Ravi Shenoy, Asst Vice President (Midcap Research), Motilal Oswal Securities spoke to Surabhi Roy on the outlook for broader markets

How do you see the markets panning out in 2012?

We see 2012 as a year for high rewards to risk ratio. Most investors look for 2:1 reward to risk ratio i.e. upside to downside. Given depressed valuations and sentiments, the risk to reward ratio is 3:1 in quite a few stocks at the current juncture. Any upgrades to earnings from current levels will improve this ratio further.
At these valuations, downside looks limited. Upside will depend on the decline in inflation and the consequent fall in interest rates. Over a four-year period, market has potential to double from the current levels.

 

The broader markets have outperformed the benchmark indices in the last one month. Do you feel that the trend will continue till the fiscal year end?

The mid-caps had been beaten down more than index stocks and hence the rally is also likely to be larger. This has a fundamental reason behind it. With the rise in interest rates, earnings of mid-cap companies that are more dependent upon local banks for funding than larger companies were impacted more.
Further, as demand stagnates, the effect on mid/small-cap companies is higher given higher operating leverage. Further, valuation correction is exaggerated on account of lower liquidity in mid-cap stocks and hence higher impact of selling. As interest rates fall in the economy, the demand overflow to small/mid-cap companies as a percentage of revenue is higher, operating leverage kicks in and low liquidity aids boost valuations.

 

Can you recommend three stocks one can buy in the mid-cap pack from a near-to-medium term perspective?

Shree Renuka Sugar: The valuations at sub-5xFY13E are very attractive and factor in concern on high debt impacting performance. We see a 30 per cent upside in the stock over a one year perspective with a target of Rs 49. One can buy on a decline.
Sintex Industries: Valuation at 6xFY13E is attractive and offers a 40 per cent upside. One can use corrections, if any on broad market weakness, to add exposures for a one year target of Rs 112.
Dewan Housing Finance: Dewan Housing Finance is a good bet on the housing shortage in India and is available at attractive valuations for the growth potential it offers. We see core business for this company growing at 30 per cent CAGR over the next two years. Entry into the education loans space and real estate private equity are likely to offer diversification to earnings over the long-term.

 

The smallcap segment has also run up quite sharply since the last one month. Is it time to book profit in this space?

Quite a few stocks in this segment have a high level of non-institutional activity. We advise investors to invest cautiously in this sector. Fundamentally sound stocks in this segment could add value to a portfolio over the next three years as valuations and sentiments improve in the broader markets. We like Action Construction Equipment, Suprajit and Tata Sponge Iron in this space.

 

What is your take on consumption-related stocks such as Jubilant FoodWorks and Shoppers Stop in the mid-cap pack?

We are cautious on these stocks on account of expensive valuations. We prefer to play the consumption story through the automobiles, telecom and the banking space.

 

Do you find value in any mid-cap banking stocks at the current valuations?

We see significant value in the mid-cap banking space. Allahabad Bank, Dena Bank and ING Vysya Bank are our favourites. These stocks are available at very attractive valuations with upsides ranging from 30 – 100 per cent.