The market is likely to correct if the BJP loses state elections in Uttar Pradesh, he said. The effect on the market, he said, will depend on the quantum of its loss in UP. He nonetheless added that a BJP loss will be a great time to buy.
The market is likely to correct if BJP loses state elections in Uttar Pradesh, he said, adding that the quantum of any such correction will depend on the nature of the loss. Nevertheless, even such a correction should be bought into, he said.
He is neutral on the pharma space and suggested investors stay stock-specific for the sector. He likes Cadila, Aurobindo and Sun Pharma from the space.
Religare does not have a buy call for the metal space, which has outperformed recently Trivedi said metal prices will soften in the near future. He likes Hindalco from the metal space.
Below is the verbatim transcript of Gautam Trivedi’s interview to Latha Venkatesh, and Anuj Singhal on CNBC-TV18.
Anuj: You have done a lot of research on what is happening in Uttar Pradesh (UP). The market is telling us that it is now beginning to bet on a BJP win in UP, is that the sense you also get from the feedback that you have received?
A: Not yet actually. It is still not very clear on who is a likely winner here and I think the market may initially react negatively for maybe a day or two if at all if they lose and again the quantum of loss is also important. However, the fact is, BJP not making into UP will not have that big an impact as much as what a lot of people believe in the market. I think that is something which could be limited.
Latha: What were the signals you picked up in UP first?
A: I don’t want to get into that. The fact is the political commenatry that we are getting back is it is really neck-to-neck between the Samajwadi Party (SP) and the BJP. The fact is that Congress having teamed up with the SP has actually been a huge positive. So, that is the way it is being perceived right now, but again we never know until the election date.
Latha: Why would you say that that will not be perceived as a material event at all, you think at the most if it was an adverse verdict, the market will perhaps dip or not dip at all and just move on?
A: I think the market will definitely correct depending on the quantum of a loss if the BJP were to lose. I am not necessarily saying it is not a big event. However, the fact is, I think it will be temporary because there is so much money coming into the market. If you look at the domestic mutual fund industry itself, in the last six months it has taken on an average of about Rs 7,500-8,000 crore a month of net inflows into equity funds.
So, I think if that were to happen and if BJP were to lose, and I hope they don’t, but if that does happen and depending on the quantum of the loss, I think it will be a time to buy. So, I would not really worry that much about the market having a major correction as a result.
Anuj: The talking point of last three or four days has been the huge move in Reliance Industries. What have you made of that, good change all of a sudden, the fact that they are making Jio paid now, do you think that deserves this kind of rerating and what is the call here?
A: The stock has been a huge underperformer, we have seen it for the last about six to seven years and I think because the company has been largely in a capex mode, so, the earnings and a lot of these capex and projects are very long ended. So, finally we are seeing the fruits of that. As far as telecom was concerned, I think that really was the big joker in the pack and how would Reliance be able to pull it off, what would be their pricing, what would be their strategy and so forth.
Finally when Mukesh Ambani announced the new plan, Rs 303 plan which I think is a phenomenal and a brilliant plan, it completely resets the pricing model in the telecom industry and hence you have seen a flurry of M&A activity since. Look at my personal case. I have an average revenue per unit (ARPU) of about Rs 7,000-7,500 a month, I will go for the Rs 303 plan. It is a no brainer. It is massive cost saving for my company and it is a massive cost saving for corporates across the country.
Now whether the incumbents come and match it or not, we don’t know, but the fact is Reliance is basically once again demonstrated its ability to come and reset pricing in a specific industry; they have done it before in polyester and this is a great win-win for consumers. So, I think the economics of this industry have dramatically changed. The fact is that they have now finally gone to paid and this is really the trigger the market was looking for.
Latha: But year-to-date (YTD) it is Idea Cellular that has moved a lot more. What would you do with that stock?
A: Don’t forget, Idea has only moved in the last six weeks on the merger news, otherwise the stock had completely collapsed; let us not forget that. So, I think the fact is whether Vodafone and Idea merge together or remain standalone, the question is can they match Reliance’s rates. If they can’t match the rates, then we have got a problem.
