Aug 08, 2013 04:39 PM IST | Source: CNBC-TV18

Mkt in doldrums, but Ambit Cap says to make money buy now

Head of Equities Saurabh Mukherjea sees the ongoing correction in the market as a buying opportunity. He sees the Sensex touching 23000 level by 2013 end.

In the past couple of sessions Indian indices have been falling like a pack of cards on the back of bleak global macro economic environment and free falling rupee.

Even in this scenario, broking firm Ambit Capital seems to be betting big on the market and sees the Sensex touching 23000 level by 2013 end.

Head of Equities Saurabh Mukherjea sees the ongoing correction in the market as a buying opportunity. At the current juncture, stocks like Maruti, Cummins, Bharti and Exide offer good risk-reward ratio, so for those willing to take risk can bet on these stocks, he told CNBC-TV18 in an interview.

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“Most of our clients have been invested in India for the best part of the last 20 years. Their read is that if you want to make money in India you have to buy at times of distress.”

FMCG stocks can be seen as safe haven investment, but their valuations unreasonable. Ambit has a sell rating on entire space including ITC.

He expects autos, industrials and realty sector to see biggest rallies going ahead. “We will prefer moving to autos and select financials,” he added. From the auto space, Maruti is Ambit’s top pick and sees TVS Motor as a good contra bet now. The broking firm is upbeat on auto ancillary company Exide as its pricing power is likely to be back.

Ambit Capital finds private sector banks overvalued and is concerned over some private banks' earnings methods.

On macros, though India is going through cyclical problems and governance issues, but India growth strong still remains strong, he added. “We may be close to bottom for GDP cycle,” he added.

Below is the verbatim transcript of Saurabh Mukherjea's interview on CNBC-TV18

Q: You have been quite optimistic about the market with targets of 23500 last time. Have you scaled it down?

A: The target has been 23000 for the last year and we are still pushing 23000 out there. This is a tremendous buying opportunity and I am not exaggerating. The bulk of our foreign institutional investors (FIIs) are long-only and a bulk of them is buying.

There are pockets of our client base where there is concern given the state of the currency and the current account deficit (CAD). But most of our clients have invested in India for the last 20 years and according to them if you want to make money in India you have to buy at times of distress. In companies like Maruti Suzuki or Cummins India or Bharti India, if you are not willing to take risk at junctures like this on fundamentally sound businesses, then it is very difficult to make money on these companies.

So the FMCG, pharmaceutical, IT pack, there the joy could be limited beyond some currency gains for pharma and IT. However, there is a whole bunch of names in auto and in industrials, decent companies, good balance sheets available that are at very attractive valuations.

Maruti, Cummins, Exide Industries would be the three names I would be looking at now. So we are suggesting clients that the economy is fundamentally solid, there are problems around CAD and currency which are not going to be resolved in the next 60 days or so. However, to make money in India we have to buy at junctures like this. Otherwise in this illiquid market it is very difficult to make profits when the market itself is on a tear.

Q: The way data is coming in, it seems that the economy has not bottomed out yet, we could be staring at even lower numbers. What gives you the conviction that we are staring at a turnaround anytime soon?

A: There are few points and all depends on how one can read the economic data. I haven't seen any other country where two-three years into an economic downturn, you have a real estate market like the one we have in our country. From my office in Mumbai I get the information that there are six construction cranes on the skyline, the Mumbai real estate registration data. Similarly, for Bangalore the real estate registration data suggests a consistent buying by high networth individuals of properties.

Similarly, real estate funds are not having any trouble raising money from foreign investors. So it is very difficult to see a country where individual balance sheets, retail balance sheets are loaded with gold and real estate. It is very difficult to say that sort of country has its structural economic issue. We have problems with out polity and with our investment cycle but those are cyclical issues every economy goes through.

At this juncture, every single break economy has a Purchasing Managers' Index (PMI) read sub 50. It is not just India, a country supposed to be well governed like China has a PMI read actually lower than ours. So in a context of a global economic cycle we are at a low point in that cycle. We have a problem with our investment cycle and some specific issues around governance which I don't think will be resolved just by election. Those governance issues are more fundamental and will persist with India for some time to come.

At the core of the Indian economy you have strong virile consumer with a strong balance sheet. So strong that you can afford to buy gold by the truck load three years into an economic downturn and have a real estate market which refuses to crack.


Q: Do you worry that could change because of the kind of unemployment numbers that we don't talk about in India, the fact that job creation has slowed down dramatically and many of the consumer sectors are beginning to see signs of fatigue? Could consumption also slow down on the margin once you look beyond what people own in terms of real estate and gold?

A: The concern is at what stage of the cycle are we, are we at a relatively middle of the cycle story where we have four-five quarters more of fall in gross domestic product (GDP) growth to come. If that is the case, surely, consumption will crack and with it will real estate.

But we are one-two quarters towards the bottom of the cycle with potentially Q3 and Q4 this year being positive upward trends in our GDP cycle. So, investors read of the market is fundamentally dependent on how many more quarters will see the fall in GDP growth. I believe in Q1 our GDP growth will be pretty similar to what it was in Q4 last year and are pretty close to the bottom of the GDP cycle.

Now whole of this year monetary policy will stay tight and hence growth will decelerate further. But base case scenario for monetary policy will be between two-three months of tight monetary policy. Much like in 1997 and then policy will be relaxed and that will allow growth to somewhat normalise as we go into the last six months of the financial year. In that regard, consumer will stay relatively healthy.

