Jun 06, 2012, 03.34 PM | Source: CNBC-TV18

IIFL cautious on auto sector, likes M&M and Tata Motors

The auto sector has been quite volatile in the past couple of trading sessions. In an interview to CNBC-TV18, Amar Ambani, IIFL says, he is a little cautious on the automobiles space. “Within auto, we like is Mahindra and Mahindra and Tata Motors,” he adds.

The auto sector has been quite volatile in the past couple of trading sessions.  In an interview to CNBC-TV18, Amar Ambani, IIFL says, he is a little cautious on the automobiles space. “Within auto, we like is Mahindra and Mahindra and Tata Motors ,” he adds.

He likes private banks over the PSU banks. Besides that, he is slightly more in favour of defensives like FMCG and pharma.

Also Read: See 10-15% upside for India in dollar terms: Morgan Stanley

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Also watch the accompanying video.

Q: What sort of positioning would you ask investors to take in the auto space at this point?

A: Few months back auto numbers continued to excite. Passenger vehicles and two wheelers were contributing for a long time. Commercial vehicles was the only segment that wasn’t doing that well. But those kind of numbers aren’t coming in anymore.

If you look at real data, whether automobiles or cement, these sectors were doing well for a long period and suddenly that data points seem to be decelerating. So, we are a little cautious on the automobiles space. After the petrol price hike people might start moving towards diesel segment. While that might benefit some of the auto players, a large portion of the market is petrol. That’s another factor.

Overall, we tend to be a little more stock specific rather than looking at a sector. Within auto, we like is Mahindra and Mahindra and Tata Motors. Mahindra and Mahindra, numbers have been good, their XUV 500 is doing very well. We believe that even if there is a shift towards diesel, it might not affect M&M so much. There are talks on how SUVs are benefitting because of diesel, the government is subsidising wrong people. But we have already had those kind of talks for sometime. We are not too worried as yet.

Q: The companies are meeting the Department of Industrial Policy and Promotion (DIPP) and Finance Ministry today to discuss that issue because there is a renewed effort to impose that much feared excise duty on diesel cars. Hypothetically, if that was were to come, what is your stance on M&M because it’s highly dependent on diesel cars?

A: I think the differential between petrol and diesel has only increased in the last 12 months or so. So, even if there was, hypothetically speaking, a hike in excise to come in on diesel, I think still the differential will be sizable enough for people to be attracted towards diesel vehicles.

Firstly, the government will find it tough to push it through. Even if it does, the differential will still be sizeable enough for people to opt for M&M vehicles. At the same time, the rural segment is doing well too and M&M is having a good presence there. That’s the other reason why we like the stock.

Q: June is a very event heavy month for us. We have the RBI policy domestically. But besides that, there are Greek elections on June 17. We have the ECB meet at the end of the month, and we also have the FOMC. Anything that you would play within the Indian markets because of this event heavy month?

A: We would like to take a portfolio asset allocation stance. Currently, we are telling our investors to lower their equity exposure to somewhere around 25% or so. Regardless of what happens in Europe, I don’t think those problems are going to go away just because an election outcome goes one way or the other. That pain is going to be around for sometime. I don’t think there should be fears of Greece leaving the Euro so soon, but still it is going to have an impact.

The US data too, which was coming up with good numbers for the last eight months or so, is not that rosy. So, I think that global problem is there. We are seeing some amount of risk aversion. So, if you will get the VIX, it’s gone significantly above 20. If you look at emerging markets spreads also, they have kind of widened. So, I think that global problem is there.

If you look at what's happening in the domestic economy in terms of the results which have come out and we have done some calculations, it seems like this will be the third quarter of net consecutive profit decline and the GDP number which wasn’t exciting either. I think there is a chance that the market can fall 10% from here and the chance of rising is more like only 5% or so. So, it could go down to 4,500-4,600 and on the upside it 5,200.

I think people are kind of unclear on which side they should take their bets also because there are talks that there could be a rate cut. RBI, this time, might choose growth over inflation. Commodity prices are kind of cooling down. So that’s possibly the only positives around currently. So, people are unclear. The market would be range-bound and then breakout either way, but we see more chance of a downside. So, our strategy is really that one should be possibly only 25% in equities currently and more focused towards fixed income, gold and other product.

Q: Besides Mahindra, are there other stocks that you looking at as outperformers?

A: We like a lot of stocks in the IT space. Infosys has a specific problem. IT budgets will come down. It will be lower this year. But the rupee depreciation will help. If you look at TCS results then they have guided for increasing their manpower’s substantially. If you look at some of the other companies like HCL Tech , there has been some good deal wins. So, we are still pretty confident on IT, some of the companies in that pack. So, we like that.

We like private banks over the PSU banks. Besides that, we are slightly more in favour of defensives like FMCG and pharma.

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