SENSEX NIFTY
Jul 05, 2013, 04.04 PM IST | Source: CNBC-TV18

Pin no hopes on Q1; shorting HUL was wrong: Raamdeo Agrawal

FMCG major HUL's open offer got expected response and the stock is rallying because sellers are out of the way.

The next domestic trigger for market is likely to be India Inc's first quarter earnings beginning next week. While there are mixed views on whether this earnings will be better than the March quarter, Raamdeo Agrawal of Motilal Oswal Financial Services does not see major fireworks from corporates.

On the macro front, with the weakening rupee and soaring global crude prices, India's ballooning current account deficit remains a concerns, but there is not much one can look forward to with regards to the Indian economy, he told CNBC-TV18 in an interview. He sees the Indian currency stabilizing at 60 per US dollar going ahead.

On specific stocks, Agrawal sees public sector lenders as good contra bets. He is bullish on oil and gas major RIL as the company is likely to be big beneficiary of gas price hike in long-term. He is hopeful that two-wheeler sales will start picking up from September onwards.

According to him, FMCG major Unilever's open offer to buyback HUL got expected response and the stock is rallying because sellers are out of the way. Further, he pointed out that shorting HUL was a wrong strategy.

Below is the verbatim transcript of Raamdeo Agrawal's interview on CNBC-TV18

Q: You were talking about the market ahead of earning season?

A: There is not much to be expected from the earnings at least as far as our aggregates are concerned. It is going to be very muted like what happened in the last quarter and it is going to be very flattish kind of situation. Of course some of the defensive sectors will do well and there are capital intensive cyclicals which will not do well.

In the aggregate, I think earnings would be flat, slowdown at the top line is more like 5-6 percent, EBITDA is about 4-5 percent, profit after tax is flattish. So I don't think there is much to expect from the earning season, but there is always some winners and some losers. So there is not much firework from the earning side, interest rate is also in a predictable territory of no change at this juncture.

I think the real action is in the current account side, so that is the thing which is globally very concerning. So you have to keep your fingers crossed how you get treated in the short-term.

Q: What did you make of the kind of response that Hindustan Unilever got for its open offer, how would you approach some of these FMCG type faces now?

A: HUL met with an expected response. It didn’t get the full offer at Rs 600, but what has happened is all the people who are thinking that stock is fairly priced at about Rs 600, have all surrendered.

So there is nobody in the system right now who thinks that the stock price should be lower and some people who must have shorted their stock thinking that stock will open little lower after the offer is closed because the guys who’s share don't get accepted they will come to sell it at lower price.

I think that anticipation has gone wrong so they must be covering their positions and that is why you are seeing upsurge right now. And for quite some time till new developments happen in terms of quarterly results, some disappointment on one quarter or the other is seen. I don't think the opinion will change in terms of valuation of HUL going below Rs 600 at this juncture and that is driving the entire view on the FMCG pack.

I have never bought any stock looking at these kind of scenarios, so I will not take any decision based on that, if HUL is at Rs 620, it is a good price, so what should be the price of Nestle that is not the way I have ever bought anything.

Q: You have tracked a stock like Firstsource in the past. What did you make of the big move that we have seen on that name? The management has been quite confident of an improvement in the balance sheet going ahead and we have seen influential investors pick up that stock as well. How would you treat it now?

A: I don't know anything about Firstsource. I know that CESC picked up some major stake in that, but apart from that I don't know anything about it.

Q: What about the range for the market going ahead? What could be the floor and the ceiling for the market now that we have started off July on a good note?

A: There are two-three things which are happening. One of the things of course is the current account deficit (CAD), how seriously it will pan out and things have turned out to be nasty and still the trouble is not over. However, I think bulk of the problem is over. At about 60, we must see some kind of stabilisation here.

Now having seen the downside of 60, we have to see the upside of 60 in the sense that what good it can do to some of the sectors like pharmaceutical, technology or some other automobile exporting companies and what it does to the threat of competition from imports.

So some of the companies which are facing massive competition from cheap imports will get some relief and they will be able to price it up or at least they will be able to hold on to the volumes and margins. So we will see not in this quarter so much but in next quarter you will definitely see some kind of action because of rupee devaluation.

