Speaking to CNBC-TV18 UR Bhat, Director of Dalton Capital Advisors said that if the demonetisation woes taper off in the next 10-15 days, the market will get busy with other things.
Trading in Nifty, he said, he would be cautious with a negative bias because in addition to demonetization drive, a lot more factors play a role. He flagged uncertainty around the Italian referendum on Sunday, Donald Trump policy, and US potential interest rate. All this will keep markets in reasonable jitters, he said.
The fall in many auto stocks is a good place to buy, he said, adding that one should start the process, because there could be further corrections.
If FIIs continue their selloffs without being offset by DII inflows for a couple of more months , then Indian market may not be able to handle it.
In the NBFC space, some are overvalued, he said; three months down now, there could be pickup in demand for houses, he averred.
Among bright spots, he mentions select banks.
Below is the transcript of UR Bhat’s interview to Ekta Batra and Reema Tendulkar on CNBC-TV18.
Ekta: It has almost been a month since demonetisation was announced. We have seen two auto companies declare their sales though it might be an aberration. Plus, we have seen markets recover more importantly from that 7,900 odd level. Your sense? Have we passed the hump?
A: For the present yes, I think so because the immediate effect of demonetisation has been factored by the market. But it all depends on how cash becomes available to people standing in queues. If the problem is solved in the next 10-15 days, this will be forgotten and market will get busy with other things. However, if there is still a problem on logistics as far as cash management is concerned, there will be further pain because as of now, the market is discounting that the problems are going to be solved in the next couple of weeks.
Reema: So, till this whole situation plays out, what should be the trade that you would recommend on the Nifty? Are you convinced about the pullback or are we running ahead of ourselves or conversely, you would recommend selling into the rally if someone has a medium-term outlook?
A: The stance to take is the cautious to negative bias because in addition to demonetisation, which is the immediate problem, there is a lot more that needs to be factored in out of what is going to come out of the Italian referendum on Sunday because that can bring Europe back to centre stage in terms of the potential instability in Italy if the Prime Minister were to lose the referendum.
Also, there is a big if on the Trump policies. Trump appointments are happening and it is more and more hardliner sort of stance there. Therefore, what he is going to translate his election rhetoric into policies, that is something that the market will keenly watch.
Again, you have the December 15, you have a potential interest rate hike in the US. All these will keep the markets in reasonable jitters. Also, you have you seen one of the biggest outflows in November from foreign institutional investors (FIIs), USD 3 billion in equities and probably something around the same in debt. So, this is something that has been reasonably well countered by domestic institutions. If this were to go on for the next one or two, I do not know whether domestic institution will support. So if the FIIs continue to exit in this fashion, markets can find lower levels.
Reema: You were telling us you are cautious with a negative bias. You reading is that perhaps, 8,000 is going to break. But let us just talk a bit more on the auto sales. The numbers are looking very good from the likes of Maruti as well as Eicher Motors. How are you reading that? Why is it not tying in with the feedback that we get on the ground that retail sales have been hit, etc and what would you recommend on the auto sector now?
A: That is one of the few bright spots left largely because these are not cash purchases. You have to give your permanent account number (PAN) if you have to buy any of these vehicles. So, therefore, it is not really going to be impacted so much except for uncertainty on account of the demonetisation. So, people may postpone that a bit.
However, in November sales that you are seeing, it looks like as if quite a lot of the sales were already committed. Therefore, I do not think you can read too much into that. But I do not expect a huge slowdown as far as auto sales are concerned and auto companies will continue to be the bright spot.
Reema: So, this 10-15 percent drop in auto companies, the prices, the likes of Tata Motors, Mahindra and Mahindra (M&M) and Bajaj, it is an opportunity to buy?
A: Yes, one should start the process, not go the whole hog as it were because there could be further corrections in line the whole market.
Ekta: The FII outflows that you alluded to for the month of November, do you think it is limited to the month of November and maybe December and January could see some respite? What are FIIs thinking? What is the main problem with India right now? Is it global or is it demonetisation?
A: The logic behind the outflow, demonetisation was just a small part of that whole logic. But the larger logic is about emerging markets being not exactly favoured. Partly because of uncertainties in Europe on account of the referendum in Italy, postponement of Brexit, there is a lot of uncertainty about Brexit itself. So, Europe continues to be a matter of worry. Plus of course, the big one is about US interest rate hike and potential Trump policies. That is something that market is keenly watching out and the improvement in the dollar, the dollar has gained strength.
So, all this points to an outflow from emerging markets because this level of uncertainty being much higher, risk assets are going to be not favoured. Therefore, emerging markets generally there is an outflow and India cannot be an exception to that even though India might be the best among the emerging markets where potentially when there is an inflow, India might be favoured.
But as of now, the story is outflow and that is not something that is going to be restricted only to November. This will continue except that generally in December, the second half there is limited activity, so because of that, there might not be too much of an outflow in the second half. But the first half, the trend would continue because even in India, if you really see, FIIs have been exiting almost about Rs 1,000 crore a day plus for the last several days now. Therefore, USD 3 billion plus outflow in November is something that the Indian market may not be able to handle if it continues for a couple of more months.
Ekta: We have seen a significant correction in a couple of these darling sectors pre-demonetisation and pre-Trump election, non-banking finance companies (NBFC) for example. What is your approach towards them? Is it a good time to buy? Will they return to their peak valuations?
A: Some of them are terribly overvalued no doubt about it. Therefore, the market was probably waiting for an excuse to correct. That correction probably is well justified. But there would be certainly some pockets of values, especially in respect of housing finance companies because that is one, if for example, the real estate prices were to come down, to ensure that cash flows are well-managed, real estate companies will start cutting down prices. So, three months from now, there could be some pick-up in demand as far as small ticket houses are concerned. So, therefore NBFCs with housing finance companies might continue to be a bright spot among the NBFCs but not other NBFCs, which are terribly overvalued.
Reema: What about cement? That has also been another casualty linked with the expected weakness in real estate. How would you approach that?
A: This is one sector, which is going to be affected because of the demonetisation.
Reema: But is the hit on the sector in the price?
A: I do not think so. I do not think it is still in the price because there would be quite some slowdown as far as these companies are concerned because these are companies, which will bear the brunt of the demonetisation effect because at the end in real estate, there is a lot of cash. There is no doubt about it and the lowest starting point there, the daily wage worker and buying sand and cement, quite a lot of it is cash based. So, it is going to be hit and so therefore, there is going to be probably further correction in that sector.
Reema: Real estate cement, you see a correction. Bright spots you have told us are housing finance companies in the NBFC side and secondly autos. Would you like to add any more sectors to the bright spots or to the sectors where we could see weakness?
A: Maybe some select banks also, banks and NBFCs, especially banks which have got corrected.
Ekta: PSU or private?
A: Private quite largely but even PSU, those who have negotiated the non-performing asset (NPA) problem -- at least they are not adding to the NPA problem in the September quarter. They might continue to do well even though there might be some problems on account of cash inflow and all that. But they are on their way to mending their NPA problems and so therefore they are at reasonable valuations.
Ekta: Restricted to the Nifty constituents, the PSU banks?
A: Yes, the large ones which have managed to handle NPAs or at least not grow the NPA book even further in September quarter. They are the ones one could probably pick.