Aug 07, 2013 01:52 PM IST | Source: CNBC-TV18

'Holding on to leveraged PSUs is just asking for trouble'

There is no need to sell MNC consumer companies such as HUL, or some of the themes which are emerging in the market, such as liquor companies. But if an investor has a leveraged block, or PSU block, there will be trouble if they hold on to it, because even if there is a pullback rally, the chances of these stocks being a part of it are less.

Despite the pain witnessed by the markets in the last 10 days, the downside does not end here, atleast not for the heavily leveraged companies, says Ajay Srivastava, CEO - Dimensions Consulting. These companies will see at least 40-50 percent erosion in share price even from today's level, he adds.

Also Read: Maintain year-end Sensex target of 20700: HSBC

Srivastava advises investors to hold on to consumer companies such as HUL and ITC and even some of liquor firms. But he believes it’s asking for trouble if an investor if still holding on to some of the leveraged PSU companies. "Even if there is a pullback rally, the chances of these stocks being a part of it are less," he says.

Below is the verbatim transcript of Ajay Srivastava’s interview on CNBC-TV18

Q: We were speaking a few days back and you were making the point that there are no comebacks this time around. After 10 days of such pain is there more downside you think?

A: I think for the companies which are heavily leveraged it is not the end of the downside and that is a huge chunk of the system. The entire infrastructure space, cement space, quite a bit of companies, the bottom-line anything with huge leverage has still not seen the end of it. I think the selling will be much more intense. They will see serious downward pressure on their share price. They will go for restructurings and they should be extracting a severe price as the previous RBI governor pointed out.

So I think it is not the end of the situation at least for the leveraged bunch of companies. They are in for serious trouble and that is a lot of companies. The government comes with a major announcement in terms of Corporate Debt Restructuring (CDR) to bail them out, if that is not going to happen these companies will still see at least 40-50 percent erosion in share price even from today's level.

Q: Will this drag down the banking system with it? Infrastructure has collapsed completely as a space, but banks are collapsing. Do you think the collateral damage could happen on 25 percent of the index still which is the banks?

A: It has already played out. If you see the PSU banking stocks as you rightly said are about 0.3 times book value. I think the only solution now left, you are back to the old regime if you remember quite a few years ago they created a good bank and the bad bank, took off the asset, they created Stressed Assets. Stabilization Fund (SASF) they created Asset Reconstruction Company India (ARCIL) and said let us take out the bad loans.

I think the time has come for the government to take out the infrastructure loans from the banking system, maybe give them bonds or part cash, part bonds to recapitalise, because if this continues one can very clearly say forget meeting Basel-III norms. These banks will need about Rs 30,000-40,000 crore capitalisation.

Share price of government would go up to 90 plus percent at these share prices. I do not know where this story is going to end. There has to be some radical measure to take out these loans from the banking sector. Otherwise the banks will have to be capitalised, that is the bottom-line which means that the government will become 90-100 percent owner of the banks which again the Sebi will not allow.

So I think something will come out of the system. I think it is the need of the hour for this thing to come out and I hope that Confederation of Indian Industry (CII), Federation of Indian Chambers of Commerce and Industry (FICCI) etc. are now more concerned about actually doing something for this sector than worrying about their evening cocktails etc. because they have done nothing for this sector.

Otherwise banking will go, infrastructure has already gone, cement is on the slide, auto is heading downward faster than we can imagine, the last bastion is consumer space which will hold because the government and political parties are going to spend huge money in the elections. So consumer will hold, pharma will hold, IT will hold, but rest of the pack is again in trouble because demand is down, loans are high, interest rates have gone up.

Q: The question which a lot of investors whoever is left in the system in equities are grappling with is whether it is too late to sell or should they hold on or should they sell even after such a big decline in their portfolio holdings. What would you tell them?

A: As I said identify where does your stock lie? If your stock lies in highly leveraged companies, should it be JP Associates, GMR Infra, DLF of the world I would still recommend selloff and go to something which is sensible or go to cash, because these companies are not going to see respite. However, if you have a portfolio with stocks like Hindustan Unilever (HUL) or an ITC or these kind of stocks I would still not say hold, because what has happened has happened. The point is HUL may crack to maybe Rs 550-500 even if it goes down, but Rs 600 is bottom because sooner or later HUL will come and do a buyout and at Rs 63 or Rs 64 it becomes more attractive than it was at Rs 54 to do a buyout. So you would not want to sell out the Multinational Corporation (MNC) consumer companies.

You would not want to sell out some of the key names, you would not want to sell out some of the themes which are emerging in the market. We spoke about liquor companies. I do not think there is a need to panic and sell those stocks out, but if you have a leveraged block, if you are in a PSU block you are asking for trouble if you hold on, because even after there is a pullback rally I do not think these stocks will be part of the pullback rally.

We have already seen a number of rallies to 6900, but never saw the IVRCL, IRB etc. come back to when the market went to 5900 also. So therefore hoping that these will come back is almost a dream. Therefore stick to your good quality portfolio. If you are in a bad bunch of companies get out and start building up a portfolio. There will be a turnaround, whether today, 3 months, 6 months, 9 months and that is the time to be in the good companies, not in this sector because this will not see a pullback.

Q: Yesterday there was a lot of excitement about the new Reserve Bank of India (RBI) Governor. How much can he achieve? How much by way of expectations should one have?

A: I do not know what expectations I have from the new Governor, because I do not think he has too many tools left to manage the situation. I think it is now back to the government. What can he do? Interest rates are already up in the system even though they say they did not want it, but they actually wanted it, the rupee has gone haywire which they have lot of control.

So I do not know whether RBI has any powers left, because all the powers now have to come out of the fiscal situation by the government, because they have to revive the economy. They have to get manufacturing going. They have to see how we get export incentives, people incentivised for exports. They have got to copy the US model. The US trade gap has been the lowest since 2008. We are at the peak point; they are at the lowest point.

So I am not sure the RBI Governor has any tools left to manage. The only big one is how do you manage the Non-Performing Assets (NPA) in the banking system and the restructuring of assets. I think that is going to be the biggest challenge and if he gets some creative solution which I am sure with his background he should be able to, we should see some respite to the banking sector. Apart from the restructuring of loans and getting the banking system in order all the initiatives now lie with the finance ministry and the government rather than the RBI.


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