Conviction scant; buy beaten down banks, IT: Purushottam

Based on valuations, banks may be heading towards a bottom and hence, a little bounce can be expected, says professional investor Sangeeta Purushottam. So investing in beaten down banking stocks, from a long term perspective, makes sense.

When very large correction happens in banks, like in case of Yes Bank, it is advisable to wait till the dirt is settled. One should then buy because fundamentally many of these banks are well-managed; hence investors will get their returns, she argued. In the last few days, many of the banks have lost sharply.

But trade in general will be linked to the rupee and global markets, Purushottam warned. However, the conviction to go out and invest in cyclicals is still missing and in such circumstance, investors' choice has been limited to FMCG, says Purushottam. FMCG is where the investors are hiding in the absence of 'safe sectors,' even though valuations are not very comforting.

Talking about IT pocket, she said expectations from Wipro are muted. HCL Tech and TCS are alright to hold because of lack of safety in other IT stocks.

Below is the verbatim transcript of Sangeeta Purushottam’s interview on CNBC-TV18

Q: We have seen a much polarised market; do you see that continuing, sectors like IT and fast moving consumer goods (FMCG) continue to do well even as banks crumble more?

A: I think banks maybe reaching some kind of a bottom particularly when we look at public sector banks, many of them are trading very close to one year lows. So, whatever little gains they had at the beginning or the fourth quarter of last year have been given away. So, it is a little hard to argue how much downside in absolute terms is left for the banks and there could be a bit of a bounce there. But on the whole the polarised character of the market is likely to remain till we see growth concerns go away and it has been a hit and miss over there. So, it is that trade is going to be linked to the fate of the rupee and broader macro concerns.

Q: So you expect some of these FMCG stocks to continue with the valuations they have been trading at?

A: I think they have sustained at these levels of valuations however unrealistic they appear because from a fund manager’s point of view or an investor’s point of view if you are holding on to these, there is really very little else you could shift into unless you move into cash. That conviction to go out and take a trade on cyclicals or invest in cyclicals is not quite there unless you are looking at a two-five year scenario and you say okay things are going to even out and I will not get these valuations again. If you are at the shorter end of the market you could still go wrong investing in that pack. So I think the FMCG kind of valuations may sustain for a while although from a longer term point of view they don't make any sense.

Q: So what would you have the highest conviction buying now, would you buy beaten down private sector banking names or would you buy afresh if you want to deploy money in any of the outperforming sectors that we just discussed?

A: I don't think I would buy the outperforming sectors. That trade has a lot of risk. If you are in those sectors you would just hold on to them for a while, there isn’t really any compelling reason to buy because when you are making a buy decision you have the opportunity of not being in the market or being in another asset class, you could just be in some kind of fixed return instrument as well. I think the beaten down banks do make some sense, but you need to have patience and have a longer term horizon. They may not perform for a while although the valuations are attractive.

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Q: What are the chances that stripped off any technical support that the market had last series on stocks like Hindustan Unilever (HUL) etc, we actually start slipping lower on earnings disappointments and get to the lower end of our trading range somewhere in that 55-57 zone again?

A: I think that possibility does exist because like I have said before once you start getting closer to the 6000-6100 levels, you really need conviction in the macros and the growth trajectory going forward to take the market higher and every time that conviction fails. So unless that comes in I think we will be in a trading range and there will be sector rotations within that.

So we have seen some of the other sectors come a little alive. So telecom has done okay, parts of the oil and gas pack particularly Reliance Industries has done okay. So there has been some level of search outside the defensive pack to see what does well. So that will continue but otherwise seeing a breakout of this range in any decisive manner just is really hard to see.

Q: What do you expect to hear from Wipro later today and what are you still comfortable buying from the IT pocket?

A: Expectations from Wipro are not very high because in terms of the relative performance of all the larger stocks this has been weaker and it is not very easy to affect a turnaround in growth very quickly when you are dealing with a large company. So expectations there are muted. On the whole in the IT pack I think HCL Technologies and Tata Consultancy Services (TCS) remains safer.

Similar to what we see in the FMCG like a pack which is a decent place to hide but not that much a comfort on valuations. So just like the pack will hold up because of lack of choices, these stocks will also do alright in terms of holding up or even giving some performance because of lack of safety in many other pockets of the market.

Q: How would you approach the non frontline private sector banks like Yes Bank and IndusInd Bank which have corrected the most?

A: What tends to happen is when you see a very large correction happening like we saw in recent times and that too of valuations which were reasonably rich, it makes sense to just wait a while for the dust to settle because the technical factors start coming into play and the fall in price could overshoot on the downside just like it tends to overshoot on the upside.

However, once the dust has settled it does make sense to look at these banks because when we look back a few years later you will again see these valuations maybe at the lower end of the trading range because fundamentally these remain good, well managed companies with a strong franchise. So at some point in the near term they will provide a good opportunity to get in for many people.

Q: What did you make of the Ambuja-ACC announcement yesterday and how would you approach these stocks now?

A: Clearly there are issues for minority shareholders, I think the discussion which has happened around the deal and the concerns raised about the structure of the deal being what it is in order to make use of that Rs 3500 crore of cash sitting on the books of Ambuja Cement are pretty much valid.

And these are issues where some of the institutional shareholders really need to step in and get themselves hurt because this just doesn’t seem to be fair to minority shareholders. So the reaction of the market and the way the stock has moved is pretty much called for.