Manish Sonthalia has just gone overweight on these 4 stocks

In an interview with ET Now, Manish Sonthalia, Head-Equities, Motilal Oswal Asset Management-PMS, explains why he reduced 14-15% allocation on HPCL to 5% and reallocated the extra 10% among Federal Bank, Bayer Cropscience, Godrej Industries and Aegis Logistics.

Edited excerpts:
Which are your key stocks where you have a large exposure and stocks where you have reduced exposure?

We have really not made any changes in the midcap portfolio that we have — the multi cap portfolio, the same set of stocks do continue. So in some of the new AIFs that we have bought, we have been playing the four themes that we have been talking about for some time. We have loaded up on consumption names like staples, etc, With the shift from unorganised to organised, private sector banks would be beneficiaries and there would be doubling of farm income going forward. These would be some of the names we would have in the portfolio.

The last time when I spoke to you was in and around the selling in the market and your view was that midcap stocks after the fall in March and April were also looking attractive. Are you hunting in the midcap space?

Oh yes. There has been some recovery in the midcap names after the 20% to 50% carnage that we saw in the correction in the market which took the market down from 11,200 to 9,900 odd levels. From that point of view, some of the names were available at bargain values and we have just added on to these names. There have been some new names that have come through in the portfolios but the only disappointment so far is that in the earning season that has been playing out currently, it is the large-caps which are actually delivering better numbers and not the midcaps.

Midcaps have seen pressure on margins even though top line growth is not that disappointing. From that point of view, maybe the bullishness in the midcap space will have to wait for some more time to have a runway and there is nothing very compelling at the current valuations in the midcap space so to speak.

The niggling factor coming back to haunt us is that crude is already back above that $76-per barrel mark. Is this going to be a niggling worry and a big impact? This is bound to trickle down to various sectors, not just crude sensitives but the RMC cost for a lot of these companies would also spike up.

You are right. We are importing inflation and so even though crude prices are going up due to global factors, at the same time, the current account deficit (CAD), standing at roughly 2% last year and this year runs a risk that we will be hitting somewhere close to 2.5% to 2.6%.

If that happens, obviously ,there is going to be pressure on margins because I do not think that demand environment is that strong, despite Rs 1 lakh crore GST collections per month.

It is going to be a challenging and a volatile quarter going ahead because crude above $75 does create problem for India and we just hope that it does not cross $80 because the current account deficit problems and weakening of the rupee will be there on the table and that will bring pressure on margins going forward.

As a house, Motilal Oswal Asset Management was bullish on oil marketing companies. HPCL was one of the big positions. The AMC disclosures indicate that you had a large exposure HPCL at least. Are you still optimistic on OMCs or given the circumstances, does it not make sense to buy OMCs?

In our PMS, we had very high allocation in HPCL but I took money off the table in HPCL and from 14% to 15%, cut down the allocation to 5%. We were looking at everything played out to perfection and leverage was going to increase given the mega capex on the company.

Refining being a cyclical, we were not so gung ho on the growth coming from the refining segment. Marketing margin was continuing to play out as expected given the deregulated environment. Now all of that was okay but now even the OMCs are not taking regular price increases commensurate to the increase in crude oil prices. Obviously, the key question that comes before us is whether deregulation is on or off the table?

Having said that, 4% to 5% allocation on HPCL does warrant attention. Given the fact that the business model is good and valuations have become very reasonable, at less than 10 PE, the dividend payout, etc, would definitely not be equal to what it was last year. It is going to be lower given the capex, etc.

There is hard core value on the table in OMCs and that is not to say that the prices are going to move up starting tomorrow. But there is very little risk in the oil marketing companies at these prices. At least, this is what I believe, It does not warrant a 15% or 10% allocation but a 4% to 5% allocation would be good I would think.

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