Dipan Mehta, member, BSE and NSE says, fall in rupee is certainly an opportunity for the investors. "Investors should be positioning their portfolio such that they are overweight in some of the export oriented sectors. Investors can go for some of the tech companies or the large and mid size pharma companies," he suggests.
The Indian market delivered a show of resilience despite global pressure. After trading for most of the day with deep cuts, the Nifty closed with just a 19 points loss at 5,146. The Sensex lost 60 points to close at 16,792.
Even for the week, the market closed with gains of 0.2%. This is the third straight week of gains for the market.
With the slippage in crude prices, Dipan Mehta, member, BSE and NSE says, India could become a better investment opportunity for the rest of the year. "Oil has been the biggest problem for India over the past two-three years or so. With oil prices correcting, automatically the macros of the Indian economy start to look up," he adds.
According to him, the only major problem remains the rupee. Today, the rupee fell further and tested 57 to the dollar mark on strong dollar demand from oil importers and concerns over the global economic slowdown.
However, Mehta says, fall in rupee is certainly an opportunity for the investors. "With the rupee being at these levels, the entire export oriented sector comes into play. Typically software, pharmaceuticals, auto ancillaries, textiles look quite interesting. Investors should be positioning their portfolio such that they are overweight in some of the export oriented sectors. Investors can go for some of the tech companies or the large and mid size pharma companies," he suggests.
Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying videos.
Q: A lot of global brokerages and global experts are pointing out that because of the slippage in crude, emerging markets like India could become a better investment opportunity for the rest of the year. Would you concur with that?
A: Yes, absolutely. I think it’s a no-brainer. Oil has been the biggest problem for India over the past two-three years or so. With oil prices correcting, automatically the macros of the Indian economy start to look up. If the oil remains at these levels then it will make the task of the government as well as the RBI much easier, given that it has an effect on inflation, interest rates, fiscal deficit and a lot of other interrelated variables.
I think the main reason for the outperformance today for the market is the fact that Brent crude has also corrected. Also, the gap between WPI and Brent has come down from about USD 15 per barrel, where it was about couple of weeks ago, to about USD 10-11 per barrel or so. So, these are very important positives for the country. The market is gradually reflecting it.
At this point of time, the only major problem remains the rupee. Despite the correction in oil prices, which will have a favorable effect on trade deficit, the rupee continues to drift lower and it's again touched an all time low. That's the only problem area for the market at this point of time.
Q: How ill investors approach India from a flow point of view? While relatively India might look better from a crude point of view, but the rupee is taking away all the benefits of that. How do you expect the flows to pan out from foreign institutional investors (FIIs)?
A: Crude and rupee are countering each other where crude is correcting, but rupee is depreciating. Although FIIs observe that the fundamentals are improving because of declining crude prices, but then their dollar returns are getting impacted because of depreciation of the rupee.
I think the real trigger for the market could be when the new finance minister takes over and what exactly the policies that he/she is going to follow and what the approach is going to be towards the managing the subsidies. Now that the task has been made a little bit easier, maybe it's the right time to decontrol diesel prices. These are important cues which the market is looking forward to.
My sense is that if we see stable to sideways movement in the global markets, some amount of expectation will start getting built up as to who is going to be of the new FM and speculations start over there. There is a pretty good chance that the street will start expecting some kind of reforms be it on the pension side or even FDI into retail or for that matter the entire subsidy mechanism.
Q: With the way the crude is moving and with the way the rupee has moved, what kind of stocks would you be wary of right now either on the upside or on the downside?
A: With the rupee being at these levels, the entire export oriented sector comes into play. Typically software, pharmaceuticals, auto ancillaries, textiles look quite interesting, given that they would benefit from higher realisations or even if they have to pass on the rupee depreciation then they would gain by way of higher market share. The companies, which are to be negatively impacted, would be the ones who have very high borrowings in foreign currency or for that matter have huge imports. So, those names are also pretty much clear.
From an investor point of view, I think this is certainly an opportunity. Investors should be positioning their portfolio such that they are overweight in some of the export oriented sectors. Fortunately, there are a lot of good quality stocks with good managements, high levels of corporate governance standards, low capital requirement, and very little scope for equity dilution. So, this particular trend of rupee depreciation is certainly an opportunity that investors can take advantage of and go for some of the tech companies or the large and mid size pharma companies.
Q: How would you approach Reliance now? Some brokerages like Merrill Lynch have downgraded the stock. There have been worries with respect to Niko cutting down its gas reserve targets etc. Do you foresee more downsides for Reliance?
A: It could be a market performer at best. I think there are better stocks to invest at this point of time. With so much of uncertainty surrounding the stock, I think investors are best slightly underweight or atleast just about equal market weight on the stock. Maybe the triggers for Reliance would come when there is more clarity or when there is a scaling up of gas production.
Depending on how the rupee has impacted the performance, one would like to wait before making a more informed call on Reliance at this point of time. So, I would say that investors could avoid the stock at this point of time and focus on some of the clear beneficiaries of the rupee depreciation or devaluation as one would say so.
Q: How would you approach the cement stocks after the 3-5% cut that we have seen today?
A: It’s a bit difficult to call cement at this point of time. Fundamentally, certainly these stocks are quite attractive. There has been fantastic transition in the cement industry where they have been able to manage their costs better. They have been able to manage their bottom-line better. If you see all their various capital ratios in terms of return on capital employed, return on net worth, all of them have improved significantly over the past two-three years. They have become consistent performers as we have seen over the past few quarters or so.
The order of the CCI certainly soured the sentiment in the sector. I would just like to put the entire sector on hold for the time being and look for buying into these stocks only if there is a further 10-12% kind of a correction and there is greater clarification or atleast some further progress on the appeal. The fines are quite stiff and certainly they would affect the financials. Going forward, with this set back, how the industry will operate also needs to be seen. So, I would say that just wait and watch and look for buying into cement shares only if there is a further decline from these levels.
Q: How worried would you be about the monsoon situation? Today, the IMD cut its forecast just a tad bit. How much of a sentiment dampener do you think that could be, if the monsoon doesn’t play out as expected for the market?
A: We have had a decent monsoon last year. So, to that extent, I think the damage caused by slightly deficient monsoon may not be as much. In any case, as far as food grains are concerned, I think the granaries are over flowing. So that will act as counter pressure and would reduce the effect on atleast food grain prices. But it affects the sentiment in the rural areas. as far as consumption is concerned, the rural economy has been driving over the past couple of years. So, I would say that investors could factor in that aspect, when they look at the consumer oriented stocks which have benefited from rising demand from the rural sector.
By and large, I think that even a slightly deficient monsoon, the market would take it in its stride. Our sense is that it could be worse than 96%. The street also is expecting that it would be rather a deficient monsoon, much more than what IMD is predicting at this point of time, unless we see major revival in the rains over the next few weeks or so. So, I would say that it’s something which needs to be watched quite closely, but the damage may not be as much. I think, to an extent, it’s already got discounted in the market.