Are midcaps a good buy in this market? Neeraj Dewan of Quantum Securities answers

“Several infrastructure stocks where order books are almost 3x last year’s sales, and there are some of them which are even 3.5, 3.7 times their last year’s sale so there were good order books plus execution picks up in the second half of the year. So this quarter and the next quarter can be very good for some of these companies plus, margin improvement is also possible,” says Neeraj Dewan of Quantum Securities


ET Now: Your view on the auto basket and in particular?
Neeraj Dewan: Valuation wise what Maruti has been trading on last 10-15 years average it is already trading above that, so that valuation comfort, which was there earlier in automotive stocks especially Maruti is not there, so I would actually prefer Mahindra & Mahindra in this slot where valuation wise it is much more attractive than where Maruti is. They have very good return ratios. The ROCs are very strong, and the numbers are also very strong, and you will see that improvement in margins also going ahead because commodity pressure has also come down, so in the four wheelers category, I will prefer Mahindra & Mahindra purely because it is better placed, the kind of growth we are seeing there and the valuation comfort which is there.

ET Now: Are you getting conviction to buy any of the midcaps in this current market?
Neeraj Dewan: Yes, definitely. There are still opportunities there. One such sector is the construction and infrastructure sector, where I do not think you are trading at high valuations right now. There are still stocks trading below their average trading multiples, and there is definitely a good order book.

Several infrastructure stocks where order books are almost 3x last year sales, and there are some of them which are even 3.5, 3.7 times their last year’s sale so there were good order books plus execution picks up in the second half of the year. So this quarter and the next quarter can be very good for some of these companies plus, margin improvement is also possible – one, because of execution; second, because the commodity pressure, which was there is also easing so I think that is one space where one can look at good midcap bets.

The other sector should be the NBFC space, where we have already started seeing some movement. I think there after the run-up that we have seen in the private sector banks first and then PSU banks. If you purely see on valuations, some of the NBFCs are also very attractive, and we are not even expecting too much interest rate hikes going ahead, so with that background, there also valuations will be pretty attractive for some of these names, so we are looking at opportunities in this kind of sectors.

ET Now: What would you cherry-pick within the entire insurance basket?
Neeraj Dewan: I think the kind of return that we are expecting from the next 1-1.5 years, I do not think they will outperform if you compare it to the other bank stocks and the NBFC space, I think there if one has to pick up insurance I think

will still be a better bet. I think you can see better growth there in like car insurance, and motor insurance can really pick up for them, so that would still remain as my top pick there, but I will still prefer staying with the banks and the NBFCs, which can give better returns from these levels in the next one, one and a half years.

ET Now: ET Now: Do you believe that a defensive tilt in light of the kind of volatility that we are seeing is a good cushion?
Neeraj Dewan: I think after the Covid rally that we saw in most pharma stocks, there has been consolidation, barring just a couple of names stocks like and may have still outperformed, but if you look at Divi’s, which was a major outperformer in the last two, three years I think consolidating at these levels.

For most of the pharma space there are still another couple of quarters where some consolidation and some clarity will arise as to what is happening to the product mix because Divi’s also said that the product mix which was related to Covid earlier is now shifting to their more long term generic and therapeutic names so that consolidation, that shift, transition is happening now and the next quarter. Over this quarter, and the next quarter, one will get those long-term opportunities again to invest in pharma names, but I think as far as generally investing in them right now for a good return in the next 6-8 months looks difficult. I think they will still consolidate some more to give you better returns going ahead.