Nifty at 5600 in next few months unlikely: Ajay Srivastava

After the fireworks of June, Indian equities have settled into a bit of a gloomy phase the past few weeks. Choppy behaviour has been a constant on both the indices, making it difficult for the market to post any strong gains.

In such a scenario, investors are wary of entering the market and prefer to sit out on the sidelines. However, Ajay Srivastava, CEO of Dimensions Consulting, says that the strategy right now is to be sector-specific because there are several pockets performing well. “Rather than looking and worrying about the range of the market, one would tend to believe that if you focused on the right set of companies, the right sectors, we are looking at 5-7% return in a month on a broad portfolio,” he said in an interview to CNBC-TV18. He further adds that it is the high debt companies, such as from the infrastructure space, that are underperforming and weighing down the index. On the downside, however, Srivastava says the monsoon deficiency is a major adverse factor for the market. Due to the scarcity of rainfall in crop producing regions, Srivasatav says the government will have to provide relief to state government, and this will increase the fiscal deficit. “I think rough estimates are about Rs 40,000-50,000 crore of relief to all the state governments, so to my mind the market has understated the risk of a drought,” he said. Due to this, and other policy hurdles, Srivastava says 5600 on the Nifty in the next few months is not very likely. Also read: No ingredient for a bull run in next 18-24 months, says Kotak Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Q: The market has fallen into a bit of a range. Do you expect this grind in a range to continue a whole lot longer? A: Yes, but having said that the market is in a range, what we have seen in the last 60-90 days and in the last month as well is that there are several pockets of sectors which are doing pretty okay. So I think rather than looking and worrying about the range of the market, one would tend to believe that if you focused on the right set of companies, the right sectors, the returns are reasonable. One would not say very great returns, we are looking at 5-7% return in a month on a broad portfolio. So there is a broad set of companies which are high debt companies, infrastructure companies which are underperforming and will continue to underperform. Leave them aside and focus on the set of companies where we are seeing reasonable performance, reasonable price appreciation. Therefore you have to really bifurcate the market in two portions - one which you don’t want to hear about and the second which you want to focus on. The one we don’t want to hear about is the one which is grinding the market and the one we want to focus on has done pretty nicely. Q: What is the grapevine in Delhi telling you? What kind of policy triggers might come about in the next two-three weeks? A: I don’t think anything is coming out in policy triggers because they are grappling with bigger issues. I think the drought is now a specter which is becoming real in the corridors in Delhi. You have already seen the fiasco on the restructuring of the state electricity boards and the power electrical distribution companies. This was the big one which they were hoping to announce in the next 7-10 days, that all the states will sign and that will be one of the biggest policy measures announced from the government. But that’s not coming through. So the first big restructuring was electricity sector which is now kind of getting held back. The only other thing left which we keep talking about is foreign direct investment in retail. Maybe that’s a panacea, I don’t know, but that may come through. But the big one, which was the electricity restructuring, is stuck now. Q: What about the diesel price hike? Is it priced in by the market already or do you think that could spark off any kind of rally? A: The rally will come only on the sentiment that the government has taken the first step to call it. What we are hearing here is that the diesel price hike is almost imminent and that everybody has approved it. The market will see a spike up of maybe 30-50 points, one doesn’t know. We are kind of becoming addicted to such announcements to get the market going. Market will spark up, but I think the high-beta and the high leverage sectors will again come back. So it’s going to be a 48 hour rally for those sectors and then we are going to come back to where we are. _PAGEBREAK_ Q: How worried should the market be about the monsoon situation? Does that have the teeth to lead to a bigger cut in the market or do you think the market will not worry beyond a point? A: It better worry. To my mind the market has understated the risk of a drought and the monsoon issue for the simple reason that the packages which will need to be given out to each and every state government is going to come out of the fiscal deficit. Therefore, the amount of the fiscal relief that was coming from the oil price increase is all going to disappear. I think rough estimates are about Rs 40,000-50,000 crore of relief to all the state governments. I know we have been talking about average deficit and so on, but if you break down the numbers, the core states which produce the food grains have had huge deficits while some states have huge surpluses, like northeast for instance. So I think the market has severely understated the risk of the drought for the simple reason the packages coming out are going to affect the fiscal deficit. We are heading into August-September, and in six months time we have the Budget coming up and these numbers are going to show up in the Budget. Q: What do you think as a greater chance or probability over the next few months - the Nifty on the back of any policy measures going up to 5600 or reverting because of the concerns you spoke about to that 4800 level