Stock- and sector-specific rallies should continue: Vinay Khattar

Interview with Head of research at Edelweiss

Retail investors are wondering whether the market rally seen since February will continue, and deciding whether or not to invest at the current juncture. Vinay Khattar, head of research at Edelweiss, in an interview with Malini Bhupta, says the mid-cap segment still has investment-worthy options. Edited excerpts:

Through the past six months, markets have run up sharply and valuations have expanded. Do you think there is steam left in the market?

The stronger-than-expected electoral windfall harvested by the Bharatiya Janata Party has sparked optimism about a gradual economic revival, leading to a rally in the domestic capital markets. Though there has been some moderation in the past few sessions, owing to concern over a weak monsoon and a spurt in crude oil prices, the overall undercurrent remains positive. There is definitely an opportunity left in the market, provided one adopts a bottom-up strategy of stock picking, a prudent way to capitalise on what is a historic electoral bounty.

Have retail investors missed the bus? What will you advise those seeking to take fresh positions?

We strongly believe the stock market continuously throws up opportunities and one always finds an option to enter into stocks with an attractive valuation, irrespective of the overall market levels. Therefore, our advice to retail investors is to stick to companies with good corporate governance and strong fundamentals.

What kind of investing strategy should one follow?

One should try to focus on stocks that are out of flavour with the market, or with valuations below their intrinsic worth, as expectations of earnings growth are muted. In this context, even a small change in expectations of earnings growth can result in fairly good stock returns, even as the downside is protected.

We also believe a margin of safety exists in stocks being traded at a fair value and the visibility of earnings is high, given the huge opportunity in their businesses. Also, the investing style should be focused on buying into companies with good business and managements at a price that does not factor in the growth potential; when the growth materialises, investors can make good returns.

Is the market at irrational levels or is there scope for value buying?

Though the broader market will see correction in the short term, stock-and sector-specific rallies should continue.

Which segment is attractive in terms of valuations?

From a long-term perspective, we look at fundamentally strong large-caps. Investors are advised to follow the SIP route to invest in these stocks. However, based on ownership and valuation metrics, mid-caps might offer better opportunities in the short-to-medium term. Given the current market situation, we recommend a stock-specific portfolio, with a focus on robust company fundamentals, a strong balance sheet and a good track record.

Name some investment-worthy stocks.

After screening, we have cherry-picked six stocks, which are being traded below their intrinsic worth and have substantial upside. Stocks such as Ratnamani Metals (supplier of high-quality tubes to refineries), Engineers India (high-end consultant to refineries), Va-Tech Wabag (water and sewage treatment plant), all market leaders in their niche areas, have significant opportunity to grow, given their business strategy and tailwinds of a revival in the capex cycle.

High-quality asset owners such as Sobha Developers are also available at a discount to their fair value. Ramco Cement, a South-based branded cement player with cost-efficient operation, is available at a 45 per cent discount to its large-cap peers. In the large-cap segment, one can accumulate Larsen & Toubro.