tata Motors can easily sell 4000 cars in the next two years said Shankar Sharma.
Shankar Sharma compared Tata Motors JLR with Mercedes Benz and pointed out that the fact that Tata Motors JLR was able to sell 4000 vehicles in India as compared to Mercedes Benz which was able to sell about 8000 despite being in India for 20 years showed what the brand value of JLR was.
However, he was not gung-ho about buying the Tata Motors DVR which was available at a substantial discount to the market price. His logic was that investors should be out there where most people can buy and want to buy. DVR is a derivative of the main stock and investors should be invested and buy the main stock instead of the DVR.
At a sector level, Shankar Sharma was optimistic about Financials in general and PSU banks in particular. He said that a lot of these stocks were looking very attractive and when the rate cycle starts softening, investors could easily make 20%-30% in names which are pretty large and liquid.
He advised that investors should get out of defensives and add a bit of risk by taking on some PSU banks, some of the beaten down infrastructure names that have been really crushed. He, however, made it clear that he did not like the infrastructure sector as a business. He also said that stocks like L&T and BHEL could be avoided because it was very hard to make supernormal returns or even slightly excess than normal returns. These stocks are already trading at very expensive valuations in the hope that they would make a lot of money in the future. He explained that this was a misplaced notion because these were utility businesses and one should only pay only utilities rates for it.
In the capital good stocks, Shankar Sharma said he liked BHEL due to its past phenomenal track record, zero debt, PE multiple of 8-9 times though he was still wary of buying that stock.
Shankar Sharma Portfolio 2012