Anuj: One more space where we have seen some rally off late is pharmaceutical. Do you get a sense that the risk reward is favourable here now after the kind of correction that we have seen, of course it is stock specific?
A: You are right, it is very stock specific. Our top picks are Cadila Health, Aurobindo Pharma, and Sun Pharmaceutical in that order. However, the fact is, the space in general, we have a pretty much neutral view on the pharmaceutical space. Don’t forget what has happened in the US, the number of distributors in the US have consolidated down from six to four. Now, these four account for 85 percent of the US generic market. So they have huge pricing power and control over pricing should I say and that is not necessarily good news for a lot of the companies that are in the outsourcing game especially the Indian companies.
So, I think you have got to be careful about what that means and I think a lot of people are still awaiting to see what may unfold from the Trump camp in terms of additional measures to limit imports. So, again, I think there are a lot of moving parts. Again, the same thing supplies to Indian IT, so, as result, I believe that, we believe should I say that it is very stock specific and like I said, the three stocks Cadila, Aurobindo, and Sun Pharma remain our top picks.
Latha: The stock that has moved quietly and was not in the news in the past couple of weeks has been Yes Bank. We have spoken a great deal about other private banks but actually YTD one of the biggest gainers has been Yes Bank. Your private sector banks space opinion in general and Yes Bank in specific.
A: The overall banking industry has seen – currently we are seeing a 5 percent credit growth and a 15 percent deposit growth. Now, that 5 percent credit growth may actually improve slightly maybe in the next couple of quarters to maybe 8 percent, but the reality is we are not really seeing the credit growth that the country needs at this point because of limited private capex, limited capex in general.
Now, in spite of that, we have got a couple of banks out there that are bucking the trend, IndusInd Bank, Yes Bank being the two case in point. We have heard a buy on Yes Bank for the longest time. My analyst Parag Jariwala loves the stock and has the highest target price on the street of Rs 2,000. So, I think that is the stock we will continue to back and I think Rana Kapoor has done a phenomenal job of taking the stock to the next level.
Anuj: What about NBFCs, is there anything that you like in this space?
A: We still like Cholamandalam. That is the lone buy we have in the space right now. However, the fact is, the NBFC space I think even investors are taking a bit of a breather here and reevaluating whether at these valuations anywhere from 2.5-3.5 times, and some are even more expensive, if this is really a time to add more or should they wait for a correction. I don’t think there is going to be major correction, but at least for prices to come off a bit. So, this is a sector which over the past about 18 months saw a massive rally and now I think people are really wondering if this is time to add any more.
Latha: What about housing finance, would you club it with the same brush or paint it with the same brush or do you think they have a little more to go?
A: I think they might have a little more to go given the fact that prices are indeed softening for residential real estate across the country which makes housing more affordable and hence the need and demand for housing loans. From a private equity standpoint, that has been a very hot sector right now, in the unlisted space of course. So, I think valuations there will to some extent spillover even in the listed space. So, I think that is in a bit of a different orbit but the reality is the overall NBFC space I think we are pretty cautious now given valuations.
Latha: What therefore are you looking for in the market, are you looking for 9,100, the all-time high being taken very easily and what about the metal trade, will that continue, is that a crowded trade?
A: On the metal side, we believe steel prices will actually soften a bit globally as well as to some extent in India; not so much in India because we have the anti-dumping duty. However, they will soften a bit, not so much because of the fact that China is threatening to shut more capacity but more so because of the fact that coking coal prices have corrected by as much as 50 percent. So, there will be a little bit more softening. We do not believe or do not have a buy on any steel stock right now and our top pick within the metal space overall remains Hindalco. So, that is a stock we like.
On the market as a whole, I still believe that we are in a situation where domestic flows, flows in general into the equity markets are so strong that earnings have taken a back seat. So, if you look at the last five year, FY13 till even YTD FY17, we have seen the Nifty go up on a five year CAGR of 10 percent whereas earnings growth at best has been 4.5-5 percent over this period of time; this is an average. So, the market is really being determined by flows rather than earnings growth at this point and I think because of that we believe the market is going to trend higher.