Reliance Industries Stocks | ONGC Stocks: ITC among Siddhartha Khemka’s top picks for next 12-18 months

The best way to participate in the market is to accumulate at every fall and on larger falls and specifically days when markets are down by 3-4%. We saw that in the previous week where markets were down 5.6% in one week and the next week it recovered almost 3.5%! So, it is kind of a zigzag market. It is very difficult to predict bottoms and very difficult to say whether all is priced in because we are getting newer data and newer information, both domestically as well as globally.

The last couple of macro data points especially from the US has not been very comforting, especially the consumer confidence data, the GDP data which all are pointing towards a slower economic growth and the fear of recession becoming a reality. That could keep the markets in a tight range if not fall down further. So, in the overall market setup, I think 15% correction is a good enough correction in the index, especially if you look at some of the largecaps. They are down anywhere between 15% and 20%.

If one looks at the broader market, the stocks are down about 30-40% odd and a lot of the negative is priced in. But on days like today, when we get new information and policy changes which impact the earnings visibility, one is not prepared for such kinds of events with the government coming out with additional duties or a windfall tax on oil and gas.

There is still risk to earnings not only from the policies, but also from the impact of inflation as well as the demand, which can remain slower or lower compared to expectations. Monsoon was one big factor which was supposed to help revive rural demand. So far, it has not been helpful and so although now we are seeing some rainfall, if one looks at the full month of June, it has been much lower than expected.
All fingers crossed, there is going to be pressure in terms of earnings growth expectation that the Street is building for FY23 and that could keep the upside limited in my view.

and at good entry levels or is the correction justified?
We will have to treat these two companies separately. On Reliance, there was some clarification earlier that the SEZs and EOUs will not get impacted. Then the Finance Minister came and clarified that they will also get impacted. So right now, by rough estimates, there is about an 8-10% impact on the earnings for Reliance and the stock closed 7.30% lower. So to some extent, the news is factored in and bearing the near term weakness in the earnings, I think it is a good company to look at from an investment perspective.

This fall gives an opportunity to start accumulating into a company like Reliance where we are looking at value unlocking, not only in the core oil and gas and chemical business but also in its future growth drivers – the telecom and retail business.

In the case of ONGC, the impact is much bigger. For ONGC and OIL, there could be an impact of about $35 to $40 per barrel in terms of the average realisation and that could have a big impact on profitability. We still have to work out the exact numbers but I think one should wait for the numbers and clarity to come, especially in terms of oil and ONGC. It is not the time to rush in.


A bit of flip trade happened today. is down 4% while is up around 4%. Is there any specific stock that you like from this space?

There were two news flows today with regards to the real estate pack. One was that on a PAN India basis, the numbers the sales or the pre-sales numbers were under pressure. But if you look at the Mumbai Municipal Region, the unit registrations for June has picked up almost 27% on a YoY basis to about 9,500 units. That kind of brought some positivity into the Mumbai based realty players.

Within that overall space, we like Lodha Developers which is our preferred pick within the real estate pack. For FY22, the company closed at a record pre-sales numbers and they have set a target of growth of almost 27% for FY23. So we are expecting about 25% odd growth for the next two years on back of the strong demand momentum and the healthy pipeline that the group has within the Mumbai region. The company is also looking to use the cash flows to deleverage and that should help improve the balance sheet. It would be the preferred investment choice within the real estate space for us.

Can you pick up top two, three bets, the high conviction buys for you and your team as far as the next 12-18 months is concerned?

From the largecap space we like

, the best among the FMCG space because of the presence in the cigarette business which has kind of remained resilient in this environment, while the other FMCG companies are facing the impact of the higher raw material prices as well as slowdown in demand, especially from the rural space.

ITC’s core cigarette business has seen growth and after almost five years of mid single digit earnings growth, we are now looking at almost 10% earnings growth over the next few years. The company has also seen lower drag from the hotel business. The capital allocation has improved a lot and that should improve the return ratios as well.

Second, if you look at the overall momentum and growth that we are seeing in the auto space, our preferred pick is an auto ancillary company,

Wiring. The company is the market leader in the Indian wiring harness space. It derives almost 95% of its business from the domestic market and has hence negligible exposure to exports.

The wiring business is getting a lot of traction because of the more electronic content which will also get accentuated because of the EV penetration in India. We are expecting strong double digit earnings growth, almost 23%, over the next few years and we believe the company deserves rich valuations given its strong competitive position, better capital efficiency, the good margins as well as positioning as a prime beneficiary of the EV space.

What is so different about ITC in the last couple of months that made you change your mind? Or were you one of those who were bullish on ITC when everybody else was busy taking out memes and jokes?

Definitely. Our rating was neutral but definitely we were not positive. We were negative to some extent and the stock also did not perform, the company earnings did not grow. Now the biggest change that has happened is that there has been a stable tax environment for cigarettes because of the implementation of GST. There has not been any sharp hike.

Already, the excise and the GST rates are at a very high level and that has helped in a stable pricing environment.