The house has avoided technology stocks for the last two years and are hedged on metals, technology, and pharma, said Andrew Holland, CEO, Avendus Capital Alternate Strategies.
Talking about the poor show by Infosys in its fourth quarter FY17, he said it is no longer a growth stock. The new strategy has not worked for Infosys and its business model has broken down, said Holland in an interview to CNBC-TV18.
Goods and Services Tax (GST), according to him could be a game changer for lot of manufacturing and industrial companies and so we could have some winners from that space. Hindustan Unilever (HUL) could benefit from the GST and so could be the next contender for superstar list of stocks.
Consumer space is turning out be a good place to hide, said Holland, adding that the house has invested quite a lot in consumer stocks. According to him, shipping sector is also starting to look good. The Baltic Dry Index is at all-time highs, he said.
Turning back to markets, he said globally, most markets are overstretched and so they are 70 percent hedged in the market. He is not too convinced about the US Trump rally and there could be a global sell-off which could bring out market down too. Moreover, earnings season in India, are not going to be great, GST also could be disruptive for at least three months if not six, said Holland.
“In the past month it has been bad news is good news and good news is great news but we will away from that stance soon,” said Holland.
Infosys Thursday reported consolidated profit at Rs 3,603 crore for the January-March quarter, degrowth of 2.8 percent from Rs 3,708 crore in previous quarter.
Below is the verbatim transcript of the interview
Sonia: I cannot help but ask you about Infosys, given the kind of sustainable weakness we have seen in the growth over the last many quarters, you think Infosys has now fallen off the radar of long-term investors and it is no longer going to be even a market performer that it used to be at one point in time?
A: You can certainly take it off the growth label, it is not a growth stock anymore and I think that is still what the market is hoping for and it is just not going to get it going forward. The whole model for them has broken and that is what you are seeing in terms of the earnings. And if you throw in the rupee headwind for them then the stock could easily fall 10 percent before it is even worth looking at.
You can talk about share buybacks and dividends but how do I value it -- it is not a growth stock anymore so it is more like a utility throwing up some cash but unless they can reshape themselves of which they spent many years now trying to do that, it has not worked, you are going to have a stock which is not quite that kind of knocky at the moment.
However, you have to check and find a new growth angle, they are just not doing it, they are sitting on far too much cash, they are not making any acquisitions and nor reinventing themselves and they have to do it. So the figures we can look at them and we can analyse them but basically, the whole industry is on a downturn and there is nothing they can do about it right at this moment.
Latha: Which is the iconic stock across the market for the Nifty itself?
A: There is obviously going to be a number of new contenders for that. I think it is going to probably come from different areas going forward as the market evolves and whilst a little bit more negative on goods and services tax (GST) going forward, I think it is a game changer for a lot of manufacturing and industrial companies.
We are going to get some real winners from there so when I think about – I have been very negative on the Hindustan Unilever Ltd (HUL) because of the price to earnings (P/E) but what I think about that kind of stock and how this could be a game changer for them is significant. Plus let me throw in that globally the company now will have to restructure itself otherwise under the Kraft it is going to come after them and try and take them over. So there is a lot of good news that could come from HUL over the next one year. So that is the kind of stock, which I think could be the next contender for your list of superstars.
Sonia: What about some of the ailing superstars, the metal space? We are now starting to see some money being taken off the table there, is this a good time to be putting in more money into this space or do you think that the story is completely done here?
A: There are a couple of things and in the very short-term, you have seen that the China housing market has come up quite significantly and steel prices in China now are at the levels of Indian steel prices. So you could see some imports now from China even with the barriers that we have in terms of import duties. So the recent increases you have seen by the metal companies in the India will have to be reversed because China you are seeing the imports and export figures today which you get is little bit lukewarm. I think they are going to start having to export the way out of it and I think that means dumping again.
Latha: Do you still run one of those long short funds of yours in your new avatar at Avendus and if you are then where would you be short and where would you be long?
A: We have successfully launched our fund last month, still raising some more money but at the moment we are about 70 percent hedged because we feel that markets not just in India but globally are over-stretched.
I would say a few things now about the US market and the so called Trump rally, which I have never believed in because he inherited a strong economy. He is talking the dollar down, he is also saying that tax reforms that he is trying to bring in will take longer than he expected and the infrastructure spending of one trillion dollar which he has never put a timetable to seem to have gone into the backwaters in terms of when that is going to happen.
So if you look at the dollar and you look at the 10-year bond yield, they are where they were before Trump came in, so it is only the market that are holding up and the market is losing its patience with this reflation trade that Trump is going to deliver. I think he will deliver but I do not think it is going to be the timescale the market is expecting. So we could see a global sell off very soon and that will bring our markets down because the earnings season – we just started with Infosys right now - is not going to be great and GST as we have maintained for some time now is going to be disruptive to the economy for the minimum three months if not six.
Sonia: Are we looking at banks as a big casualty when the markets do sell off because there seems to be no resolution to the non-performing assets (NPA) issue just yet and this time around as well, the earnings are expected to be lacklustre?
A: I do not think it is just the banks, I think it is across the board. I do not think if you look at the data coming out, I do not follow the index of industrial production (IIP) data because it is too volatile but every company we speak to has not seen any v-shaped recovery from demonetisation. It is very slow and just as recovery may be picking up, we will have GST been implemented so it is going to be a poor year for earnings.
We are already down to 15 percent earnings growth by most brokers. I suspect that is going to get down to 10. So maybe we cannot state these kind of valuations, it could be wrong because of global liquidity but global liquidity always has something that will pierce that bubble and it is usually not something which is very positive. It could be North Korea, it could be Syria, you do not know what it is going to be but it is certainly that the past – I would say the past month has been bad news is good news and good news is great news and I think we are going to move away from that kind of stance very soon.
Latha: Where would you take off money, you said that you are 70 percent hedged, which are the places where you are going to take off? Would it be these metal names, would it be bank names?
A: I think where we have been putting our hedges has been -- you are right on the metal side, certainly the technology side, and pharmaceutical because both those sectors won’t get hurt by the rise in dollar but also the headwinds against those sectors. The pharmaceutical and IT are so heavily geared to the downside that they make natural hedge for you in terms of where the markets are.
Banks we have not really taken the action yet partly because the momentum is there. There is just so much talk about restructuring bad banks, NPLs, restructuring that it is keeping the momentum there. However, once we finally see what the finance minister does then we will take a better course of action. However, my feeling is that PSU banks have certainly out run the expectations that we had and that is where probably the most gains will be when markets do fall and the banking sector falls.
Sonia: You spoke about Infosys and how particularly for this company the business model may have been broken, but what about the sector as a whole, it just gives rise to a lot of uncertainty with respect to H1B visas and what the incremental negatives could be. Is this a sector you would avoid entirely?
A: I have been avoiding it for last two and a half years but I would continue to avoid it. I have said before and I will say it again but I think of these stocks now as utility and if you are a utility, you have to pay me huge amount of dividends. The yield is what we are holding the stock or you do a buyback or both and I think that is where we are. I can\'t think of it as a growth stock anymore, those days are gone.
Latha: Where would you hide, NBFCs, any of the midcaps? If you have to invest, where would you hide and you are 70 percent hedged, where are you not hedged?A: We are in quite a lot of the consumer stocks because that is a good place to hide. I have already mentioned one stock to you which I think could be a big beneficiary of that. Also, the shipping sector looks a little bit more interesting. If we look at the Baltic Dry Index (BDI), it is reaching all-time highs. So, there is obviously a lot of movement in terms of export and import trades and that is what keeping the Baltic Dry Index very high. So, the shipping sector is also looking quite good.