Time to nibble; bet on IT, auto, FMCG, pharma: Edelweiss

Investors should take on a more defensive approach after the dramatic collapse in equities brought on by the Fed statements, says Nischal Maheshwari, Head - Research, Wholesale Capital Markets, Edelweiss Financial Services.

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He recommends putting money into FMCG, IT, pharma and auto stocks. "Another 50bps rate cut is likely by year- end, with fall in interest rates consumption theme should be back," he told CNBC-TV18 in an interview.
He says this is a good level for nibbling; nearly 25 percent positions should be built around these levels.
Keeping the monsoon theme in mind, his top three agriculture-related stock bets are Rallis India, PI Industries and Coromandel Fertilisers. "The initial phase has been pretty good for the monsoons. Across the country it has come ahead of time. Fertilisers, pesticides and agriculture related stocks will do well," he says. Below is the edited transcript of his interview with CNBC-TV18:
Q: What is the approach towards the market at this juncture? Most people we have been speaking to have indicated that they would stay away from emerging markets (EM) like India because of what happened overnight. But for a retail investor or for a viewer what would the recommendation be at this point?
A: In this kind of a scenario we have been telling our investors to be on the defensive side. If you really look at it the consumption has not gone from the market. Secondly, if the interest rates start coming down, which already 50 bps has happened and we still believe that there is going to be another 50 bps cut in the remaining part of the year then consumption should be back on the agenda. So all Fast Moving Consumer Goods (FMCG) stocks, to an extent autos, pharmaceuticals and IT are three or four sectors which one can still look to invest in. The exporters are going to benefit out of a falling rupee, so both IT and pharma would be positive on that front. Q: Are you asking your investors to buy right away or would it be that you will get the same stocks which benefit from rupee depreciation at more attractive levels?
A: The call which one has to take is where the rupee is headed. If rupee goes down further it will definitely be beneficial for these companies, but what I see is this is a good level for nibbling. One can start building up positions, maybe 25 percent of the positions should be built around these levels. Given these levels it is an attractive level in the market to start acquiring these stocks.
_PAGEBREAK_ Q: You put out an excellent note earlier today on the impact that the rupee depreciation will have on companies and groups that are laden with debt. As you point out in that note it may not show up in the P&L, because of many of them because of the AS11 comfort are taking it through their balance sheet. But in stocks like Adani Power, Adani Enterprises, Adani Ports, that one is really the biggest in terms of the debt-equity impact because of what is sitting in the balance sheet. Are there big further falls to come?
A: We have recently interacted with the management. We are seeing that some solution has to be found to this power problem, whether it is in terms that the government is going to allow them to pass on the incremental cost to the State Electricity Boards (SEB) which the Central Electricity Regulatory Commission (CERC) order has already allowed, though some of the states like Haryana have gone ahead and challenged that decision. I think some solution will be found, because this is too large an investment on the ground for the corporates. The second thing is if you do not create an enabling environment then incrementally nobody is going to setup power and India cannot grow. If you look at a thumb rule power requirement is around 1.2 times the growth of the GDP. So I think that will start impacting. I already think that the impact will start coming in 16-17 because there has been no power plant which has been there on the ground for last two years. That is why some solution would be found for Adani also. So I do not see much downside from these levels. Q: If you had to give us a list of about 4-5 stocks or companies where you expect to see big downside because of the rupee impact which ones would they be?
A: In terms of stock price it may not happen. Everybody now knows that the rupee goes from 59-60. What happens is obviously most of the companies will come back and tell one that one does not need to provide it this year, because the debt is going to be paid maybe two-three years later and at that point of time what will the level of the rupee be, that is more important. The note just highlights saying that these are the people which have an issue as far as debt is concerned and have an issue as far as the exposure is concerned. Does it mean that these stocks are going to go down far substantially from here? Q: To come back to your conference and that set of agri companies and stocks that will be on your radar, tell us about which do you think will be the winners and what is the mood among the investors? Are they looking like they will bite even these agri stocks?
A: I think this is one of the bright spots in this market actually. The agri space has not done well for sometime now because of the last year's failed monsoon, but this year if you look at it the monsoons have been early and it will be slightly more than what people expect, so some amount of flooding and all would be negative. But initial phase has been pretty good for the monsoons. Across the country it has been ahead of time. This sector will definitely benefit out of it, whether it is the fertilisers or the pesticides, all these stocks will do well. The ones we like are Rallis India, PI Industries, Coromandel Fertilisers. These are our top three picks in this space.