Retail investors continue to be bearish on the stock market, and instead are putting their money in fixed income, real estate and commodities, says Gautam Trivedi, Managing Director and Head of Equities, Religare Capital Markets Limited.
He says it will take another 10 percent rise in the market to get retail investors interested in equities.
The market is likely to remain flat in the run-up to Budget as some of the key reform measures have already been announced, he says, adding that investors are now watching for signs of fiscal consolidation.
Trivedi is bullish on cement shares as he expects these companies to report strong fourth quarter earnings on recent price hikes. UltraTech Cement is his top pick in the sector.
Midcap stocks have taken a beating over the last couple of weeks, leading many market participants to think that they could likely underperform the large caps by a wide margin. That is because most investors would prefer to back the big names when the outlook turns cautious. Trivedi, however does not see midcaps falling too much from these levels as he says there are enough FIIs which are focused on second line shares. They will resume purchases in these stocks if there is a sharp correction, he says. In general, FIIs are still bullish on the India story, he says.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: Getting USD 7 billion has not moved the market. What do you think is the problem?
A: The retail investors continue to remain a problem. Either the retail investors know something that we don’t or the Foreign Institutional Investors (FIIs) know something that the retail investors don’t know. The fact is retail investors continue to remain bearish on the market. They are pulling out money from all sides.
We have seen money being pulled out by retail investors from mutual funds. Now the life insurance companies are continuing to see redemptions. We see selling pressure on the retail broking side, where we run one of the biggest franchises in the country. So that is unfortunately the real reason of all this.
Q: What do you hear when you interact with retail investors? Why this pessimism?
A: We don't get to interact much with retail investors. However, when I speak to my retail team, apparently the retail investors continue to prefer fixed income instruments. The rate cut clearly was a positive, but wasn’t big enough. The yields are as yet unattractive enough for people to look at the equity markets.
Secondly, a lot of action is shifted to the commodities exchanges. Don’t forget the commodity exchanges do not have any similar to Security Transaction Tax (STT) so that is to some extent more lucrative. The volumes on the commodity exchanges have more than double of the equity markets. So, there is a lot of action that has shifted effectively there.
Real estate continues to remain a very lucrative area of investments. Gold to some extent has slowed down, given the high prices and the increase in import duty. However, alternative investments continue to remain more attractive for retail investors versus the equity market.
Q: What do you hear from the FII crowd is this interest, stock specific in terms of offer for sale (OFS) that are hitting the market or do you expect these kind of close to continue through February and March?
A: I expect the flows to continue, the momentum is very strong. Back in December, in Asia meeting FIIs had clearly mentioned that their interest in India is extremely strong. Coming January at least the long only would allocate more money into India and so far that is happening. Thus, that momentum will continue, not withstanding of course as the returns haven't been great year to date.
However, at some point retail investors will have to start participating in the market. They will realize that the intensity of the flows are strong, it wouldn't make sense to continue as net sellers. The market needs to reach at least another 10 percent higher for retail investors to come back in the market. So, in general FIIs remain pretty supportive of the Indian equity story.
Q: This huge underperformance that we are seeing from mid and small caps, is that reflective of retail investor apathy that you were alluding to?
A: Yes absolutely. If you look at the overall interest levels from the retail side, whether it is this year or the previous years it has largely been concentrated on midcaps. Even now the retail investor interest is in stocks that are sub Rs 100 in absolute price.
So, that mostly qualifies for midcaps. That is where we are seeing most of the selling pressure coming in right now.
Q: You have a buy on Ambuja Cement and a hold on ACC but post their results there has been quite a bit of disappointment in cement. What makes you constructive?
A: We are overall constructive on the cement space, not just these too but even others as well. Our top pick remains Ultratech Cement. The overall mood in the market has been slightly negative on cement simply because we saw prices come off in the last quarter.
A lot of that is alluded to the fact that both Ambuja and ACC have December year ends and were pushing volume through into December. However that has started to reverse, we have seen price rises come back quickly across all the four metros. Even in places like Lucknow, Patna, Hyderabad we are seeing price increases come in of anywhere from Rs 10-15 a bag.
So, given that situation we will see a much better fourth quarter. If one looks at Ultratech Cement, EBIDTA per tonne was as much as Rs 1000. Results are starting to still look pretty good. So, we continue to remain bullish on the cement space.
Q: You have a sell on Jubilant Foodworks, a stock that cracked post the earnings warning and then rebounded very sharply. How are you calling that one?
A: We like the stock below Rs 1000. Evaluation aside but the overall growth clearly has come off significantly. Same store sales, growth is down from a peak of 35 percent to now 16 percent and the management is guiding for lower growth.
So, that is where we are coming from. We don’t have a problem with the stock from a fundamental standpoint. Then one has got capex related cost that will be absorbed because of Dunkin Donuts. So, we have a sell on the stock but sub Rs 1000 the stock does look attractive.
