Continue buying pharma; bullish on HCL Tech: Sanju Verma

Sanju Verma, Group CEO, Violet Arch Capital believes that banks will trade in a narrow range trending downwards and can fall another 10 percent from hereon.

In an interview to CNBC-TV18 she says that despite disappointing numbers in the pharma space for June quarter, she would still go ahead and accumulate these stocks.
Verma continues to be disappointed with Infosys despite its 4 percent volume growth sequentially. “At this point the one company that we continue to like is HCL Tech. I also like Tata Consultancy Services (TCS),” she adds.
She prefers waiting for the IT pack as there is still a lot of clarity required with respect to the outplacement clause in the immigration bill. Below is the verbatim transcript of Sanju Verma's interview on CNBC-TV18 Q: Are you surprised by the market behavior we had this week? Some of the erstwhile stronger stocks were falling, while some of the beaten down counters were having a bit of a dead cat bounce.
A: I was not particularly surprised by the market direction, but by the ferocity of the fall earlier this week thanks to the systemic crisis in the National Spot Exchange Limited (NSEL), the spot exchange for commodities. It again brought out the regulatory risks that a lot of the intermediaries, market participants have to embrace and grapple with in the most challenging times when you least expect such a systemic crisis to be thrown at you.
So, its unpredictability spooked the markets.
The earnings trajectory so far has been far from flattering. Even pharma for instance, be it Dr Reddy's or Sun Pharma or even Ranbaxy for that matter, it is always whether you look at it as glass half full or half empty. However, considering sheer numbers, they have not been great. Dr Reddy's for instance lost 5 percent the day it announced its numbers because of a dismal 13 percent growth in sales. Hindustan Unilever Limited (HUL) reported just 4 percent growth in volumes given that most market men were expecting anything in the region of 5-6 percent but that did not happen.
The bellwether within the fast moving consumer goods (FMCG) space which has been holding up all this while – the net sales growth for the cigarettes wing stood at just 7 percent and overall net sales was a measly 10 percent. It is the lowest in the past couple of quarters.
Also, market has been spooked because nobody is expecting anything significant by way of earnings traction from cyclical's. Defensives too don’t seem to be holding up well. The recent numbers from the pharma space sort of bear that out. So, it is a mix of various things – not to mention the most important being the fact that from 61.2/USD on July 8 to today we are still almost at about 61/USD levels despite the spate of measures taken by the Reserve Bank of India (RBI) since July 15.
All that we have achieved is money market yields tightening by 300-400 basis points. Liquidity getting scarcer, money getting more expensive but the currency is still playing spoil sport because the RBI seems to have forgotten that while it can curtail speculation domestically in the onshore Futures market, the non-deliverable forward market is beyond its ambit.
Don’t forget that it is non-deliverable forward markets where on a daily basis USD 6-7 billion worth of currency transactions take place in terms of rupee-dollar swaps.
The RBI has little that it can do. Rather than effectively communicating it has been just blabbering and creating a lot of noise adding to the already dismal sentiment prevalent today.

_PAGEBREAK_ Q: What would you do with the banks now? Many of these stocks have lost 40-50 percent of their market cap since the start of the year. Is this is a time to be putting any money in or do you believe that if there is a next leg of the downside it will be led by banks?
A: Banks have already led the ferocious fall in the last one month having lost 13 percent – I am talking of the bankex. Since the start of this calendar year, on an average the bankex is down more than 20 percent. Will it get worse from here is a difficult call, but the best case scenario is that banks will continue to be skittish.
They will trade in a narrow range trending downwards.
There could be a fall of another 10 percent. Q: This market has been bipolar. Around 40 Nifty stocks are down year-to-date (YTD) and 5 index stocks have gone up 30 percent or more – the two pharma names Lupin and Sun Pharma and the three IT names Tata Consultancy Services (TCS), HCL Tech and Infosys. First signs of crack have come in the pharma space now with both Lupin and Sun Pharma falling about 8-10 percent this week. What is your sense with IT, would that be the next to follow?
A: I started off by saying that pharma has chosen to disappoint just as large chunks of the defensive space have done as well.
Despite the fact that I too was disappointed by the numbers coming in from the pharma space, be it Lupin, Ranbaxy, Dr Reddy's, Sun Pharma, it is literally a Hobson's choice at this point. You really don’t have too much to choose from.
While the June quarter numbers for the pharma pack have been disappointing, I would still go ahead and accumulate these stocks.
I have not liked Infosys for a while now. We continue to be disappointed despite the 4 percent volume growth that the company showed sequentially. They will do well under the National Association of Software and Services Companies (NASSCOM) guidance of between 14-16 percent in terms of dollar revenue growth. So, at this point the one company that we continue to like is HCL Tech. I also like Tata Consultancy Services (TCS).
However, the reason why I would wait before I jump in and go the whole hog and buy IT stocks is that there is still a lot of clarity that needs required with respect to the outplacement clause in the immigration bill. While that has passed through by the senate, it has to pass through by the Congress as well.
Once that happens either way, then one will get more clarity.
Purely from a dividend yield perspective while TCS and Infosys give you dividend yields of something like 2-2.5 percent and HCL Tech gives you dividend yield of between 5-6 percent, free cash flow yield is also about 5-6 percent. It is trading at less than 10 times enterprise value (EV) to earnings before interest, taxes, depreciation, and amortisation (EBITDA) and just about 13 times price to earnings (PE).
So, you have to marry valuations with growth and on that count HCL Tech scores over some of its other peers.