Go for IT, FMCG; banks to stay under pressure: Anand Rathi

Given the way the markets are behaving, with Nifty falling below 5400, Sandeep Shenoy, ED, Anand Rathi, advises investors to stay with liquid stocks. He feels IT, some pharma and FMCG companies that are not ruling at a premium could be the safe havens.

Also Read: Market suffering from bipolar disorder; FIIs scared: IIFL
According to him, the bearish sentiment that has been plaguing the markets for somtime now triggered Friday's fall. The fall was triggered by local factors, and not so much by emerging markets or global issues, he says.
Besides the slow down in earning growth, Capex too is showing a discernible slowdown, says Shenoy. Even a 4-5 percent growth with capex cycle coming back will help. He says the top 50 stocks have not been not generating substantial returns, which has become a problem for the banking system. The banking sector which is plus 25 percent of the market cap is not going to be on an upward trend for quite sometime, he says. The systemic problems will continue to hit the banks' books. Below is the verbatim transcript of Sandeep Shenoy’s interview on CNBC-TV18 Q: What you have heard after Friday's fall? How much of it was an emerging market (EM) phenomena and how much of it was basically the markets being spooked by what the Reserve Bank of India (RBI) did on Wednesday post-markets?
A: We are of the opinion it has largely to do with the sentiment which is more to do with local factors rather than trying to extrapolate as to what is happening on EM or on a global scale. Yes, on a global arena there were problems and that was casting a long shadow on our markets, but having said that it just triggered it off on Friday that will be taking it to another level which may not be logical.
We had some problems. The entire crack was more or less waiting to happen. On Friday, all the ingredients were in place, be it on the rupee side, be it on the bond side and be it on the selling side. So I think the results season where no triggers left, the bears came out in the open and that is what we saw in the markets along with the volumes what you mentioned right now. Q: How far can the haemorrhage go? Now of course people are forcing the government to see the real issues behind the fiscal deficit and the Current Account Deficit (CAD). There is a wave of opinion among opinion leaders that diesel prices should be hiked perhaps by Rs 5-10. Do you think moves like this will put a stop, some dramatic correct moves, not cosmetic moves could put a floor or do you think that even that is not going to help anytime soon?
A: I think we can take all the moves, but whether it is correct or not only time can tell. The government has taken quite a few moves assuming that they would be correct, but they do not seem to be. Q: They are largely cosmetic. USD 200,000 cut to USD 75,000. The entire individual spending of dollars in a year has been less than USD 1.5 billion. What are you really cutting?
A: The structural issue here is there is the problem on earning growth which is showing in a discernible slowdown and also the capex cycle. If capex cycle comes back and earning traction is there, I am not seeing a ticket 20 percent growth, even a 4-5 percent growth with capex cycle coming back because India Inc. if you take the top 50 stocks, substantial amount of block is lying waste or is not generating any returns.
So obviously that will become a problem for the banking system and cause its own related problems. If that is addressed and the wasted block becomes a productive block or even a return generating block, to a large extent that will boost the market regardless of what happens outside India or within India. That is the key point.
_PAGEBREAK_
On the selling side, markets are never rational. They always move towards either skew. We may have skewed on the negative side to a larger extent, but if you hold onto it probably rationality may come in, because situation is bad, but it is not as pathetic as the markets convey right now. Q: Where would you see support emerging at the moment? Now the new war cry is 5200. Is that a line in the sand at all?
A: I am not exactly a technical analyst, but if you go by fundamentals earlier we were of the opinion that somewhere around 5600 market should find some kind of stability. Obviously we are much below that now. Q: That assumed what kind of earnings and valuations?
A: We could have got around 4-6 percent kind of earning. One has to be mindful of the fact that Returns on Equity (ROE) were not getting punctured quite substantially and the book value of the top 50 stocks are to a large extent safe. So price-to-book could have been one of the largest supports for the system. Obviously that is not a sacrosanct level, but with interest rates moving up obviously on price-to-book level also you could see some kind of pressure and that is visible right now. The day reference rate shows some kind of stability we could see a pullback to that level.
Having said that, will that mean that we are going to be on a northward journey, no. We could be having an extended sideways movement till the next set of triggers come which is Q2 results and that is sometime away. Q: How worried would you be about the bank's asset quality going into Q2, because we already know that there will be treasury losses, but in terms of asset quality do you expect the pain to be even more than what we saw in the previous quarter hence maybe banks could see further valuation downgrades?
A: Time of that stratospheric premium which private sector banks had over their PSU yield is going to be a thing of the past. We cannot sit here and say that systemic problems are going to afflict with laser guided accuracy to only PSU banks and they are going to just bypass the private sector banks, obviously not. When you cross Rs 1-2 lakh crore balance sheet those systemic problems are going to hit your balance sheet.
So we are seeing the first signs of that. The first victim of that would be the premium valuations which most of the private sector banks are having and that is eroding right now. So once that happens probably we may see stabilisation coming in. Banking sector which is plus 25 percent of the market cap is not going to be on an upward trend for quite sometime to come and that is one of the worrisome facts. Q: Is that why Godrej Consumer is falling today? People are just taking away money where there is, after all every good stock has been attacked. So is it just a time now to take profit where there is a little bit of value left?
A: It could be. Maybe a particular fund may have some larger exposure and wanting to prune its exposure or go into liquidity. I think these are more one-off things rather than trying to pinpoint a structural flaw in a company. Cash flow generating or free cash flow positive companies are going to be much safer havens despite their esoteric valuations. Profit booking can be expected. It happened in ITC, it happened in Hindustan Unilever (HUL), it will happen here. Q: What is your sense about where people might hide or where you would advise investors to hide?
A: Low leverage, cash flow generating ability and free cash flow, I think you are not going to get them all together, but somewhere like IT, some of the pharma companies and some FMCG companies which are not ruling at exotic premium could be the safe havens. The entire underlying focus is to ensure that your capital is safe and you have maneuverability to move into the market back when the times are good or when the curve turns. It may happen few weeks down the line or few months down the line. But liquidity should be there always with you, so ensure that your investments are in liquid stocks. Q: Have you written off infrastructure?
A: Market has always taught us one thing - never write-off something, it can always bounce back. Infrastructure is having a huge block which we rightly use as a wasted block. The day the wasted block becomes a productive block and we get some kind of inkling, people who have over leverage, but have built something out of that leverage into some tangible block which can be cash flow generating those are the infrastructure stocks which could give you good returns in days to come. So keep a very close watch on them. Q: We have seen historical cycles like this before when the bears hit with a vengeance. What does this remind you of? Does it remind you of 1997 when we saw huge interest rates, run on the currency because of the Asian crisis? Is there any parallel? How long can the downturn last? It does not look like V it looks like a long U actually.
A: 1997 is more nice a corollary, but then one has to be mindful of the fact that when we went through the Asian crisis and the Asian tiger problem became our problem we had a salve coming around the corner which nobody was aware of, IT. So IT provided the much needed salve and created multi-lakh crore market cap in Infosys and all. So I hope the first part is true and something like a second part also could be around the corner.