Q: On this point that you made about the midcaps, is that your sense of how the best part of this year may shape up with a lot of divergence in performance?
A: Yes and no. As much as retail investors have been pulling out of midcaps there is a whole lot of population of the FIIs that actually are active investors in midcaps as well. I don’t want to name those funds, but there is a lot of appetite from FIIs for midcaps.
So, if midcaps continue to fall, one will see buying interest coming back in selected names for sure.
Q: The other segment of the market which is getting pounded is metals. Would you be cautious on the global commodity space?
A: Yes very much. We are still structurally very cautious on metal space. A lot depends on how China starts to change and increase its overall fixed asset investment. However, we haven’t seen any major evidence of that as yet. We are still structurally negative on the metal space.
Q: Tactically what do you think the market’s next move could be? Could retail be validated over the next few weeks with a correction of 7-8 percent on the market?
A: I don’t think so. I don’t see any sense of retail to find the market attractive. Between now and the Budget anyway the market is going to be largely flat, so I don’t really expect anything major over the next few weeks in the market.
Q: You think the news from the Budget has been priced into the market already. The kind of good news which might come or do you expect any positive surprises there?
A: Expectations this time around on the Budget are actually quite low. That is simply because a lot of reforms have already been announced over the past two months by the Finance Minister. He has done a phenomenal job of marketing these reforms to FIIs.
So, a lot of that has already been priced in to some extent. However the fact is that the market is still looking for one major signal which is fiscal consolidation. If the FM continues to remain fiscally tight as he has been, the market will take that pretty positively.
Nobody wants a pre-election year splurge from the government. If the government doesn’t announce anything major in the Budget that will be a major positive.
Q: There is quite a bit of paper lined up for FY14 that is post March, there is Coal India, Neyveli Lignite, there are new issues like Nuclear Corp etc. Do you think that will fire up retail interest or unlikely?
A: It could fire up retail interest. Let us not forget the OFSs and the IPPs. We are looking at atleast another Rs 25,000-30,000 crore of that pipeline as well. A lot finally depends on the pricing of these deals. If one has another Bharti Infratel that will be taken pretty negatively by retail investors.
So one has that on one hand and on the other hand you have an NTPC which was extremely well priced. Stock on Friday was trading above its issue price of Rs 145. So, it boils down to pricing.
The government seems to be definitely more prudent about the way they are going to price these deals and make an attractive at least something on the table for investors whether retail or institutional.
Q: Since the RBI policy day the market has started underperforming and actually losing ground. Is it that a lot of the domestic guys sense there wasn’t that much happening in terms of bells and chimes towards rate cuts for the rest of the year?
A: I don’t think so. People are hopeful and the mood is that RBI will oblige with more rate cuts throughout the year. We are looking at potentially another 100 bps through this calendar year. If that were to come through, it will be taken extremely positive by the market. So, a lot depends really on what the RBI wants to do finally.
Q: This quarter PSU bank results have been poor but private sector has been better. Do you want to buy State Bank of India (SBI) and sell Axis Bank?
A: Yes, I will tell you where that is coming from. There has been a structural negative view on PSU banks back even in December, in Asia meeting. The overall preference was still extremely strong towards private versus PSU, even though we explained the fact that the premium of the privates over PSUs was as high as about 170 percent.
Now that has contracted a bit since the rally in the PSU banks. However, especially in the past few days we have seen a significant sell down in PSU banks. So, that is starting to happen.
The internal debate between PSUs and private and the one view which an FII gave me last week, he said ‘10 years ago you had two private sector banks taking on the might of the PSUs that is HDFC Bank and ICICI Bank, you have three more; Axis Bank, Yes Bank and Indusind Bank and with new banking licenses coming through potentially another three-four.’
The fact is the structural view on the PSU banking space is not very positive. So, that is where most of the FIIs seem to be coming from.
Q: You spoke about Jubilant but also with Titan Industries. You think this is an opportunity to buy Titan?
A: We structurally like the story. The stock needs to correct a little bit more. The impact of the increase in the import duty on gold will play out in next quarter numbers. So, one will see some of that starting to get factored into the price.
However, structurally it is a straight play on the Indian consumer and has been phenomenal story over the past 10 years.
Q: Given the point you were making about FII interest, any level in mind, a level below which you think the market may not fall around this Budget event?
A: You will see people buy most at around 5900. The index might go another 100-200 points below that but that is it. I don’t see that much weakness in the market between now and the Budget.
Q: If the market does grind here or correct a little bit what kind of sectors or stocks would you advocate your investors to be topping up on?
A: I would ask them to look at the private sector banks if they do end up correcting a bit from here. Cement is another space that we like a lot. Within the autos we like Tata Motors, Bajaj Auto and Mahindra & Mahindra.
We are starting to reach a consensus internally on whether Maruti Suzuki is a sell from these levels and given how the yen has depreciated as much as 20 percent since October. This stock has clearly been a beneficiary of that. So, at some point the stock turns out to be a sell.