ITC, HUL no longer safe, sector rotation coming: Quantum

With safe haven stocks like HUL and ITC cracking heavily in the last 2-3 days, a consolidation with a positive bias is likely, says Sanjay Dutt, Director, Quantum Securities. The valuations had got stretched there so we will definitely see rotation into other sectors. He continues to be bullish on the market.

He told CNBC-TV18, the market will come back to decent levels once the currency stabilizes at sub 60, and when RBI rolls back its short-term tightening measures.
He does not feel the underlying value, the underlying fundamentals of companies are as bad as prices are making them out to be. He feels a lot of money can be made in various stocks in the next 6-12 months.
Dutt is not too optimistic on IT as he feels there are many other good quality stocks where one can invest and actually look for two-three times returns over the next two-three years. Also Read: Nifty stays strong on short covering; ITC, HDFC, HUL lead Below is the verbatim transcript of Sanjay Dutt’s interview on CNBC-TV18 Q: You were quite bullish last time we spoke since then a lot has changed. Have you had a change of heart?
A: I haven't had a change of heart, I have been wrong since we spoke last and I was expecting 5850-5900 levels to hold. Contrary to that we have seen what has happened and primarily because of the measures Reserve Bank of India (RBI) came out with in terms of tightening and hardening of interest rates because of the volatility in the currency.
However, I continue to remain bullish on the market, I continue to see leadership changing and what is making me more confident by the day is the fact that Hindustan Unilever (HUL) and ITC, the safe havens, have cracked heavily in the last two-three days which means that the safe trade where everyone was hiding, particularly the large institutional investors are booking gains there.
The valuations had got stretched there so we will definitely see rotation into other sectors. And the fact that we have seen the worst in banking that could have happened to us. We have seen the bankex decline aggressively since July 14-15. Now we are in pretty good shape, all the so-called short-term bullishness that was there at the 60-70 levels about a few days back has all got corrected. Q: So what is it that you expect to see from the market over the next couple of weeks?
A: I think a phase of consolidation with a positive bias because I don't see yesterdays lows being broken really. I was pretty satisfied with the RBI policy, RBI was very candid that these are short-term measures and would definitely look for reasons to cut interest rate, cut cost of funds, improve liquidity as and when the exchange rate issues are sorted out.
Of course the risk lies here as to what the government can do particularly as we have seen reports and we have all known that currency issues has got more to do with what is happening offshore than what is happening onshore because the onshore market is more or less dead after the RBI restrictions. So once currency starts to stabiles sub 60 levels, 59 plus minus I think markets would start to come back to more decent levels.
More than the index going up I think it is within the market there will be opportunities now where one would see a change of leadership taking place, moving away from pharmaceutical and FMCG stocks to other stocks which have been beaten down much beyond. Q: What are fundamentals justifying? We are half way through earning season and frankly it has been a complete washout. It looks like we are in a much more extended cycle in terms of earnings disappointments. Are you seriously feeling okay about the kind of earnings performance this market has put out and the kind of pressure it is going to face for the next few quarters?
A: I can't say what is going to happen in the next three-six weeks but I can confidently say that the next 6-12 months ahead would definitely be much better for sectors in the market in particular. I may not see the index going up 1000 points in the Nifty, but I definitely see a lot of money being made in various stocks.
_PAGEBREAK_
The reason I say so confidently and why I think that the cycle will turn now, we were just doing one metric and I mentioned this last time also that in the last five-six years if you should take the CAGR, the Nifty is down minus 8 percent in dollar terms. Whereas if you see the Nifty earnings even in dollar terms if you take the last six years would be up in the range of 10 percent. So this disconnect has to be factored in somewhere.
Of course the problem is that the Nifty composition and how some stocks tend to influence the Nifty levels. But my view is that because of the currency, because of what has been happening and aggressive slowdown we have seen and a multitude of factors coming together that has really hit our economy and hit the country that we are seeing such a negative mood.
However, the underlying value, the underlying fundamentals of companies aren’t as bad as prices are making out to be. I can find innumerable instances where companies with negligible or no debt are trading at valuations which we cannot believe today. So this is the time when you actually got to go down there and start picking up stuff. And the storm is going to last a month or two more, you will see more pain, you might see 10-20 percent prices lower than what you bought but that is how asset classes work. Q: While this froth has started coming off FMCG, IT seems to be the next favourite for the market. Would you take profits here or do you think there is more to run?
