Stock Picking: Pick stocks with favorable risk-reward ratio: Pawan Parakh

“There are several stocks that are not really in their comfort zone and therefore we need to pick stocks from the bottom up and carefully select ideas where the risk-reward ratio is favorable. Otherwise, it is a tough market as far as stock selection “He is worried,” he says. Pawan Parakh, Geojit Financial Services.

What day? Both the Skilled and the Sensex At a new all-time high, or should I say a new all-time high, at least for the Nifty and a lot of stocks that are really contributing today. But would you say you would be a little cautious about this rally because a lot depends on what the US chooses to do in terms of interest rates and it looks like a 25 basis point cut could be in the cards?

Pawan Parakh: Honestly, this kind of rally is not surprising because if you look at the story of India, it is doing all the right things in terms of investment in manufacturing, focusing on renewables, new technologies, electronics and manufacturing, and so on. So, directionally, India remains a very attractive story.

But honestly speaking, given the kind of rally that we have seen and kind of a linear rally that we have seen in the last year or so, I have to say that stock picking has become really very difficult.

There are several stocks that are not really in your comfort zone and hence we need to pick stocks from the bottom up and carefully select the ideas where the risk-reward ratio is favourable. Otherwise, it is a tough market as far as stock picking is concerned. Do you think that banks might now also be able to catch up if this movement in the markets lasts long enough?
Pawan Parakh: Well, I’m not so positive about banks for now because I think banks still have to deal with… credit cycleAfter COVID, credit costs have remained very moderate. I think we are in a period where credit costs are still normalizing. And, in addition, we all know that there is a mismatch between deposits and advances.

While valuations are very comfortable, I think, given that if deposits do not increase as expected, it could dampen growth and at the same time if business costs start to increase, we have seen in the last quarter where one or two microfinance institutions or one or two small finance banks when the performance was not up to the mark, we saw the kind of reactions that happened there.

So, given that context, I would actually wait at least one or two quarters to see some stability in performance, some stability in terms of rebalancing between deposits and growth before really building a position in the financial or credit businesses.

What is your view on the pharmaceutical sector? There have been very specific moves today in terms of stocks as well. Granules is down 16%. But on the other hand, Aurobindo Pharma has performed well. Of course, IOL Chemicals etc. have also risen quite a bit. Within the pharmaceutical sector, what are you watching and what looks interesting?
Pawan Parakh: That’s the nature of pharmaceutical sectorOn the one hand, there could be some adverse observation in one of the factory audits and on the other hand, there could be another company where there is some positive result that could actually drive the stock up.

I think something similar is happening in the pharmaceutical sector, but, having said that, at a macro level, we find the sector very interesting because we believe that, although the national pharmaceutical business is a story of mass consumer goods, from time to time there may be one or two months in which growth is moderate, but if we take a slightly longer-term perspective, I think that this is a sector that can continue to grow between 8% and 10%.

And then there’s the generics story, which is still very promising. I think last time, when we talked about them, I pointed out that most companies in this sector have blockbuster molecules in the pipeline for at least the next two or three years, and two or three years is a good period in which they can renew their product portfolio.

So, from a directional perspective, the pharmaceutical sector looks very interesting. And I must also tell you that, on a relative basis, the pharmaceutical sector also makes sense because it is defensive in nature. So, if the markets were to fall, I would like to believe that the pharmaceutical sector would fall less than other sectors. So, it makes sense to be overweight in the pharmaceutical sector and we are as well.

Some of these oil companies were under pressure because there was an expectation that since crude oil had dropped to the $70 a barrel level, there might be a possibility of a retail price cut. How should the issue of OMCs be addressed at this point?
Pawan Parakh: If you want to take a two- or three-year view, I think the OMCs offer a nice attractive entry point, in my opinion, because over the last two weeks crude oil has fallen, but even if crude oil were to recover, I would like to believe that on the refining side, a lot of these OMCs will still be making decent margins because over the last three or four years refining capacity globally has not seen much traction and over the next two or three years, some of these companies will see an addition in their refining capacity.

Secondly, I think the government, over the last three to four years, has made it very clear that, even if intermittently, it will not increase the retail price, but at some point it will ensure that the OMCs are compensated for any loss they have suffered in the absence of an increase in retail prices. I think the valuations are quite attractive at the moment.

And if crude oil prices were to remain at that level, it is safe to believe that in the next quarter or two they will make a lot of money in terms of marketing margins. So, considering that earnings are stable and valuations are good, I would like to believe that one should really try to buy shares of some of these names.