Speaking to CNBC-TV18 Rajat Rajgarhia, MD, Institutional Equities at Motilal Oswal Securities, said markets have shown a resilience. Near-term impact has been severe on corporates, he said, adding that he will be surprised if markets break the recent low made last week.
NBFCs' growth rate may have come down from a high of 40 percent to about 20-25 percent. Organised financing business get stronger. He mentioned the likes of Bharat Financial and LIC will attract their target audience. “You need to be more selective now.”
In the consumer space, he said high-ticket items will see a postponement as people will delay such purchases in the light of demonetisation.
“The whole trend within banking where retail lenders gained over corporate lenders…there may be a bit of a reversal.”
Cement companies’ valuations have been up. The demonetisation event has normalised valuations, he said, adding that the housing market will be a large driver for cement sector.
In the last 2-3 days, while emerging markets have seen inflows, India hasn’t attracted foreign investors, he said, adding, however, that this will be offset by domestic flows. “Flows from DIIs will pick up pace.”
This time the Budget rally will coincide with companies reporting their earnings. “If markets remain in the 8000-8500 range we will weather this period.”
Below is the verbatim transcript of Rajat Rajgarhia’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: Do you think the market is showing a bottom at that 7,920 mark, are you all buyers?
A: In the very interim, yes, the market has shown a bottom. I have been surprised by the resilience of the market because the near-term impact of this news has been so severe on the corporate space that the market could have gone down.
However, generally, globally markets have been quite strong. Emerging markets (EMs) have started seeing some flows, so our market has also seen some rebound. Right now for the time being I will be surprised if we break that recent low that we made last week. So, that is why market is into some recovery mode right now.
Sonia: Would you buy any of the auto stocks now or do you think that there is still more correction to go as the demand pressures continue?
A: Rather than now buying every auto stock, you will have to be more selective on where does that demand recovery will happen sooner. Within the categories, commercial vehicles will still see recovery happening later than some of the other categories. Passenger cars may have seen demand being merely postponed and not cancelled.
Again -- at the rural level, given that the expectations from the rural post this monsoon has been good -- tractors may have seen couple of months of postponement, but you will see recovery coming back again. So, within that auto pack Mahindra and Mahindra (M&M) and Maruti Suzuki are the two names where one can still be more constructive right now.
Anuj: The space that has made a big comeback is non-banking financial companies (NBFCs) so two part question a) do you think the concerns were overdone and that is why we have seen relief rally and b) how much more to go from here for these stocks?
A: NBFCs has been one of the first bunch of companies, which have been hosting calls to calm down the investors’ fears. The story pre-November 8th was all these companies were growing at 30-40 percent, they were trading at 3 to 5 times price to book; 15-25-30 times earnings. This just puts some breaks to that accelerated growth. All these companies now go back to their drawing board, try to look at the segments, the risk that can come. So, what all of these things does is slowdown the growth in the near to medium-term for these companies.
That 40 percent growth rate comes down to probably about 20-25, but structurally, if you look at the entire demonetisation the organised financing business just gets stronger. So, whether you have business models like Bharat Financial Inclusion or a Muthoot Finance or LIC Housing Finance, the target audiences for them just gets more. You need to be more selective to buy NBFC now compared to pre-November 8th that almost any and every NBFC was just getting re-rated and was into a chasing mode.
Latha: The long and short of the demonetisation how has your research team received it? Which stocks are you worried about at all?
A: I am worried about spaces where the business models will take lot longer to recover right now. This comes and impacts right at the discretionary front and within discretionary you can now re-coin the terms in to two phrases one is which is necessary discretionary and second is luxury discretionary. The high ticket value items will see postponement right now.
Slowly and slowly, we were thinking that media will start becoming a more necessary discretionary. You will start seeing branded apparels at the bottom of the pyramid becoming more necessary discretionary. However, maybe luxury cars, things that you can postpone for a year, a lot of the people would like to delay it for some time.
Secondly, this whole trend within the banking where retail lenders for last four-five years gained significant prominence over the corporate lenders. You just may see that little bit of reversal happening into the market share where corporate lenders -- I am here essentially talking about some of the PSU banks also where the focus on liability franchisee can become so strong that many of these stocks can start looking to outperform the banking Index.
Latha: Any comments on rupee, we have weathered a very big storm on the rupee?
A: That is a very important achievement, but nowadays we talk quite often in the team that the fear in the market is not from known, it is from unknown. foreign currency non-resident account (FCNR) fear was well-known, the demonetisation fear was unknown.
The market these days react more to events that you cannot forecast. The next big event that markets have to weather is the December quarter numbers, where people are right now fearful of what companies are going to report. So, let us see in another month or so.
Latha: How much are you trimming earnings and in which sectors?
A: You will have to give us couple of more days because we are compiling all other aggregates and hopefully this week we should come up with a report, which will give a full summary of which sector and aggregate level how the numbers are being cut. However, I just wanted to leave one thought that the aggregate numbers may not see a meaningful cut because almost 40-45 percent of our earnings come from export oriented models where you will not see any cuts in the estimates because of this.
In the remaining 50-55 percent, you may see a bigger cut in Q3 maybe because of the sudden collapse, but otherwise full year numbers will not see any meaningful cut still.
Sonia: You spoke about how you like some of these consumption names in the auto space like Maruti and M&M. What about the two other pockets, paint companies and cement? Any picks there that one can still look into buying now?
A: The problem with cement was first the forward estimates kept on getting trimmed down every year for the last two years. However, the valuations kept on moving up. Some of the largecap cement names started trading at 50-70 percent premium to their replacement cost. What this event has done, it has at least normalised valuations for some of the companies. The big boost for cement will come whenever you will start seeing the sops coming from the government for housing. Housing will still remain central to the cement demand for the next many years to come.
I would generally be positive on cement from FY18 point of view and at least this correction makes people again start looking to pick up some names that they can. However, it is not going to be a full sector call, you have to be very selective about the names.
In paints, again problem is valuations, you have 15 percent growth but you have 35 price to earnings (P/E). How do you make money in them? It becomes a 5-10 year story. At least that is not a space, which we will be very excited right now to own from the next 12-18 months point of view.
Anuj: Since you head the institutional team at Motilal, what is the feedback on fund flows because we have seen consistent foreign institutional investor (FIIs) outflows some part of it is being matched by the domestic institutional investor (DIIs) and do you think this EM problem has more legs to go in terms of this FII outflows?
A: If you look at since November 8th, we got a little confused on how much of the outflows was relating to this whole demonetisation because EMs themselves were receiving outflows from FIIs. However, in the last two to three days while EMs have started seeing inflows again like this week Korea, Taiwan have seen USD 300-400 million of inflows, India continues to see outflows. So, there are pockets of investors within the global markets who are still worried about India from a very near-term point of view.
However, that is more than adequately being offsetted by the domestics and I am very positive on the domestic flows. With the fall in the gold, the interest rates, equities is the only place for long-term investors to come and earn any respectable double digit returns from here. So, the flows from DIIs in the coming days and months will only pick more pace.
Latha: Finally would you brace yourself for a decent pre-Budget rally?
A: This time the Budget rally will coincide well when corporates will come and keep reporting December quarter numbers and further temper down our expectation for the March quarter. So, if the market remain in this range of 8,000 to 8,500, we will weather this period every strongly.