For better returns, invest in consumption cos: IIFL

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While the 2004-2007 bull market was led by companies that invested a lot in expansion and concentrated on capital expenditure (capex), Sandeepa Arora, Vice President of India Infoline, believes, now, companies that focus on consumption will fare better in the stock market.

Between FY04 and FY08, the entire rally was led by the investment theme. That has slowed down because we are not going to look at corporate capex come back in a hurry. Most of the fund raising has gone not towards capex but more towards paying off debt. So the investment theme may take a backseat for a while," Arora told CNBC-TV18 in an interview.

"But the whole consumption theme whether it is auto or FMCG for that matter be Dabur has continued to do well," she said.

Arora termed the recent correction as "healthy" because of the one-way rally that took place last year.

Below is the edited transcript of Sandeepa Arora's interview on CNBC-TV18. Also watch the video.

Q: We had a hellish last week. Is the worst behind us you think or would you fear for February?

A: That is a tough call you are actually putting on this spot but I would assume that we are pretty much at the bottom. Our sense was probably Nifty closer to 4,600-4,800 is where we probably see the bottom. I think the worst is behind us.

Actually if you look at it through the entire recovery, we have not really seen a major correction, this being the first so it is actually very healthy for the markets.

Having said that I think we are pretty close to the bottom and I do not see too much downside from here at least.

Q: You are in the midst of that IIFL Conference. What is the sense you are getting because the one thing, which is alarming people is the string of FII sales that we have had over the last week, fortnight are people still interested in buying at lower levels or is there are risk aversion that you sense at the conference?

A: The conference starts February 3 so we are not in the middle of it but the sense that I am getting from speaking to various clients is: we have not got a really very negative response from anyone. On the contrary, in fact, if we have seen a lot of bullishness on emerging markets especially India.

So I think that would continue and like I just mentioned, since the start of this rally we have not really seen any major corrections. So I do not think we need to worry about thus one correction because it is something that is very healthy for the markets in the long run.

Having said while we are very sanguine on India and emerging markets - it also needs to be complimented by the continued recovery in the global cycle. That is a big if. So the worries are from the global side and not so much on the emerging market side.

Q: Are these possibilities in your eyes, retest or going back to the support of 4,540 where we pulled back from last time we had a major correction?

A: As far as possibility goes, anything is possible, the probability I do not know. I do not think so unless like I said something disastrous happens on the global front. On India as such, we are not really bearish but if an event takes place that is not foreseen or something like that anything is possible. It is hard to say.

Q: Your conference kicks off soon enough. I imagine you being engaging with clients and corporates what are you hearing about this intense outflow of money we have seen. Some say it is ETF, some say it is Asian fund pressure what exactly is leading to so much by way of an outflow?

A: A lot of these funds had come in early last year when we were seeing a lot of pessimism so I would think that a lot of profit booking is happening. There is not really so much to worry about. The sense that I am getting is that it is largely ETF-driven it is not so much long-only-driven.

Like I said if you take a slightly longish view, I have not really heard too much of pessimism or any such statements from any of the clients that we are speaking to so I am not really worried here.

Q: What about the earnings season? What did you take away from there? At IIFL did you have to upgrade a lot of stocks or it was pretty much in line and there were not major surprises for you to drive stock prices further?

A: No. There have been surprises to say the least. But I think going in line with our call on the markets that we are primarily bullish on the consumption theme and not so much on the investment theme that is something that we have not stuck for a while. If you look at the results, barring a few here and there, if you largely look at the consumption names they have done fairly well barring one of two names here and there like Lever.

But the whole consumption theme whether it is auto or FMCG for that matter be Dabur or any other stock most of them have done extremely well. In fact, we have seen some positive surprises in some of these names.

On the other hand, if you look at the entire investment theme, which we believe is going to be in that slowdown and will continue to do so in maybe the next six months or so those are the results that have been fairly disappointing.

But that has been pretty much in line with the call that we have been making. So I think broadly we will see moves in the index driven by some of these consumption-linked names that is where we are bullish on.

Q: You are showcasing quite a few of the banks in your conference - what is your sense to how to play the financials now because they are not really, they are somewhere in between the consumption and the investment theme if you will?

A: Absolutely. In fact if you are staring in an environment where interest rates would harden, one would think that banks would not do well. But I think most of that negative is now in the price because banks have been falling ahead of even the RBI meeting that happened and the markets have been correcting and banks even more so. So I think most of those negatives have been priced in.

Now, we are looking at a scenario where credit off-take will happen in the second half. I think that is actually very positive for the banks so when we construct a portfolio we are prima facie looking at overweight on banks. So I think that sector will do really well. Having said that, you obviously have to be stock-selective but our call on the banks is positive from here and we look at an overweight scenario there.

Q: You also have the two companies that did not cover themselves in glory this earnings season: L& T and Punj Lloyd? How are you approaching that pocket now because you guys do a lot of detail research on capital goods and infrastructure?

A: Like I just mentioned that investment theme if you look at FY04 to FY08, we have seen the entire rally being led by the investment theme. I think that has probably slowed down because we are not going to look at corporate capex at least not in a hurry so corporate capex has already happened.

Most of the fund raising has gone not towards corporate capex but more towards paying off debt so investment theme is something that will take a backseat for a while, we do believe that even over the next six-eight months we are not going to see a big pick-up which is why you are seeing that impact on L&T or a Punj or any of those names and I think that would actually continue.

Barring a name like Crompton Greaves or one or two names you are not seeing too much of traction, that will definitely continue. Which is why you have visibility in terms of growth in the consumption theme because the scenario this time around in this leg of the rally has changed.

I mean the entire earnings are led by the consumption theme and not by the investment theme. That is going to continue for a little while more probably.

Q: Tactically though would you treat this period of despondence on the market or at least in terms of sentiment as a buying opportunity or do you think you will get better buying prices perhaps around the budget?

A: One would have to wait for the budget because the biggest macro headwind is the fiscal deficit. One really needs to see what the government outlines in terms of how the borrowing programme will be, what is their view on expenditure all of that and how are they going to look at stimulus going forward. So definitely, the budget is a very big step, which we will have to watch so you may see a fair amount of volatility up until the budget.

So it is hard to take a call but having said that, if you look at the broader growth story that pretty much remains intact whether you are looking at the rural consumption or now the pick-up on the IT side. All of those are showing extremely positive signs. So I think we would be positive on those names and the market will be driven by very specific themes.