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Last Updated : Aug 09, 2013 07:29 PM IST | Source: CNBC-TV18

Time to go long; risk return in favour of buy call: Avendus

Girish Nadkarni from Avendus Capital believes that despite ground reality of economy being extremely tough, markets are at such level that risk return is in favour of buy trade.


Girish Nadkarni from Avendus Capital believes that despite ground reality of economy being extremely tough, markets are at such level that risk return is in favour of buy trade.


“Broadly we are at a time where the risk return is significantly in your favour if you go long on the stocks because the rupee market despite the turbulence that one has seen is at a level where you will see stability coming soon,” he said.


He adds that G-Sec yields will stabalise at about 8.5 percent and rupee at about 60-61 level.  He does not see mass exodus of foreign institutional investors (FII) unless there is downgrade by international credit rating agency.


Did you read?: RBI takes further step to stem rupee's slide against USD


Nadkarni further added that private sectors banks, which were once regarded as safe heaven will continue to be in pain for one more quarter. “With the rates holding up high now and the need to book treasury losses on mark-to-market losses one more quarter of pain in the private sector banks is still left,” he stressed.


In terms of corporate earnings he does not see any improvement going forward due to near standstill industrial growth. However he believes that Fast-moving consumer goods (FMCG), pharma companies and IT companies will now be relative safe havens as far as the results are concerned.


Below is the verbatim transcript of the interview


Q: So far we haven’t seen any major pullout by foreign institutional investors (FIIs) but after you looked at last weeks trend it seems like FIIs are losing their patience now in some of the key sectors that were over owned names in the IT space, FMCG, etc. How are you positioned on the flow situation from hereon, do you expect to see any kind of mass exodus by FIIs soon or do you just believe that there could be some churning here and there?


A: I don’t think there will be a mass exodus unless there is a downgrade by the international credit rating agencies in which case all bets are off. However, at this stage we are seeing a tired market where the Reserve Bank of India (RBI) for last two years had played a tight money policy and over the last three or four quarters they have kind of eased that policy.


The havoc in the markets was essentially caused by the FII pullout from the bond market and that amount was quite large, which we had not seen before. That in turn played an impact on the currency and consequently on the sentiment in the stock market.


There is no denying the fact that the ground reality for industrial production, factories, businesses in India is quite dismal at this stage. There are problems with infrastructure these are amply reflected in the Index of Industrial Production (IIP) numbers.


The quarterly results of companies that one is seeing right now is also to a certain extent the reflection of this prolonged period of weakness that one has seen for the last nearly 18-24 months. Having said that most stocks other than the major index stocks have seen erosion in values between 50-70 percent in a large number of midcaps and what was essentially therefore holding up the market was a flight to safety in FMCG and pharma stocks.


There are a lot of redemption pressures on mutual funds even now. As the liquidity has dried up in a lot of midcap counters are under stress due to redemption pressures and also on FIIs sellout. In such scenario you would need to end up selling the stocks that are most liquid; and that is what one has seen in the last two to three days where some of the good stocks have seen some erosion in their values.


I would think that we are now at a level where the RBI has taken certain measures and the government is taking measures to improve sentiment and induce foreign flow into the country.


Broadly we are at a time where the risk return is significantly in your favour if you go long on the stocks because the rupee market despite the turbulence that one has seen is at a level where you will see stability coming soon. I don’t think the rupee will fall significantly from here and we will also see G-Sec yields of about 8.5 percent.


We have seen some reversal of FII flows, some money coming in into the country with NRI remittances and other things. So, you will see interest rates stabilising at about 8.5 percent in terms of G-Sec yields and rupee at about 60-61 levels will kind of stabilise and you will see the markets also kind of bottoming out at this level. So, I am not so negative on the markets, the ground reality is difficult but the markets are in a level where the risk return is significantly in your favour for buy trade.


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Q: This year we have HDFC and HDFC Bank underperforming the index, that doesn’t happen very often and also some of the other private sector banks falling 30-40 percent, has that broken out as a safe haven and going forward is there some more pain? This week I was reading reports that maybe some of these private sector banks need to correct to 1.5-2 times price to book value, would you share that view?


A: There is pain of at least one more quarter left in the private sector banks because the PSU banks have by and large fallen quite significantly and at a percentage of the book value that they are currently trading at, a large part or a significant part of the asset quality concerns are somewhat built into the public sector banks.


The issue with private sector banks is that while the asset quality is much better than the public sector banks what will play out in this quarter is that because of the increase in the bond yields what has happened is that a large number of banks had moved their portfolios from held-to-maturity (HTM) category to available-for-sale (AFS) category and some of the pain of the restructured assets was kind of partially mitigated by the treasury profits in this quarter.


With the rates holding up high now and the need to book treasury losses on mark-to-market losses one more quarter of pain in the private sector banks is still left. Having said that in the last three to four days we have witnessed a lot of the private sector banks which either depend on wholesale deposits because the short-term money market rates had moved up or their prices have kind of corrected quite a sharply.


The private sector banks will not go up in a hurry for the next one quarter. Downside there maybe some downside certainly left in the private sector banks but a large part of it has already happened in the last one week.


Q: I just want to come to you on the earnings season particularly and on individual stocks how are you going to approach it in the sense that we have seen a lot of stocks rally post their earnings, a few of them actually names like Power Finance Corporation (PFC), etc that have seen good earnings and that has posted good gains. Is there anything from earnings season that you would recommend after you saw a good set of numbers?


A: Most of the numbers that one saw in this quarter were a little less than what analysts had estimated. However, for the rest of the year analysts estimates are getting downgraded. The stocks had fallen prior to the numbers and therefore when some of the numbers did come up there were some element of a relief rally that one saw in the stocks. Having said that the next quarter numbers across sectors is unlikely to be significantly better than what one has seen in this quarter and that is largely because of the reality of the situation on the ground.


A large number of sectors starting from capital goods to engineering to the auto sector there are issues on the demand side, there are issues on the infrastructure side and therefore the weakness that one has seen in the numbers this quarter will continue in the next quarter. Banking is one sector which has got added to that as I mentioned earlier.


The next quarter numbers will not see a significant improvement in some of these sectors. By and large the sectors which continue to do well will kind of continue their momentum. FMCG companies for example have seen numbers which are just under the analysts estimates. Having said that they are still growing in an economy where the industrial sector is by and large decelerating. So, fast-moving consumer goods (FMCG), pharma companies and IT companies now will be relative safe havens as far as the results are concerned. So, their results will continue to be just about better than the expectations.


The result season next quarter will not reveal anything which is different from the results season that one has seen this quarter. The call that one has to take right now is, is the outlook on the situation beyond 9-12 months and I think one has to look at valuations versus the outlook on these companies if things on the macro economic front begin improving.



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First Published on Aug 9, 2013 02:28 pm
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