Jun 21, 2013 12:22 PM IST | Source: CNBC-TV18

Don't buy rally; RBI may up rates to save rupee: Dimension

Srivastava says it would be at least a couple of years before the macro-economic environment normalizes. He says the RBI may even be compelled to raise rates in its efforts to protect the rupee.

The market could bounce on short covering, but investors would be better off not buying into the rally, feels Ajay Srivastava of Dimensions Consulting. If at all investors want to buy equities in this market, they should focus on companies with dollar-denominated earnings, says Srivastava. He is bullish on Divis Labs, Oracle Financial Services and Tech Mahindra.

In an interview to CNBC-TV18, he says it would be at least a couple of years before the macro-economic environment normalises. He says the RBI may even be compelled to raise rates in its efforts to protect the rupee. At the same time, given the chaos in global markets, there is little the Indian government can do on its own.

On the index, Srivastava sees in slipping below 5500 after a brief pullback and then trade in a range between 5450-5500.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Huge volatility playing out globally has the time come for you to look at some stocks or you are still sitting on your hands?

A: It depends on from where you started; our position was almost zero in the market. Tactically, we must focus on companies with export rupee-dollar earnings and that is the bottom-line. Anything which is leveraged is a no-go in this market, it does not matter how much it falls, because the kind of pain they will go through to handle rupee at 60 or 65 to a dollar is almost unimaginable.

One would like to buy some stocks but we are saying that we need to buy the stocks which have got clear dollar-denominated earnings and zero leverage balance sheet.

Q: Just because it has fallen already though, do you think the market is ripe for a short covering bounce or not yet? There could be more damage given what is happening on the sell side?

A: Tactically, you are right perhaps that market might bounce back for a little while if the shorts take up profits today, maybe sometime by 11.30 am to 12 noon or just before or after Europe opens. There is a need for the shorts to take profit, because for the last two and half to three years we have not had such a good reign for the shorts in the long time. One was afraid that central bank would intervene, and the markets did go up every time the shorts came in the market.

For the first time we have a unbridle run on the market to say we can short with impunity based on fundamentals, demand-supply and fully knowing that the Fed will not come and step in. What the Fed can do is already stated now.

For first time in many years, the shorts are getting a right to be participant in the market; they may or may not book profits today, if not today then maybe tomorrow, so it is just a question of a day or two. So, there could be a rally, but this rally is not to buy into. This pain is not going to go away with this two-day fall in prices. It is going to go much deeper; whether it is in our banking system and our leverage balance sheet. For instance, Reserve Bank of India (RBI) – I am not going to be surprised if the United States (US) yield going up as you saw yesterday, RBI may actually have to reverse and increase the rate and that is the possibility that we are examining now. So forget, reduction of rates, they might have to increase the rate. You saw the bond auction yesterday, allocation of quotas etc. That is telling us that the rate increase might come if we have to protect the rupee, protect the currency. Otherwise, it is almost like a free fall.

Q: Of the high quality names that you are talking about, do you think that even those names are vulnerable to foreign institutional investors (FIIs) selling in the near-term? So, while fundamentally they might look okay, technically there could be an overhang if a few billion dollars go out of our market?

A: Some of the names like Divis Laboratories, Oracle Financial Services and Tech Mahindra – there could be an overhang, but the supply is not as much as the damage they can do to the other stocks, like the private banking stocks.

There everybody is loaded up to the gills in terms of stock. We saw HDFC Bank, which went up from Rs 630 to Rs 730, although their earnings were flat, it was Rs 1,000 crore net profit for March 31 and Rs 1,000 crore for December 31.

Those are the stocks, which are more vulnerable today especially stocks where there is heavy ownership, the performance has been sub-par perhaps and it is easier to sell the stocks.

These stocks which are dollar earning denominated like we spoke about Divis, Sun Pharma, there the ownership is there, but not of the magnitude and easily liquidity available compared to the banking sector on some of the bigger names.

So, we believe that even if pain comes it will be much lower and perhaps could be an opportunity to keep accumulating because in one or two more years, these stocks are going to outperform the market purely on currency, forget the performance on operating levels.


Q: Just for the overall market how bad could it get in your eyes? Do you think the Nifty could go all the way down to 5,000 kind of levels eventually?

A: It is difficult to call a level, but definitely it is going to go to 5,500 and below, that is very clear in the market. Temporary, we may have a bounce back, but that level is there for the taking at this point of time. The reason is very simple that the transmission of rupee at 60 or 62 to a dollar is going to be very painful in the next couple of months.

