Which stocks to buy at record-high levels? Amar Ambani of YES Securities picks these 5 shares

Benchmark equity index BSE Sensex together with broader indices scaled new record highs this week. While the 30-share Sensex has gained 3.94 per cent year-to-date, the BSE Midcap and Smallcap indices have rallied nearly 12 per cent each. Will this momentum sustain? Which stocks might deliver robust returns to investors? In an interaction with Business Today, Amar Ambani, Head of Institutional Equities at YES Securities, shared his views on the domestic equity markets. Edited excerpts:

BT: Small-, mid-, or large-caps: Which segment do you think will outperform from here onwards?

AA: Inflation has softened over the past couple of months. Prices of key commodities like natural gas, oil, coal, steel, wheat, palm oil, milk, lumber and the like, have all come off significantly. We believe this is more due to supply restoration rather than demand destruction, as is evident from the strong US jobs market data, Euro area resilience, and pre-pandemic levels of the global supply chain index. This is a comforting sign that makes us confident that central bankers across the world will pause the rate hike cycle very soon. India surely has seen the end of the rate hike cycle.

Stable yields and rupee, and sluggish investment avenues like China will route FPI money to Indian shores. There was already a lot of money waiting on the sidelines, now there is also a big carry trade playing out from Japan. I am bullish on the Sensex based on a host of positive signals—continued government capex, continued private consumption backed by strong credit demand, healthy growth in corporate earnings on improved margins, led by falling input costs and soaring bank results.

We have well and truly embarked on a new upcycle for small- and mid-caps. They will outperform the broader market in the next couple of years. A lot of stocks in this space are leaders in their own sub-segments, have a long visible track record and will gain from formalisation and digitalisation of the economy, lower input costs, availability of credit at better costs, and expanding valuation multiples.

BT: Which sectors do you think may emerge as winners on D-Street?

AA: We are overweight on banks and non-banking financial companies (NBFCs). The bad asset quality cycle is clearly behind us now, demand for retail credit is strong across the board, corporate deleveraging is complete, and incrementally wholesale demand is about to pick up. With the infra boom and burgeoning housing demand, we are upbeat on the building materials space, which includes cables and wires, plastic pipes, cement, and home improvement stocks.

BT: BSE Capital Goods, Realty, Auto and FMCG indices have gained over 10 per cent YTD. Will they continue to perform like this?

AA: The real estate sector has come out of a long slump that lasted several years. There are multiple tailwinds at work for this space. We are seeing huge demand for budget homes, so much so that the inventory overhang has substantially reduced. We’re witnessing developer consolidation as smaller builders unable to cope with RERA and not able to tie up funding are selling their land or getting into joint development agreements with bigger names. Buyer preference has heavily shifted to reputed names that command a significant premium on their inventory. For large builders, inventory absorption is higher than for new launches. Balance sheets are clean and healthier with equity raise, asset sales, and debt repayment from home sale-powered cash flows. The good times for real estate stocks are here to stay.

As far as capital goods space is concerned, the data for gross fixed capital formation suggests private capex is about to take off. Data on imports of key machinery also hint at some action in the industrial space. Although private capex is currently dominated by renewables and other select sectors like cement, it will get broad based as capacity utilisation rises beyond 80 per cent. Besides, process automation is a mega opportunity.

I view Auto, especially two-wheelers, as a trading play, given the high penetration and heightened competition. Earnings could grow 18-20 per cent for another year and, therefore, the action will likely continue for a while. The passenger vehicle and commercial vehicle space are market performers at best. We prefer the consumer discretionary space to FMCG. However, we believe ITC is the portfolio counter from within consumer staples.

BT: Could you suggest five stocks for a 12- to 24-month timeframe?

AA: We like energy-to-telecom major Reliance Industries and telecom major Bharti Airtel among the big firms. RIL is reaching a stage where the phenomenal value of the retail business will fetch you all other businesses (Oil & Gas, Refining, Petrochemicals, Green Energy, Fuel Stations, Telecom) virtually free, at the current price. The stock has largely underperformed the Nifty benchmark for nearly three years now. Once this consolidation ends, we could see another major up move.

In the case of Bharti Airtel, operating profits will grow close to 20 per cent CAGR for the next three years on the back of higher data demand, migration to higher value plans, and a rise in average realisations (ARPUs). With 5G capex largely passed, cash will now be used to repay debt. The valuation will be much higher when the market sees this unfold in a sector that is practically a duopoly now. Besides, improving the regulatory framework is a big plus.

Apart from banks, which have a broad story, where you can pick any of the large names, we like ICRA in credit ratings, a mid-cap proxy. Its rating business will do even better with more bond and CP issuances, as rates decline and private capex lifts. Margins will inch upward and it can outperform banks with strong profit after tax (PAT) growth and better return on equity (ROE). In line with our theme on building materials, we like Polycabs as the cables and wires leader and Apollo Pipes, which is witnessing high demand from housing, irrigation and plumbing.

BT: How one can invest Rs 10 lakh at these record-high levels?

AA: Asset allocation will depend on your goal and risk capacity and appetite. The thumb rule is to invest an amount equivalent to your age in bonds. When it comes to equities, I don’t think the market can be termed expensive. Based on the trajectory of rates, growth in earnings and market cap to GDP, we are trading at reasonable levels. On a P/E basis, valuation is at 16 times multiple on an FY25 basis. There are times when the market does look expensive, but my advice would be to focus on stocks, rather than the index.

BT: Are you positive about any newly listed firm? Why?

AA: I think among the recent ones, Mankind Pharma is an interesting name. It’s a domestic play, similar to Alkem, though with a higher chronic therapy drug business. Given steady growth visibility and stable margins, it seems a decent long-term story.

BT: IT stocks have been underperforming markets for the past 1.5 years. How do you see the future of the sector?

AA: There is no doubt about the revenue potential of Indian IT services, so there’s no question of a bet against it. Technology cycles are long-term in nature. Presently, only 30 per cent of IT workload has transitioned to the cloud. Then there is the sunrise opportunity from AI/Machine Learning-based tools. Indian IT companies have strengthened their relationship with hyperscalers, built dedicated teams, and engaged in collaborative development. All these are key developments. Notwithstanding the near-term stock price performance, the future is bright.

 

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