And you will also see the challenges to some of the companies which are leveraged in foreign currency, their life will be very miserable. So one is struggling with that big development and there is not much in the economy to really look forward to. Political situation is also quite messy. So I don't see anything which can take the markets to some kind of a big move immediately, but the foreigners are also not very gung ho on India. So I would think that the current level is what one should be watching for quite sometime.

Q: You were talking about CAD, but even the capital account now presents a bit of a crisis because of what's been happening with outflows and the currency. What do you hear in terms of these liquidity trends? Did the market see the worst of it in the last week or so or do you think this is going to be that slow drip kind of outflow for the market?

A: The bond sale which happened, I spoke to some of the currency dealers, they are saying that for the time being whatever was to be done that parcel of bonds has been sold. They are not seeing any more parcels immediately but if Indian rates come down and US rates shoot up which nobody has any control, the equilibrium that is set right now will breakdown and there could be some more outflows. But right now they are not seeing any major disturbance out there.

Q: The big disappointment in terms of its sales trend has been the autos. In fact, on Hero MotoCorp , we hear that every month they are losing out on market share from Honda. How do you approach this auto space now?

A: As far as the two wheelers are concerned, these 2-3 months are going to be dull months because of the intense monsoon and every year it has been like this. Some of the urban side where scooters are sold because of school opening and all should be somewhat better. In July and by August end, one will start seeing pick up again. Everybody is preparing for the big season in Diwali this time because monsoon is very good so farmers will have good volumes and good price. One will see rural prosperity. It will be very interesting to see that two wheeler pack in second half and most of the managements are saying that it will do well.

But as far as competition with Honda is concerned, it is in the open and will continue. I don’t think life is going to be easy either for Honda or for Hero. I think both have to put their best foot forward in the next two-three years and in a large market like this which will grow, which has been growing at 12 percent in the past and I don’t see why in the next 5-7 years it will not grow at 12 percent again. Once it starts growing at about 12 percent in the next 5-6 years, there will be enough for both of them, actually for all of them even Bajaj and TVS Motor included.

Then global markets will open up for them. I don’t think it is as simple as one makes out to be - Hero versus Honda or something like that, but it is going to be a little more competitive than what it was. There were 203 players, now it will become one more player. I don’t think one should write-off anybody that easily.

Q: What did you make of the gas price hike news in terms of whether you can think it can still be incrementally positive for this space and which one looks best poised to capitalise on the price hike that came through?

A: Actually the real price increase immediately has gone to Oil and Natural Gas Corporation Limited (ONGC). ONGC has other complex situation in terms of how exactly the overall profit and loss will pan out in the sense that what is going to be subsidy gain by this government because government seems to be very determined to keep fiscal deficit at sub 5 percent. With the rupee depreciation, the subsidy burden is increasing in oil and gas.

They will look at ONGC profit to take care of the subsidy. I think there is no clarity even at the top management of ONGC about what will be the shape of their P/L even post hike of gas price. Though it is the best thing they could ever get.

Reliance Industries is again beneficiary in the long-term, but in the short run, they do not have volumes so the benefit will be very limited till about 2015-2016, till 2016 and then when they will see ramp up. The future potential of Reliance could be very big in this particular issue.

Q: PSU banks have seen quite a bit of a slippage since the start of the year like Bank of Baroda , Punjab National Bank , etc, have lost 20-30 percent of their market cap since the start of 2013 would you buy any of them now or would you stay away?

A: No. Already I have in my portfolio enough of State Bank of India so I will not increase anymore in my portfolio but the guys who do not have, they should probably get the courage and buy now some of the better ones at least to some extent in their portfolio because credit cycle might be at the bottom of the curve and as credit losses one cannot have as much losses as one has in the last two years.

First round of business cycle reverses, one has maximum credit losses and when the business cycle starts looking upward credit losses will slowly start panning out and actually one might see more recoveries than delinquencies. That cycle is somewhere in the next six-eight months. These are the darkest days for PSU banks if they have any future at all. If there is one place where one can contemplate it is here. I would think that given their book value they should be a good bet, but one needs courage to see further decline in prices and still not get unnerved.

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