Siddhartha Khemka on why he would buy financials on dips

What do you make of the markets, the sort of selling despite the numbers?
If you look at the overall numbers of the quarterly season, so far we have seen that after a couple of good quarters, finally some breaks are clearly visible in some of the index heavyweights. This was more or less on expected lines where some cost pressures were expected to impact and that has come into effect.

A lot of results from heavyweights are either in line to marginally lower and that is something the Street has not taken quite positively, especially in an environment where even the market is factoring in the strong growth expected over the next couple of years.

This will continue for maybe one or two quarters and so Q4 and Q1 might bear the brunt of the commodity cost inflation and keep the markets volatile. We have seen global volatility impacting Indian markets as well. One day, we are up, the next day, we are down and kind of stuck in a broader range.

Coming back and looking at the financials and the fundamentals, we expect at least one more quarter of pain and that could keep the market range-bound but from there, there are green shoots visible. We are seeing some of these sectors specifically taking price hikes. The demand has been pretty stable and with a good monsoon expected, if rural demand picks up, the overall quarterly results could pick up steam from second quarter onwards, Then we can see the resumption of the momentum in the market.

What do you make of numbers coming in from UltraTech, Maruti? On the face of it, they are looking better than estimates.What is the sense that you get?
In the case of UltraTech, clearly the numbers are in line to marginally better. I would not say that the numbers are way better but cement as a sector is expecting cost pressures. Margins were expected to be lower but they have managed to do some price hikes.

I think further price hikes will only help revive interest in the market. If you look at the cement space specifically, there has been buzz around the ACC, Ambuja Cement divestment by Holcim and that has kind of brought the momentum back into some of the cement sectors.

Maruti, on the other hand, again looks like they have managed the cost pressures well, volumes were flattish to marginally lower. The realisations have been better and that has helped the margins and report a better than expected profitability. The demand revival is clearly visible at least in the last couple months.

We have seen the improvement, the semiconductor supply chain has kind of eased off a bit. And with Maruti also planning aggressively in terms of the new launches, revamps and also entering into the EVs. That could play out well over the next couple of years, specifically in the case of Maruti.

In this kind of scenario, where does one hide? Would you tell the retail audience to churn their portfolio or hold it steady? Does any particular sector stand out to you?
If you look at the result season, there have been a stark reaction on companies which have given even a margin miss because a lot of these stocks are priced to perfection. In certain cases like Bajaj Finance, there are premium valuations which the current growth and outlook cannot justify and hence the negative reaction.

On the other hand, the current valuations are factoring the growth that some of these companies are reporting and hence we are not seeing that kind of upside. Some midcap IT names reported good numbers and we saw a sharp positive reaction. Coming back to the recommendation, I would say that especially in this environment of uncertainty, one has to stand with stocks or companies which are reporting strong numbers.

They are the ones who will be resilient in this environment and one needs to look at them clearly and move towards them – be it within IT. So, basically be it across sectors or within the sector, there are companies which have reported good numbers and companies which have not reported good numbers.

For example, within the banking space, we have results from ICICI Bank which have been much better compared to

which was not as per the expectation. Within IT, we have seen some of the larger IT peers not reporting strong numbers but some of the midcap IT players giving out good strong numbers. So there has to be some churn and one has to back the performance in terms of results.

Would you advise retail investors to use the dip as a buying opportunity in some of the banking names?
Yes definitely. We have not seen much of a rally in banking names despite some of them having reported strong numbers. Some of our top picks within the overall banking space are SBI and ICICI.

ICICI reported strong robust operating performance and that was a combination of the core PPOP performance, control provisions and improving asset quality. The business loan book growth was at 17%, mainly led by the retail which grew about 18%. The bank enjoys the lowest funding cost among private banks and which enables it to grow that business especially in the retail segment.

So ICICI Bank at around Rs 760 is a good valuation attractive stock for retail investors to look at from a one-year perspective where we have a target price of Rs 1050.

What are the defensive areas?
For defensives, I would look at broader consumption space and within them again sticking with the companies which have reported strong numbers. One such company is

which came out with numbers recently you can categorised it in the broader consumer space. It reported strong growth supported by volume growth of almost 19% across geographies and we have seen that with the early onset of summer there has been a good demand.

The company has expanded into food segments as well and entered newer geographies. So I think that is one stock where we are quite positive within the overall consumer space and also it is a midcap name. It may not be a typical defensive name but looks good with strong results. The company has also announced a bonus. That gives a downside support in the current market. We have a target price of about Rs 1,230 from one-year perspective on Varun Beverages.