Mar 21, 2013 06:29 PM IST | Source: CNBC-TV18

Political uncertainty has come earlier than expected: Mehta

Indian market which had performed stronger at the beginning of 2013, have come under political turmoil. Investors are worrying that these issues may not get resolved soon.

Indian market, which had performed stronger at the beginning of 2013, have come under political turmoil. After Dravida Munnetra Kazhagam (DMK) pulled out of ruling United Progressive Alliance (UPA) government in this week over Sri Lanka issue, investors are worrying that these issues may not get resolved soon.

"We are dealing with political uncertainty and some amount of discounting that it is not going to get solved in the near future at least and even may persist beyond an election, which maybe held either end of this year or early next year," Dipan Mehta, Member of, Bombay Stock Exchange and National Stock Exchange told CNBC-TV18 today.

Mehta believes that current stress in banking stocks may not continue going forward and the fourth quarter earnings of bank will once gain establish their strong business model.

Below is the verbatim transcript of the interview

Q1: We have a cocktail of bad news that our markets are trying to grapple with. In your mind which is the biggest worry that the market has and which could drag the markets below the levels that we are currently sitting on?

A: Political uncertainty is something which markets all over the world kind of shiver whenever it takes place. We are seeing in the Indian context a lot of uncertainty coming through far earlier than maybe the street was expecting and the exact color and the nature in which the various arrangements at the centre are dissipating is causing a lot of anxiety in the minds of investors. My sense is that the markets are also seeing beyond the next Lok Sabha election and gradually factoring in that there could be a terrible mess in terms of a hung parliament and that could put the country back by two to three years. So, we are dealing with political uncertainty and some amount of discounting that it is not going to get solved in the near future at least, and even may persist beyond an election, which maybe held either end of this year or early next year.

Q: In your engagement with investors are you getting the sense that given the political uncertainty they are looking to exit out of India because yesterday we did get a bit of a foreign institutional investor (FII) sell figure in the cash market, is that going to be a phenomenon that we need to deal with?

A: As far as domestic investors are concerned they have not been in the market for the past several years and even when we saw the rally earlier this year or for that matter most of last year, domestic investors had been selling. So, their allocation to equity remains at extremely low level and all these events which have taken place, and the way the market has tanked in this month means that whatever little expectation was there that they would enter the market just gets delayed by the that point of time.

The real concern is the FII flows and if those start to turn negative then you could see markets correcting even further from these levels. However, on a fundamental basis we should consider the fact that the Reserve Bank of India (RBI) gave us another point 0.25 percent reduction in the interest rates and we have repo at about 7.5 percent. If inflation does tend to come under control and current account deficit also comes to a more manageable level maybe because of oil prices coming down, maybe because of gold prices coming down and if the RBI cuts interest rate by another 50 or 75 basis points for the rest of the year then markets will have a very good chance of forming a base and gradually rallying from around these levels. So, apart from the political side there are certain positive trends which are taking place, which markets are ignoring at this point of time, but we should keep a lookout for them.

Q: In a market like this you would expect many of these vulnerable pockets like infrastructure, capital goods etc to crack but the worrying trend is the way some of these best in class private sector banks are starting to move lower? Would you worry about this pocket losing its premium and pullout money from private sector banks now?

A: I think a lot of institutional interest and investments gone into private sector banks and some amount of selling is to be expected in light of what has taken place politically. However, the business models of most of the private sector banks remain extremely attractive and I am sure that the quarterly numbers, which will come out in April, will again demonstrate that these companies are in fine fettle and they continue to deliver on topline and bottomline basis.

Overall they have managed the last two-three years of recession; they have managed the non-performing asset (NPA) cycle as well as various domestic challenges considerably better than the public sector undertaking (PSU) banks. Therefore, we are seeing some technical selling, some foreign institutional investors (FIIs) selling in these private sector banks, but I would say these are opportunities to increase exposure to private sector banks and investor should not consider that something has changed drastically as far as their business operations are concerned.

Q: Your thoughts on the cement space and the continuous collapse that we are seeing both in terms of production data that is coming out as well as on the stock prices?

A: The cement industries are intricately linked with infrastructure spending, real estate as well as overall economic activity. We have seen an ugly number as far as gross domestic product (GDP) is concerned, and no headway being made in terms of construction of any kind of infrastructure. Therefore, we are seeing that getting reflected in the monthly cement sales as well and that apart some fresh capacities are expected to come about, which is why we are seeing some pressure coming through on the cement companies. But from a long-term investor point of view one needs to be little bit patient on this particular sector. I think the long-term dynamic certainly have improved but they are facing some short-term challenges.

Q: It is very troubling to see the mid-cap space. Names like SKS Microfinance has cracked close to about 15 percent in just one fall. How does one approach it?

A: That is the big problem as far as retail investors are concerned and some of the India dedicated FIIs are concerned that there is a complete breakdown or meltdown taking place in the mid-cap stocks. Partly could be individual stories where there are concerns of corporate governance issues or some specific negative developments which may have taken place, but by and large I think that mid-caps have been correcting far more sharply than the large caps. It is also to do with the fact that on very little volumes we are seeing mid-caps correcting as well. So, this is a phenomenon which usually takes place when the markets are rallying and markets are stable, large caps are stable then you will see mid-caps outperforming and the exact reverse takes place when markets are tanking like this. So, this is something which the investors have taken in their stride and some of the good quality mid-cap companies could become quite attractive at these levels. However, stock selection is going to be of prime importance in a time like this.

Q: An average investor who is looking at the market with a longer term horizon in view do you think this is a good time to be cherry-picking or do you think better levels will come and one should just wait for this volatility to pass through. Is this a good time to be buying or would you wait?

A: Buying should not be done at one shot. But some good quality stocks can be handpicked, especially companies where there is a good visibility, very little requirement for capital, little scope for equity dilution and high corporate governance standards. So, if you get such kind of businesses at these levels they could be quite attractive and one could buy a bit and then wait and see how the markets are moving and have enough resources to buy even if the stocks dip further.

Again, the outlook has to be long-term, couple of years or thereabout and not expect much of short-term returns. So, if that is the kind of temperament the investor has then these are certainly good levels to enter the market. As I said stocks selection is of paramount importance over here. There are lot of attractive stocks in pharma, FMCG, consumer oriented stocks, some of the non banking financial companies (NBFCs) and also the private sector banks, which have reached attractive levels. These companies and these sectors have demonstrated significant investor appreciation return over the past several years and there is no reason why going forward over a longer term they should not deliver. So, I do feel that these are levels to do some amount of cherry-picking but patience is going to be the key word if anybody is looking at increasing exposure to equity in these markets.

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