In a country where gold can be bought at the rate of USD 7-8 billion a month, it is a bit hard to believe that the consumer will keel over and die if that is the appetite at which we can buy gold. Similarly on the real estate market if we have high elevated rates, tight monetary policy conditions like the ones we have now for another two-three quarters, surely real estate market will see an impact. Such monetary policy conditions will sustain for two-three more months before the new governor comes in and starts normalising monetary policy.

Q: What to do with the banking space now after the big correction?

A: This has been our main underweight over last year. The view we have articulated is that start buying cyclicals but stay into high quality cyclicals. The main cyclical sector we have been very vocal about avoiding is banks and within that private sector banks.

Concern has not been just credit quality but also about inclusive regulation which will gradually crimp the profitability of the private sector banks particularly with regards to third part products. So bank assurance products, profitability for the banks to sell these insurance products will diminish over the next couple of years.

I also have doubts about certain income recognition practices that private sector banks follow. So, we are very vocal there that the top private sector banks are overvalued and should be avoided and that remains the view even after the correction. The correction in private sector banks has still some way to go.

Q: What kind of price to book multiples do you see some of the leading private sector banks coming down to because they held a range between two and four price to book over the last many years?

A: There are two types of adjustments you will see in the private sector banks. They have been clocking return on equity (ROE) of around 1.6 percent. Over the next two-three years that will come down to around 1.1-1.2. If you lever that by around 10-11 times gearing, you get to an ROE of around 14-15 percent which a good bank in most places in the world should do around 14-15 percent ROE rather than the near 20 percent ROEs that private sector banks post.

Once the ROE pulls back from 20 to around 15, the price to book will stabilise for a decent bank for the good private sector bank. The price to book will stabilise at around two times. Clearly several of them are trading at many multiples of two times hence the pullback has some way to go.

Q: Consumers after the recent valuation expansion have given up some of that froth over the last 10 days but could there be further adjustment?

A: The consumer pullback will continue. Over the last couple of years a lot of investors both domestic and foreign have parked themselves in pharma and consumer stocks in the hope that this will be a safe haven. They are a safe haven but the valuations have got so unreasonable, 30-40 times for consumer plays. Valuations have got so reasonable you are bound to see a pullback.

Paradoxically as signs emerge of a recovery in the country in the second half of the year, the pullback will get sharper still. So our emphatic recommendation to clients has been start moving towards the better auto plays, towards the better industrial plays and three-four financial plays whether relatively small lenders are insulated from the worst ravages of power, infrastructure and real estate.

There is this notion that you can park yourself in consumer stocks and pharma stocks for years at an end. That will gradually unravel as the year proceeds and as it becomes apparent that the economy will come out of the funk that it finds itself in.


Q: Would it hold true for a stock like ITC?

A: We have a sell on ITC and the entire FMCG space on valuation grounds. Some of them have greater defensive characteristic and clearly ITC is one of them. The question is has the stock been re-rated far too much in this climate and my answer would be yes. You will see the entire FMCG class pullback from around 25-30 times to around 15-20 times.

A healthy company growing profits around 20-25 percent a year should be trading at 15-20 times even if you are an FMCG company with the ability to do buy backs and dividend payouts. So if you were to look at the Indian market, you will see two types of rebalancing over the next year. First is the very high weightage banks, like Nifty still has 24-25 percent in banks that is bound to come off.

It is unusual for an economy with 6-7 percent growth to have this high weightage in banking particularly in six private sector banks. You will also see the whole concentration of market cap in FMCG and pharma also came off. IT will gain market cap weight as the dollar and the American recovery helps the sector. The biggest appreciation in value will be auto industrials and real estate.

Q: What would you do with HDFC which is there in pretty much every global portfolio? Do you see valuations contracting there as well?

A: We have been sellers in HDFC for the best part of the last year and given the tight money market conditions there will be some impact on their funding cost.

Our greater focus with HDFC has been the fact that regulations vis-à-vis non-bank home finance companies, regulations have changed quite fundamentally in the last couple of years. In particular it has become easier for home buyers to refinance.

If you had borrowed from HDFC or from LIC Housing Finance, you can now refinance away to State Bank of India (SBI) or Axis Bank who are offering more attractive rates. This was not possible two-three years ago, you couldn’t refinance, now you can and consumers are availing of that and it is putting pressure on HDFC’s net interest margins and the whole construct of being a non bank which competes with banks in a heavily competitive space like home finance.

Q: What about auto since you like that space? Two auto companies you would prefer buying?

A: The easy one would be Maruti Suzuki. Maruti at Rs 1300 given the strength of the company’s export franchise, it’s ability to build a much bigger export franchise than what is has given today, its strength in the domestic market and specially in the small car market. Maruti Suzuki at Rs 1300 is very attractive.

Bajaj Auto is the other name I would go for. Again it is a play on elections, on monsoon and on export market. For all auto companies, this is the strongest export franchise. Our channel checks in Africa and Middle East suggest that Bajaj is now significantly cheaper than Chinese bikes that are being exported from China into Africa.

You have a superior bike available in export market at attractive prices. Those are straightforward bets to go after. For those with a greater appetite for risk, I would point them towards Exide Industries that will be a strong revival in their pricing power. You will see Exide pushing up prices continuously over the next three-four quarters. If FDI in insurance gets approved by parliament then whole concern about Exide’s free cash flows being used to finance the insurance venture will also dissipate.

The other is TVS Motor. This is the cheapest bike company for a good reason, they have underperformed operationally for a number of years now. But at six times earnings with the tie-up with BMW in the bag and it is a pretty substantive tie-up with BMW in the bag the market has oversold TVS. So for a greater upside, Exide and TVS and for safe ride Maruti and Bajaj.

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