Exit Renuka, switch to better stocks: IIFL Private Wealth

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Even though the broader index was relatively flat yesterday, the midcap space saw carnage. Prashastha Seth, Senior Vice President at IIFL Private Wealth believes that this volatility will continue till there is some certainty in terms of the economic outlook.

Talking about Shree Renuka sugars, Seth said that investors should look at exiting the stock and moving into better stocks. "The sugar sector moves in a cycle. If the agricultural commodity cycle is favourable, the stock will do well and vice versa. A high interest rate environment is possibly not good for these companies" he said in an exclusive interview to CNBC-TV18.

Depending on one's risk appetite, Seth recommends PFC , REC or even smaller banks as a better bet.

Below is an edited transcript of his interview with Anuj Singhal and Latha Venktesh. Also watch the accompanying videos.

Q: What have you made of this big underperformance that we have seen in the midcap space? Is it likely to continue?

A: I think you might continue to see that till the point certainty emerges on the economic outlook. What is happening is people want to hide in the safe stocks, stocks where earnings ability is there. So I think there are a lot of macro economic uncertainties with respect to growth, interest rates and how the capex cycle is going to fare from here. I think till the point the clarity emerges and macro economic outlook becomes more positive, you will see people continuing to hide in their stocks. Whatever has been outperforming might continue to do so going forward as well.

Q: An investor has 500 shares of Shree Renuka at Rs 64. Should they continue to hold or sell at present rate?

A: I think you have to take it as a trading call rather than an investment call. The sugar sector moves in a cycle. If the agricultural commodity cycle is favourable, the stock will do well and vice versa. The problem with some of these companies is that their balance sheet is extremely leveraged. So to that extent, high interest rate environment is possibly not good for these companies.

I would probably sell it and switch to better stocks because there are a lot of stocks available at good valuations. I think it is more of a trading bet rather than an investment bet at this point in time.

Q: Get out at current levels; do you mean get out at Rs 59-60 or thereabouts?

A: Yes, and move into better quality stocks. My sense is that agriculture prices might be weak, that is number one. Number two, is because of the leverage in balance sheet your interest cost probably will continue to be very high for some of these companies. I would definitely not put in money in Shree Renuka at this point of time.

Depending on the profile, if somebody who wants to take a risk, PFC or REC or even smaller banks could be a better bet. Even the NBFC space looks better than Shree Renuka at this point of time.

Q: An investor has 1000 shares of Punj Lloyd at Rs 84. What is the future of this stock?

A: I don't think there is any point in selling at these levels. I think Punj is not going to go back to Rs 200-230 levels that it has seen before this fall began. But at this point, markets are pricing in zero execution, continued issues in its subsidiaries and high interest rate environment. So any bad news is probably priced in or at least a lot of the bad news is priced in.

There might a correction of 10-15%, but I would not sell it. You will definitely get rallies with macro environment changes. But at the same time, investors must realize that some of these infra names are not going to go back to that levels seen one and half years back. So you shouldn't wait for those kinds of numbers levels to sell. Some of these stocks have just been beaten down a bit too much. Along with bad news flow, you might have another one or two quarters during which things continue to underperform. But for somebody who has bought it, I don't think it makes sense to sell Punj Lloyd at Rs 58-59.

You must remember that over the next one or two quarters things are going to be tough. The government execution has to improve and so does the Punj Lloyd Middle East situation has. To that extent, I think averaging should be avoided till some clarity emerges. On an absolute basis, this is not a bad level to buy the stock.

Q: An investor has 25 shares of Bharti at Rs 390. What will be the scope within one year?

A: I think Bharti will do well. It seems that the tariffs bottomed out so you have seen Bharti, RComm , and Tata Teleservices raising their rates. To that extent, every incremental increase in tariff directly flows in to the bottomline.

I think the only concern about Bharti is concerning Zain's operations in Africa and that is a difficult call at this point of time. Management has been guiding for significant improvement in EBITDA from African operations but you will have to wait and watch and see over the next two-three quarters on how these things pan out.

I think there is positive news possible from Indian operations and Africa could also possibly throw in a positive surprise. Given the current macro environment, I think investors will continue to like and hold stocks like Bharti. I would continue to hold Bharti because there will definitely be positive returns. But whether you get a 10% or 25% return depends on how African operations shape up over the course of the next one year.