Mkt trend may reverse anytime; bet on oil stocks: HDFC Sec

Dipen Sheth, Head-Institutional Research of HDFC Securities advices caution as the current market rally is only driven by global liquidity and the market trend could reverse anytime.

“The dollar index is up and the US arguably seems to be on the cusp of an economic recovery are some indications of a reversal in trend sooner rather than later especially in view of the recent run-up,” he told CNBC-TV18. Reiterating the fact that retail participation in Indian equity market continues to be poor, he added that investors are moving away from equities to other assets like gold and real estate.  He expects institutional investors to keep selling as long as they face redemption pressures. Also read: Fin Min detects Rs 400cr custom duty, tax evasion Meanwhile, Sheth is bullish on OMCs given the diesel price hike announced last week. He said one can bet on oil stocks if under- recovery levels remain low. Diesel prices have been hiked by 90 paise per litre, with that diesel under recovery is now down to under Rs 3/ litre. From the IT space, he is upbeat on HCL Technologies. Below is the verbatim transcript of his interview on CNBC-TV18 Q: What would you do with the market now, what are your expectations after such a strong pullback? A: The last 10-11 percent movement, as is the case with much of the movement from one year ago levels is entirely driven by FII inflows and the liquidity sloshing around globally and finding its way into India. As long as this liquidity is on, the trade is on. It is very difficult to take a call as to when this might reverse. However, some early indications are visible already; the dollar index is up, the US arguably seems to be on the cusp of an economic recovery. So, some of these flows might reverse sometime sooner rather than later, especially in view of the recent run-up. I would be very cautious at these levels. Q: The domestic investors have been almost consistent sellers through this run up we have seen on the market. Has that been your approach as well, selling with every rise or do you think that opportunity will come a little later for the market, for now you should still buy into this strength? A: If you look at the last 16-17 months or so, the twelve months of 2012 and the five months we have had here of this  year, there has been something like USD 20 billion inflows last year and then in this calendar we have seen USD 12-12.5 billion inflows. Parallely, the Indian institutional investors have been almost continuous sellers through this process. I think it is reflective of the fact that Indians at a retail level have stopped allocating money to equities, whatever little money they were allocating earlier, and have moved aggressively into gold, real estate and other assets. In fact consumption has kicked up because of the fact that inflation is running high, real interest rates are low, so the incentive to save is also not much. The only inflation beaters right now seem to be real estate and gold for a while at least and the Indian institutional investors will continue to sell, so long as they face redemption pressures. Q: How should investors’ approach this up move, would you book profits selectively or do you think the liquidity trends are so strong that one should not be in a rush to book profits? A: So long as the liquidity keeps coming in, you cannot argue with the tide. In fact at some point of time towards the end for sure you will see some kind of a suckers rally. May be one should wait with at least half of ones portfolio at a retail level. However at an institutional level I don't think people have a choice, it is not that Indian funds have moved into cash aggressively. I think we will see a rally even from here on but I don't have too much faith in this kind of a rally. Q: How are you approaching some of these consumer names, while Hindustan Unilever (HUL) has done well, last week some of the companies which reported like Jubilant Foodworks and Asian Paints did not look very strong? A: We don't have Jubilant under coverage but if you ask for the headline view, I think the same store sales growth has fallen down to something like 7 percent, compare this to about 30 percent two years ago. So, if you adjust this 7-8 percent for consumer price index (CPI) then they have got negative real growth in same store sales growth. That doesn’t inspire, so it is obviously reflective of urban pain. Even after correcting 20-25 percent in the last two-three months, the stock is still trading for 30 times consensus one year forward earnings. So, that is little bit of aspirations running too far ahead of reality with Jubilant. On the other hand with Asian Paints, volume growth did taper off, From FY11 to FY12, FY12 to FY13, volume growth has continuously declined but FY13 showed a very creditable 7 percent volume growth and over FY14 and FY15, we would be betting. We have the stock under coverage and we are betting on a revival of volume growth. There is no danger of market share slipping away; there is no danger of inherent or underlying demand subsiding in any way. We have actually upped multiples and we see this 5-10 percent correction in the stock as an opportunity for long term investors to get in. _PAGEBREAK_ Q: The tricky ones remain the banks and that is where some of the pressure had started off for the market a few weeks back. Numbers from PSU banks especially have been so all over the place. How do you approach that sector now? A: If you look at this result season what is happening in the banks, very strongly is also happening across all stocks. There is a polarization of performances. The high quality businesses are getting better, the not so well run businesses or the ones which are facing structural headwinds are running into problems. If you look at the banks, the most disastrous case in point being Allahabad Bank, they reported something like Rs 2600 crore of slippages this quarter which is a complete disaster. There are PSU banks with asset quality concerns whether it is Oriental Bank of Commerce, Canara Bank and so on. However they have kind of delivered within stated guidance and with Allahabad that has slipped away. On the other side if you look at the private banks they seemed to be run on a very tight leash. The last three-five years you will see that the stock performance across banks has been entirely driven by asset quality concerns. So, if you are a bad underwriter you will get punished and I don't think the market is going to let you get away. Q: A lot of brokerages especially on the institutional side are now beginning to recommend a lot of midcap stocks. Do you think that time is coming now to start investing in the midcap universe again? A: Midcaps are a little tricky because you can get caught away in the froth and buy bad stocks just because they are moving up. If you keep your sanity and just buy high quality businesses, I don't think you can lose in midcaps over the long term. In fact if you look at some of the Indian mutual funds; some of the best performing schemes have been the midcap schemes. I dare say some of the worst performing schemes have also been midcap schemes but that is not the point. The point here is that you have to be strictly stock specific and I am sure you will find opportunities to invest in the midcap space. Q: We did get that diesel price hike over the weekend. Would you continue to be optimistic on the oil marketing names? A: That is reflective of what I call clear structural problems and some things that India doesn’t seem to be doing right. Apparently, we might have got it right. The under recoveries in diesel are now less than Rs 3 a litre and if this continues but if this momentum continues and if diesel under recoveries start coming down, then already for FY14 most brokerages are penning in something like Rs 90000 crore of under recoveries. If this plays out than the oil marketing companies (OMCs) are tremendous value plays. They have been value traps for as long as I can remember but if this blue sky scenario really plays out for them, stocks like Hindustan Petroleum Corporation (HPCL) are worth double what they are today. Q: Would you buy anything from IT now after the deep correction and subsequent resurgence on some of those names? A: Yes I would. There is a little bit of disillusionment particularly with regard to Infosys and the fact that it doesn’t seem to be getting its act right for a while now. However, at the margin if you will notice some interesting trends are playing out in the IT sector. The demand which is now being put on IT companies is not just to grow but to innovate and innovate substantially, differently from what they have been doing so far. Some of these IT companies have already got that part right. HCL Technologies is a shining example in terms of the way it chased the infrastructure management services (IMS)  business over the last few years and has posted the strongest revenue growth primarily because of its focus on this slice of the business. The others whether it is Infosys, or TCS have begun to figure this out and are definitely changing their business models at the margins. This is a sector, which has attracted the crème de la crème of India’s educated elite over the last 10-20 years. I think they will find a way out and in many cases the valuations are compelling.