Sanju Verma, MD & CEO Violet Arch Capital Advisors, says that for India, the month of September from medium returns perspective has been one of the best months for Indian stock markets in the last 21 years with the medium return of 4%. If the past is anything to go by then September should be a good month. However, in terms of risk adjusted return wherein lot of weightage is given to volatility then September becomes the fifth best month from a stock market performance perspective.
Below is the edited transcript of her interview to CNBC-TV18.
Q: The GDP is languishing at 5.5% and high inflation, do you think that the time has come for India’s sovereign rating to be downgraded to junk status and do you see it happened before the end of the year?
A: At the moment it is not material to talk about a rating downgrade. I see no reason why Russia, Italy and Ireland should share the same rating by S&P and Moody’s.
Italy and Ireland have a debt to GDP ratio between 80%-120% and Russia’s debt to GDP is 8%. These three countries have a rating of BB+ or BBB-.
For India, the month of September from medium returns perspective has been one of the best months for Indian stock markets in the last 21 years with the medium return of 4%.
If the past is anything to go by then September should be a good month. However in terms of risk adjusted return wherein lot of weightage is given to volatility then September becomes the fifth best month from a stock market performance perspective.
But given the consistently high returns over the last 21 years which is what a medium return is very assuring. I think September should be better than last couple of months that have been.
I agree that the GDP, service sector and gross fixed capital formation number have been disappointing. It is disappointing that for the first time in three quarters the implied GDP deflator has risen from 6.7% to 7.5% may be due to hikes in excise duties and service tax rates and is a matter of concern.
Till about a month back, all brokerages were talking about monsoon and the rainfall deficit being to the tune of 15% or 20% but the rainfall deficit is only 13%. We expect agricultural growth between 1.5-1.7%. Many brokerages which had downgraded the GDP growth number to 5%, 5.5% based on a negative GDP growth I think certain upgrade could be in the offing because now as I see it with this stupendous recovery in the sowing activity in the last one month with the overall deficit down to just 13% a agricultural growth of 1.5% seems to be realistic.
Q: In such a scenario what would you do with your portfolio? What's the change that you would recommend for investors, should one continue to stay invested in defensives and FMCG which have done well so far or have they peaked out and its time to do some bottom fishing?
A: As I have always maintained in the last couple of months, the whole dichotomy between defensives and cyclicals is too stretched. It has lost its relevance in the current scheme of things.
I would still go and buy an HUL which is trading at 36 times one year forward I may not be enthused by Nestle, not because it has shown a 15% growth in profits but mostly because I can't understand why the company had shown a forex loss of Rs 95 crore.
Similarly, look at cyclicals for instance, the auto ancillary space has done seemingly well in the last couple of months. I wouldn't buy Motherson Sumi again a company given its size has notched up a forex loss of Rs 200 crore for the June quarter. I would be slightly vary of putting my money into Exide, where a 25% plus growth in sales for the June quarter has not resulted into profits, net profit is down 7%, margins are down from 20% to 15%.
I would still go ahead and buy Apollo Tyres. The full impact of international rubber prices haven fallen from Rs 250 a kg to Rs 200-210 has still not been fully capitalized on. This is a company which will show you a compounded earnings growth of nothing less than 20-25%; there is certainly more headroom available. One has to be slightly discrete rather than blanketly buying cyclicals or defensives.
Yes, if stock price and sectoral performance are anything to go by then the pecking order with respect to sectoral choices at this point in time would be FMCG followed by pharma. I would pepper that up with banking sector given that banking stocks despite all the negative buzz about NPAs, under capitalisation in some cases, NIMs coming under pressure, banking as a sector has still returned 3% by way of returns in the last quarter purely from an appreciation perspective.
Q: Is there anything in the metals space that you would buy now because in previous times of downturn some of these stocks like JSPL gave phenomenal returns?
A: Metals have been in the news for all the wrong reasons with most base metals trading well below their marginal cost of production. We have chosen to be contrarian here. SAIL is our top pick.
I think in the case of metals, I am not saying go and buy SAIL because it is trading at a price to earnings of eight times or it is trading at a price to cash of four times, for the most metal companies including Hindustan Zinc, they are sitting on a cash between 30-35% of their market caps. In these trying times, companies which are sitting on cash are companies that you would like to take a serious look at.
Valuation comfort is certainly one of the reasons, but most importantly in the case of metal companies the downside has troughed out. Things can only get better. In the case of SAIL, there has been buzz that the company’s net profit is going down by 18%. How many of us mentioned that despite cost of production increasing by 8% y-o-y for SAIL for the June quarter, the EBITDA per tonne has gone up by 29%, which is one of the most parameters of valuing a metal company like SAIL.
Do not be mislead by the fact that a SAIL between FY12 and FY14 will hardly give you too much by way of compounded earnings growth. It could at least be in the region of 8-10%, but since the cycle has troughed out. There is headroom to believe that things can only go better from here.
Same is the case of Hindalco, they are prima facie with a 34% fall in net profit. The results look far from impressive, but I think the big story here is what will happen once the Hirakud smelter and Mahan expansion and the Utkal Alumina Project all these come on stream, then the growth story can really be big.
Novalis has been doing phenomenally well, notching up and likely to notch up EBITDA to the tune of USD 1 billion or USD 1.5 billion over the next 1-1.5 years every single year. I think that metal companies look good, but within that I would be more bullish on the ferrous space with SAIL being our top pick and from the non-ferrous space it has to be Hindustan Zinc.
Q: What have you made of the impact all this coal blocks scam will have on the entire power sector and how the situation will play out from hereon?
A: The situation is very complex. This whole debate about whether Coal India should be privatised and open bidding should be allowed. I think people who talk about this certainly don't seem to have done their homework because as per the Coal Nationalisation Act, open bidding for commercial purposes by private parties is not allowed.
So, there was no way that the government could have allowed open bidding or competitive bidding. Theoretically there is no reason to support monopoly by Coal India, which means that at some stage the Coal Nationalisation Act will have to be amended.
Q: There is a lot of political posturing that we are seeing from the Samajwadi Party as well, a talks of a surd front emerging, etc where do you see all this political chaos land up and what could the end game look like now?
A: The political posturing is posturing at the most. One needs to understand that the Prime Minister really had no role to play, in fact anyone in his position would not have been able to do much because the whole coal scam, the coalgate mess, the so called loss of Rs 1.86 lakh crore, I am not condoning it but the point which the CAG has failed to mention is that how can one talk about open competitive bidding which all political parties including the Samajwadi Party have been asking for without amending the Coal Nationalization Act.
If you take a look at Orissa which is one of the richest coal mine belts in the country. 300 million tons of thermal coal is available in Orissa itself which can fire two thirds of our existing coal-based power capacity. Since 1993 till now some 63 coal blocks were granted by the Orissa government only one has commenced production.
It is true that a lot of these coal blocks were allocated to state entities and private players under the captive coal block scheme. Why is it that they were not able to monetize these captive assets? The problem here is there should be some penalization for lack of utilizing of the coal blocks that are allocated to any entity could be private could be public and before we debate this in the Parliament, this needs a constitutional amendment. The whole problem has arisen because the three most important things which are required to produce power be it via gas, coal or hydro are land, forest and environmental clearances.