3 auto stocks Yogesh Mehta is betting on

Among OMCs, we are not looking at 2x, 3x kind of a return but at least 20-25% return can be expected from IOC or ONGC or HPCL, says Yogesh Mehta, Founder, Yield Maximisers. Outlook on ITCOverall ITC and for that purpose, FMCG, is doing well in this January to March quarter. Hotel business is something where there is a little bit of more disappointment. I am expecting around 35% to 37% decline there. As for the paper business, the volume and sales growth shows the paper business is doing 10% to 12% better. The cigarette business has also done 12-13% better in the January to March period. I believe overall the cigarette business will do well and so overall profit should be in line and analysts’ average estimate is around Rs 3,900 crore. I am expecting it to be in the range of Rs 3,850-3,950 crore. All the businesses are doing well but a major part of analysts are expecting that the tax burden and shrinking margin environment for the cigarette business may act as a negative factor for ITC. As the rest of the businesses are doing well and unlocking the economy will give a boost to all the businesses. Valuation comfort, the return ratio comfort and key financial ratio comfort are all there. The quarterly numbers should do well plus the dividend would be an added advantage. It is just a question of if and when, but results would be much better than or in line with expectation. Which of the auto stocks would you be betting on?We have seen a big dent in the monthly numbers but it was very much expected due to the lockdown in May in the key states or 80% of the sales generating territories. So even in June, if there is a partial lockdown, then there will not be much of a positive surprise for the auto numbers. Majority of the plants were shut and they have done their maintenance activity. There is no major negatives for all these companies but I feel that the unlock theme which I have talked about earlier should play out well for all these two-wheeler companies. I would be looking at Hero MotoCorp, the commentary from Mahindra & Mahindra with the capex lined up and the tractor business outlook. Even in Escorts, there is the valuation comfort and the agri business focus of the government should do well for these companies. So, two- wheelers and tractors with an agri view are the two segments I will be looking at. Mahindra & Mahindra with the great valuation comfort, Escort with a strong business outlook commentary and Hero MotoCorp among the two-wheelers where the new launches have been postponed, are the three bets. On disinvestment process and more importantly oil OMCsTwo-three months back, we talked about this company where the value is still there along with cash balance. BPCL disinvestment is on. We are waiting for the dividend record date announcement and then due diligence by September or maybe December 2021. We may see further action on other PSUs. OMCs have great value and the margins are now intact. Earlier when crude was down below $60, there was visibility for their GRM margins and probably they were loss-making. But right now, since the last three quarters, the scenario has changed completely and the GRM margins have stabilised rather than improved. The electric vehicle scenario is still far away than anticipated. So the demand for petrol and diesel continues along with the new two-wheeler, four-wheeler sales in place. IOC as well as HPCL provide a great value comfort from here. Everybody is chasing growth-oriented companies from March 2020 till May 2021, but the value stocks are still languishing within the range. They have now come out of that and probably one fine day we will have to switch from growth to value again to have a better risk reward ratio into the portfolio. In that context, OMCs provide great comfort even in terms of ONGC, the upstream marketing company. if crude goes from $70 to $75-80. Wise persons are projecting a target of $80 plus in the near future and so probably ONGC would be a great play because the dividend yield was not there for the last year but from this year onwards, it may be a great play. We are not looking at 2x, 3x kind of a return but at least 20-25% return can be expected from IOC or ONGC or HPCL. In the case of BPCL, I will keep my fingers crossed. If the divestment happens, then probably you may see a good uptick in this name but otherwise rest of the three names which I have given can give a decent return for the investors. On speciality chemical space Post the China scenario, specialty chemicals have lasted on the growth path with just one, one and a half year of great sales growth while bottom line numbers and the margins are improving day by day . With that scenario being visible for at least three, four quarters, they have lined up capex in individual product range but demand is also improving. We have seen a great demand from the pharmaceutical APIs in the pandemic scenario. We have also seen specialty chemical demand growing in individual names. So product wise, there is a scenario that demand will continue and all these companies are enjoying high margins and the financial ratios are also improving and valuations, which were quoting at around 20 times, 25 times, are now in the 40-45 times range as a basket. But the growth is equally good in names like Aarti Industries, which is providing great returns for the investors at over 15-17% CAGR returns historically. The other name is Vinati Organics. Capex has been lined up and the company is quite confident about generating good revenue numbers from FY22 onwards. On the higher base of FY21-22, it would be in the range of 20-25% growth rate, so one should add these stocks on declines but not at the current level. On the cement basketI was quite bullish on cement volume growth from quarter three onwards and I believe that the construction activity in the commercial residential property is the way demand is improving. It clearly shows that there is a long way to go for that. There is valuation comfort and growth visibility in UltraTech Cement and Ambuja Cement. EBITDA per tonne is still at a great comfort level for Ambuja and UltraTech. That can be still looked upon as an investment case scenario, but the second quarter of the financial year is always dull for cement. One should play this theme as an investment case and there is a long way to go from here. As a conservative investor, risk-reward will be much favourable as far as the cement sector is concerned.

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