again? A: To our mind, 5600 in the present situation looks to be very unlikely given the macro situation and given our domestic demand compression that we are seeing. I think we are not factoring it in, but now we have seen the results. The demand compression has starting to hit the defensive sectors, the FMCGs, the apparels industry, the consuming sector, the car industry. So I don’t think we are expecting a 5600. However, as we said, what we are expecting is that when the market goes up or goes down drastically, you need to find the market leaders and go into those sectors and companies and invest. They give tremendous opportunities. I don’t think the market is going to 5600 is happening in the short-term horizon just on the policy pronouncements. I think you will see severe amount of short selling if we go to 5600. Q: What are you guys doing on frontline IT, because not just Infosys but even TCS seems to be correcting after respectable numbers? A: We have zero positions in IT for our customers and for ourselves for a very long time. When we go to America and we see what’s happening there, we get focused on the three Indian companies. The company which is eating their lunch is Accenture there. They are really bagging the big orders and their growth rate in America is phenomenal. We tend to compare TCS versus Infosys, but actual competition for them is actually coming out from Accenture in the US and they are losing out terribly at these markets. So that’s why for the last six months I think exposure to IT has been zero. We still won’t build up positions because the Indian model of these companies is not working out in competition with the US system today. The US wage rates have gone down compared to the Indian wage rates, the arbitrage has gone down and they have a better qualified manpower sitting there in the US. Therefore we are losing out on the high value contracts. So till the time we get a comfort that Indian models are now going to duplicate Accenture kind of model you would tend to hard to believe that IT is a place to put your money. Q: The sector which has done very well from the export basket though is pharmaceuticals. Are you bullish there? A: Extremely bullish. That is one sector we have loved and we continue to invest in. It has given very good returns; I think in the past 30 days the basket has given a return of about 7-8%. The reason for this is exports, definitely, but there are also domestic factors. I think two good events have taken place for the industry. One is that the government has not allowed MNCs buy 51% into the country which kind of limits the competition. The second is the big plan of the government to spend about Rs 20,000 crore on supply of generic pharmaceutical products and medicines to the general public through their system, which is going to be a big takeoff from the local retail system. Also, these companies they have almost zero debt; they are sitting with cash balances. So you have got a system which is working out very well for this industry per se. So if you are not there I think it’s time to build up the positions, if you are there keep it. _PAGEBREAK_ Q: Which sectors are you steering clear of aside from infrastructure which you already mentioned? A: I think sugar is one we are staying clear of totally; that’s one sector we have never dabbled in. You already took away my biggest sector which I don’t like is infrastructure which we have kind of been keeping out of for time being. Let me put it other way around. Apart from banking and pharma, maybe a few FMCG stocks and one airline stock, I think we are by and large keeping away from most of the market at this point in time. Q: Axis Bank came off a little bit yesterday post results. Is that in your owned list or you want to own a very different set of private sector banks? A: No, that’s not in the owned list for two reasons. One, we strongly believe that the set of numbers that we are seeing may not necessarily be the correct numbers in terms of the non-performing asset (NPA) provisioning. So there is a little bit of discomfort on that. Given the legacy of the management from ICICI Bank, you kind of support that legacy and we have seen it. You can also see that the market has given HDFC Bank 4.5 times book value and only 1.8 times for Axis Bank. It’s telling you a story that the comfort of the market with the portfolio of Axis Bank is not happening at this point of time. I think if you look at the last three quarters of Axis Bank performance, they kind of almost make us believe that they don’t have any NPA story out there barring marginal Rs 100 crore odd so. Maybe so, and we may get pleasantly surprised. I am not saying that I have inside information, but that’s one reason why we kept away from Axis Bank for the time being. Q: Would you buy Bharti now ahead of that EGoM on spectrum today? A: For disclosure, we have been carrying a long position on Airtel for a while. So we are kind of little bullish on that. The reason being one the EGoM should give us something. Also, they have closed the old cases with respect to the first initial allotment at the time when all the telecom business started. I think that’s a strong positive because that was a big overhang with analysts and overseas as well as to what’s going to happen if that case comes up as a political vendetta. That case having closed, the uncertainty of the basic allocation is out of the system. Now we are looking at the future and therefore there is lot more comfort in continuing to hold the position for some more time. Q: What are your top midcap holdings now at this point? A: I think top midcap holdings of ours would be SpiceJet. We are taking a small call into IVRCL which is pure arbitrage kind of a call given the past developments. With the present pricing at Rs 46-47, that’s one big holding that we are carrying. With that and a few pharma stocks, I think that’s where our midcap story ends.