The important point is that local demand is just crumbling in the market today. There is no demand of any product or services; discretionary spend is at bare minimum in the market. In that kind of scenario hard to believe that this is the bottom to the market. The bottom is still a way off. I don’t know,  maybe 5,000 looks to be too extreme at this point of time, may come perhaps, but we are almost at the doorstep of 5,500 or 5,450.

Q: Sources indicate that crucial issues like the gas price hike may not come up for discussion at the Cabinet Committee on Economic Affairs (CCEA) meet today. Are you getting disappointed about the way policy has moved and perhaps that June deadline that was promised will not be honoured?

A: In the last lame-duck year of the government even if things happen and you see in the issue of foreign direct investment (FDI) policy, nobody has come in and put the money. It is hard to believe that decisions of this magnitude will get taken in the last year without political ramifications. So, gas price increase may come up, but solidity of that decision is going to be? Will it be challenged in the court thereafter? I don’t know the answers.

My key point is that we are in a global vortex where these small policy moves by the Indian government are not going to make a difference. We have a genuine and a serious problem that we cannot export enough. What we did was – we try to welcome foreign capital in the country that has not worked. However, what we should have done is focus to make our export comparative, make our manufacturing comparative, we have not done that. So if you can’t export enough then all these measures are pointless. If you keep running a current account deficit (CAD), what will the economy do at the end of the day? You have seen it already. Shutting of gold can be a temporary phenomenon, but net-net we are a deficit nation and rupee-dollar devaluation will wreak havoc across the economy.

Q: If your belief is that the market is heading sub-5,500. Do you think this recent correction is going to cause a complete reset of the range we have been trading in these last couple of years? What looks like the ceiling now for the market?

A: In an environment like this it is very hard to take such calls because lots of the factors are not domestic at this point of time and unpredictable. I would tend to believe that 5,700-5,750, maybe 5,800 could now be the ceiling which we will touch for a long time and the reason is very simple that this unwinding taking place will kind of try to take money out if they can.

We got USD 40 odd billion of investment in this country – now how do you take that money out? The rupee is already at 60 plus and you have already lost lot of money in the market. Maybe exchange-traded funds (ETFs) may take it out, but genuine FII investors would tend to believe that let us hold on to this investment and wait it out. They would think that since a big sell-off has happened, there will be a reversal and will try to liquidate. That is going to be the bottom-line.

So, there will be the off-points, but the selling will come. 5,750-5,800, maybe a 200 or 300 points on the upside is par for the course in this market purely because of volatility; the short covering is going to take the market up. It is not going to be the long buying. It is going to be the short covering taking the market up.

Q: Whatever happens to the market do you get the feeling that what has happened to the rupee etc. might have basically pushed our recovery back from an economic perspective also by maybe three-six months, whatever we were assuming on the deficit, recovery in growth etc. all that will take longer now to materialise?

A: Not only three-six months but it would be years now. The reason I am saying years is because the first time yesterday we damage our bond market and the customer’s sentiment.

We had all taken for given that rates will go down, so money was parked in income fund etc. The retail sentiment got a walloping in the last seven days, when those funds have started to underperform or even go in red.

So, we have a scenario where the environment is telling us that there is no place to hide. The only place to hide is real estate in the market and there also there are issues about pricing etc. in the market. Generally, the demand environment across the spectrum of the economy is shaky at this point of time, number one.

Secondly, even rupee-dollar will take a long time for these companies to come to combat with it. Debt repayment is one aspect; import of materials is other aspect. Some of the companies we own in, they import materials but suddenly when the rupee went to 60, we were not hedged for that level. So, how do you take that to the retail prices? - The demand is down, the cost has gone up. What do you do to the margin of the companies?

Therefore, this is not going to play out for three-six months, this is going to play out across one-two years.

Talking about oil pricing - what does the government do to the oil pricing? Can you take up by Rs 3-5 a litre and shock this market.

So, we are talking of at least one-two years even on present basis before we come to semblance of normalcy in the system. If one looks at the non-performing assets (NPAs); every company is going to go to the bank and say listen I can’t pay these loans to external commercial borrowings (ECBs) etc? What do I do? This is my balance sheet, restructure me? So, banking system, retail finance, retailers itself, it is kind of a complex web we are getting into and which is not going to take only three-six months to recovery. People say approve 10 projects and we will be on our way but I think no, we will not be on the way.

There are far deeper issues now and at this stage, so it will take a minimum of two-three years. We will have to just settle this out before the growth trajectory starts in a manner. I am sorry to be negative, but that is what it looks like to us.

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