A: I would take profits here because I am a little worried about the IT model per se in most of the companies. In select pockets I would still have IT in my portfolio, select stocks I would still want to have. However as a sector I wouldn’t be too optimistic because I think there are many better opportunities there in good quality stocks where one can invest and actually look for two-three times returns over the next two-three years. Q: What do you do with bombed out stocks like Jaiprakash Associates at Rs 35 or Bharat Heavy Electricals (BHEL) at Rs 150?
A: Anything that has got too much debt and has got problems in terms of cash flows and is a victim of slowdown and a combination of high debt is going to take a lot of time in sorting out. However part of the collateral damage in the market have been companies which have very strong business, good management, don't have much debt that is where I would want to be.
So in place of JP Associates for instance which stock I don't have and I don't have a conflict of interest, I have been watching it for the last four months is Jindal Saw. The stock has a market cap of about Rs 1100 crore, debt of about Rs 1500 crore so enterprise value is somewhere in the range of Rs 2700 crore. Top line Rs 5000-6000 crore there is no reason why the stock should be there at Rs 38-40. It was Rs 130 sometime in February-March. So it is just that collateral damage, some institutions sitting somewhere decided to just get out of India position and bombed out the stock.
So that is where you got to look for value but companies with higher debt, companies with problem in terms of execution. JP Associates is one example and phenomenal problems in terms of cash flows and being able to meet the payments what we are hearing about. I don't want to speculate but on the face of it very high debt and there is still going to be a lot of problems. Q: You have been tracking oil and gas for a while. A month back Indian Oil Corporation (IOC) would have seen a lot more enthusiasm about its issue. Do you think it will face the same kind of reception when it hits the market?
A: It is very sad at times but it is very easy to sit outside and criticize decisions taken by the government on when to do what but unfortunately timing is everything in the market particularly when it comes in hitting the market, when you are doing offer for sale (OFS) or you are doing fund raising.
However even now I think IOC would get subscribed, would get good amount of money coming in, good amount of interest because it is a good stock and whatever we may say the oil sector issues are being sorted out, diesel prices have been going up in the last six months as government said 50 paisa per month.
So the sector is being resolved. I have never been a believer, I have never been one who had exposure and has investments in oil and gas and particularly government companies. But I think IOC would attract investment interest at this point of time. Q: You were talking about ITC and HUL. But what do you do with some of the smaller stories from that name, would you have the confidence to buy Titan Industries or Bata India or VIP or Jubilant Foodworks now?
A: Anything that is stretched in terms of valuations I would want to stay away. Anything that is over owned by the large investment community, meaning Foreign Institutional Investors (FIIs) and institutional investors, I would like to stay away because that is where the aggressive rotational trade is beginning. Even now growth fundamentals etc may be good for these companies but you will be caught with technical damage in the sense institutions and some large investors wanting to get out because of higher valuations and finding better alternative investments going ahead. So therefore I would be a little cautious there. I think I would get better entry points once the unwinding begins and is towards the fag end of it. Q: You track media as a space. There it seems like a one trick pony, it has been reduced to just Zee Entertainment and nothing else. There results were quite good but how are you approaching the sector now?
A: The sector is going through a lot of problems. There has been lot of talk about being cut down and layoff etc. Some of them obviously have been speculations, some of them have been true. However I think there have been problems with companies which have not made cash profits. To quite an extent the news model is being challenged completely, particularly the television broadcasting news model has been challenged completely.
Companies who don't have integrated models in terms of web properties, in terms of cross domain exposures whether it is entertainment, news etc. Those companies are going to definitely be in problem and that is the reason why Zee stands out there because that is one company which continues to make cash profits.
So other than Zee, Star and the unlisted space, one really cannot think of anything else that is actually making money, of course Sun TV. That is the reason why you see the sector running through a lot of trouble. The cost, the expenses are not sustainable, now advertising caps coming in terms of minutes etc, it is going through a lot of problems and then it is a victim of slowdown that is there. Ad budgets and those kind of things obviously get cut.
It is a period of about six-nine months or 12-18 months when you will see some media houses running through problems, scaling down, merging, restructuring and that probably would be a good time to look at some of the non Zee plays. Q: What about telecom, that also emerged as a favored play by a lot of investors over the last few weeks? Would you buy a Bharti Airtel or Idea Cellular now?
A: Idea stands out definitely while Bharti would be a perfect large cap exposure for the large institutional investor because he has no choice when he has to buy something big and in buckets where in terms of a few million stocks to hold in his portfolio. However from a small industry standpoint and from a relatively private client group or high net worth individual (HNI) investors kind of standpoint, Idea looks a best play in the sector.
And Reliance Communications has gone through its restructuring, it has corrected. One can find a good entry level there also but Idea would be my top bet there. I don't have exposure in that stock at this point of time but that is a good place to be in.