At a time when the country’s macro data and sentiment is weak, one should look at individuals stocks for good returns, believes Ajay Srivastava, chief executive officer, Dimensions Consulting. "This is the time to focus on smaller stories that have given positive returns in the last three to six months," he adds.
In an interview to CNBC-TV18, he advises investors to keep a short-term investment horizon and churn portfolio in every 15-20 days.
"One might have pain for some companies for sometime but eventually the stronger stocks will prevail. So, in portfolio buildup the key point is to encash your profit. Every 15-20 days see your portfolio, churn it around, book the profit. It doesn’t matter whether the stock price goes up or down later on, don't worry about that but block in the profits," he adds.
Below is the edited transcript of Srivastava's interview to CNBC-TV18.
Q: It has been a volatile kind of session for the market, there doesn’t seem that much strength in the markets pullback. How are you reading it and how do you think we will move through this earning session?
A: Enough has been said about the negative. The key is for all of us is to start focusing on the little side story building up in the system where we can make our money. Our macro economy is doomed, the rupee at 62 per dollar is a disaster, but the interesting part is that there are stories building up in the system and one has to focus on them. If one starts to focus on macro economy, he'd better stay out of the equity markets altogether.
Assuming that one wants to be in the market, the key is to focus on smaller stories. There have been success stories in last three-six months, with positive returns in the equity markets and those sectors, companies, certain events are leading up to good quality returns even in this depressed market scenario.
So, despite the bad macro economy, there are success stories, rerating taking place and company specific items which are coming up. Focus on them because that is the only way to make a return unless you are a short-term or you go short majorly in the market which is very good. However, most of us don't do that. So, we recommending focusing on those 30-40 counters and start making money because macro economy is a dismal zone in any case.
Q: Do you fear that in the next few weeks and months you will probably get to buy these businesses at much lower valuations if some of the global investors who hold these companies for whatever compulsion have to sellout a portion of their holdings in India?
A: We are also keeping our investment horizon extremely short-term. So, yes we fear at one level. However, I don't think the market will be washed out even if the big sale happens.
One might have pain for some companies for sometime but eventually the stronger stocks will prevail. So, in portfolio buildup the key point is to encash your profit. Every 15-20 days see your portfolio, churn it around, book the profit.
It doesn’t matter whether the stock price goes up or down later on, don't worry about that but block in the profits. We are not saying invest for a year’s horizon, we are saying there are pockets. For example, the ADAG stocks are rerating. Reliance Infrastructure looks very attractive, it has been very attractive for the last two-three weeks to rig up. Maybe Reliance Capital too will move up and so on.
The Vijay Mallya stocks too have done a wonderful job of returns. So, these are the stocks one should be in. It is getting positive returns and should there be a major sellout, one isn’t in a bad zone with these kind of stocks.
Q: The big problem is still the rupee. It has been a shock the way this week opened up for the currency market. How much more pressure is that going to put on the equities?
A: It will put a lot more pressure on the equities. Looking at the last three years inflation differential shows that we are simply catching up and it is going to get lot worse not because of reasons that everybody is saying so, but because we are not seeing the government focusing on making India export comparative.
Our cost structure is going out of control, inflation will bounce back to possibly even double digits in consumer very soon because every pass-through of 61-62 per dollar is going to add huge amounts to inflation.
Hence, with this inflation rate, with the cost structures, with the government where it is today, there is no way we are becoming export comparative. And we invest in companies, run these companies and we know that government has done nothing to make us competitive. So, unless we export and earn income, there is no way we can meet this gap.
Hence, the gap is going to continue, it is a one way street and therefore the purge is that the equity markets, leverage companies are going to pay a very heavy price and part of the offset we are already seeing in the banking system by saying the bad debts are going to go up so nationalised banks are seeing a major slaughter in the book values and the share price valuations.
Q: You think this situation might continue for even one more year where the market remains stuck, you probably trade a few stocks here and there but no discernable change in trend is visible?
A: No. My view is that the market will tend to go down because the biggest expectation on the system is that the interest rates will be cut. If that expectation doesn’t come through in the next two-three months and, if on the other side it might even reverse, then the RBI might be forced to take the interest rates up if inflation goes to double digits. That trend might reverse and reverse quite sharply.
So, we are not sanguine that we are in a range which is not going to be violated on the downside. I think it will be violated to the downside because the way the economics is panning out, the whole basis of interest rate cuts being the basis of economic recovery is a problem.
Another issue is the infrastructure recovery. Once we spend the money, it first goes to steel. Steel prices are pegged to international prices which means that the price is going to go up. So steel prices, cement prices, aluminium prices are all heading up. Therefore, we are seeing that the ability to do a cost effective infrastructure itself is going to get into doubt very soon as soon as demand picks up. So, it is not going to be a ride because 62 per dollar means steel is expensive, cement is expensive. That makes our projects unviable. They were pretty bad in any case and are unviable now.
A: I would definitely buy HUL at this point in time because we should wait for Infosys quarter result to see what they are saying about the future. I think they will purge all the issues in the system in this quarter and give all the bad news so that it is out of the way for the new team to perform. So, one you might get lots of bad news in this quarter so wait for that to buy. I think there will be a price correction at Rs 2500, I won't buy it before the results are announced.
I will buy HUL because I am seeing a clear path that HUL will go 100 percent eventually. If the rupee goes to 65-70 per dollar over the next three-four years, it is a definitely it will go to 100 percent. So, we have got a 30-40 percent rise over three years built up in HUL. I don't think you have a 40 percent rise built up in Infosys
Q: Would you buy anything in the oil and gas space now?
A: We were strong believers in all the oil marketing companies (OMCs), we had positions, we sold them out and the reason we sold them is that will the government would go back to pass through the cost to the public.
That is a question that is going to come up. I don't know what the parity exactly is. Say if right now we are lacking behind by Rs 2-3 to a litre. In the election year will that happen and if oil prices keeps going up, will the pass-through happen is something that has to be seen. So, we are holding our positions only on that basis. We want to see what the government says in an election year and whether it will continue the pass-through?
On diesel, passing 50 paisa every month is happening but that isn’t enough. So, one would tend to buy if one sees a government move to say that they will continue to pass the cost. I would then be a buyer again in the stocks.
However, if the government holds its hand and we are back to losses in these companies then one doesn't want to buy these stocks. So, this month we have to wait and see whether the government policy comes. If they pass through, then I am a buyer of OMCs. I don't think I am buying too much of Oil and Natural Gas Corporation (ONGC) but OMCs I am definitely a buyer.
Q: Would you buy Reliance Communications from the telecom basket now?
A: I would rather not put money in Reliance Communications but the rerating process should give better returns in Reliance Infrastructure and Reliance Capital and also Reliance Power which saw the first spark yesterday. So, one could be catching this thing early as there is a rerating on the cards. One may think it is speculative but so be it. But when there is an affective rerating of RComm, I don't see any reason why the better companies in the group- Reliance Infrastructure and Capital should not catch the fancy.
So, if one wants to allocate capital, then they should be chasing the rally in RComm but they will be catching the first legs of the rally in Reliance infrastructure and Reliance Capital.
Disclosure: Dimensions Consulting have long positions in Reliance Communications.