Aug 05, 2013 04:03 PM IST | Source: CNBC-TV18

No steam left in FMCG; CIL deserves a beating: HDFC Sec

Dipen Sheth believes if there is a selloff from foreign investors on a sustained basis, there will be very little support for the market because they don't see macro situation improving.

Though there is a distinct possibility of Indian equities seeing a sharp correction, but there is no solid reason as well for the market to hold at current levels, says Dipen Sheth, head-Institutional Research, HDFC Securities.

“Domestic investors have been net sellers. Foreign investors don't see the macro situation improving, if there is a selloff from on a sustained basis, there will be very little support for the market,” he told CNBC-TV18 in an interview.

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Meanwhile, he sees no steam left in outperforming sectors like fast moving consumer goods (FMCG) stocks and advises investors to book out of them.

In case of Coal India, he believes that after the IPO and the run-up in the stock, the reality surrounding bad governance and bad management in the PSUs is coming back to haunt this company and therefore, investors have rightly punished this stock.

Below is the verbatim transcript of Dipen Sheth's interview on CNBC-TV18

Q: Last few weeks have been quite dismal for the market but is there a possibility of more damage ahead?

A: There is a distinct possibility that after the economy got into a hard landing mode, the stock markets are headed for a similar outcome. It doesn’t sound very encouraging to suggest that markets should crash, but I am trying to fish around for reasons why markets should sustain at these level and I can't see too much of rational ground. I would want markets to stay up, but I cannot see the logic why they should.

Q: What could drive the declines because a lot of people are clinging on to the hope that the few 10-12 stocks that have managed to support the Nifty, will continue to support the Nifty going forward? Do you see cracks appearing in sectors that have been relatively insulted so far?

A: Yes and no because some corporates are reasonably immune to a broad macro economic downturn. The question is how long they can continue to be here. So, in FMCG the consumption story was playing out courtesy higher government spending and resilience driven by demographics. Some of that is now being questioned especially in the view of higher valuations.

Some of the private sector banks were highly valued versus their PSU peers and the reasons were very clear whether it was in terms of asset quality or in terms of business growth. Some of that has come under cloud in recent times.

For a long time people didn’t believe in the IT sector and surprisingly a bit of depreciation in the rupee has led to a slight revival in environment for IT services. We saw the sector coming back from 10-11 times kind of multiples. So, you need to get very selective and find rational grounds for stocks to hold up. Where they have held up so far and you cannot find additional ground you should get out. I would suspect that FMCG is one such spot.

Q: Do you see the prospect of even more capitulation from investors on top of what has happened already in the broader market?

A: It depends what investors you are talking about. Domestic investors have seen almost continuous outflow of money from their funds and therefore, they have been net sellers if you look at broader intervals

On the other hand, the foreigners have been buying and some of the logic behind that buying is coming into question now. Should there be a selloff from foreign investors on a sustained basis, there is very little by way to support the market because they don't see anything on the policy front, they see the currency weakening, they see macros worsening, they see earnings downgrades. They see return on equity (ROE), return on capital (ROC) coming down so the multiples they want to give might need to come down seriously. If there is a rush for the exit, I fear we are in bad times.


Q: How do you approach names like Bharat Heavy Electricals (BHEL) where stock prices have fallen a lot but numbers have still managed to surprise on the down?

A: For BHEL, our earnings number this quarter was probably the lowest on the street. Two-three weeks ago we published a separate pre-quarter note on BHEL cautioning people that there was no point fishing around for value at Rs 180-190 levels. There is two-three years of sustained slowdown in order inflows and earnings growth and the cracks in margins visible to us.

The stock actually corrected before the numbers came out and even post the numbers I don't think there is much hope left. For the next two-three years we will continue to see stocks like BHEL or even some of the larger stocks in the capital goods space just hanging around where they are or drifting down slowly their price by book ratios are still not at cyclical bottoms so there is more scope for them to fall.

Q: Coal India has come back to almost its IPO price, what are you telling your clients to do here?

A: The truth on Coal India is that it is an extension of the government and doesn’t seem to be a corporate to me. But here is a company which is sitting on arguably the largest coal reserves owned by a single company in the world or may be the second largest. It is sitting on Rs 60,000 crore of cash and is being asked to sell coal at dictated or notified prices.

This company could have been a money spinner for the government and should be leading India. Unfortunately after the IPO and the run-up in the stock, the reality surrounding bad governance and bad management in the PSUs is coming back to haunt this company and investors have rightly punished this stock. So the excessive dependence of EBITDA on e-auction realisations has proved to be at least in the immediate context the reason why profits have taken a beating.

The way forward might be for Coal India and this has been a two-three year wish list to start getting more output from the ground. Given the reserves it is possible and given the money it has at its disposal it is possible for it to kick start the capex cycle for the entire country. I don't see what is getting in the way.

Q: Do you have Financial Technologies under coverage because people are absolutely numbed by that fall?

A: So a quarter or two ago we seriously toyed with the idea of bringing MCX under coverage at least and we are lucky we delayed the role out of the coverage. The collapse of governance around the National Spot Exchange (NSEL) is leading to severe strains on their balance sheet with the result that many years of profits or cash reserves can get wiped out.

I am not too sure what has played out there and it is premature to make a comment but there is something seriously wrong there and yes we are happy we are not covering them.

Q: What will you do with Yes Bank which until two months back was a big favourite for a lot of investors and the stock from Rs 550 has come down to Rs 290. Is it a good time to buy or is there more pain ahead?

A: The expectations for Yes Bank were running sky high, the bank was getting close to three times book at one point of time because growth kept coming quarter after quarter and margins kept staying high despite the bank’s wholesale nature of funding and yields being higher than rest of the banking universe.

It is difficult to take a call on valuing Yes Bank fairly and that is what has come under strain right now. I am not sure whether the numbers will collapse or not in the coming months but the environment for Yes Bank to grow at 25-30 percent clip is certainly not in place. To that extent, there will be a challenge for the bank to sustain the kind of numbers that it has been sustaining.

It is fair to look at the fact that the environment is not supportive for the kind of growth numbers that Yes Bank has been posting and with the recent tightening in wholesale financing markets, margins should also come under stress. Yes Bank now deserves a lower multiple than what it deserved one-two years ago.

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