Policy stasis pins mkt down; limp Budget rally: Quantum

Sanjay Dutt, director, Quantum Securities explains on CNBC-TV18 that liquidity is still very sparse in the system and the downside is limited after the recent correction. Dutt adds that structural hurdles needed to be addressed to improve investor-sentiment and expects PSU banks to correct by 10-15 percent from current levels.

Dutt advises selling Jubilant Foodworks at current levels and highlights that PSU banks' asset-quality continues to be a concern. The market is witnessing tepid growth and low retail participation and he is interested in buying stocks of companies with little or manageable debt. Below is an edited transcript of the analysis on CNBC-TV18 Q: Do you think the correction is over and done with or is there more to come?
A: The correction is over. Obviously the indexes- the Nifty or the BSE Sensex - are deceptive at this point of time by revealing only a 2-percent fall from highs. However, the midcap indices are down about 7-8 percent and the small-cap index closed at a five-to-six months low on Tuesday. The damage that has been to the broader market is much bigger than what really has been made evident by the Nifty or the Sensex.
I think the indexes will not move up in a hurry and we will continue to meet resistance and may in fact actually fall another one percent from the current levels because both the structural, fundamental as well as the short-term liquidity outlook looks pretty bleak.
The government is sucking out money via offers-for-sale (OFS) issues coming out of public sector companies. Insurance companies continue to be sellers and there is nil retail participation. The economy is back at the same position and though there is a lot of song and dance about policy action, the implementation is still lagging. Q: What can be attributed to this savage correction in the midcaps because many of these stocks have corrected 15-20 percent in the non-index large-cap space? What do you think caused the damage?
A: Very clearly and in just two words – balance-sheet and liquidity. Liquidity is still very sparse in the system and investors are tight-fisted with cash with midcap and small-cap companies are not able to access funds from any source. Most have balance-sheet flaws that are pending resolution for many years and have posted very stunted or nil growth.
So the rise was just a technical rebound from the extreme lows with no change in the fundamentals. Add to this the complete stasis in government policy initiative as evinced by the increase in the number of companies hindered by red-tape in receiving payment for good and services rendered to the government little expectations of payment before March 31 or probably the next fiscal.
So a combination of a complete stall in government reform, stasis in monetary policy, the RBI clamp on liquidity and the resultant loss of faith in investors that sent the midcap and small stocks on a downward spiral and savaged the market. Q: You track the sugar sector. What have you made of the news that seems to suggest there could be some headway with regards to implementation of full decontrol?
A: I pay no attention to sectors or stocks dependent on government policy action. The news of full decontrol has been floating around for many months and it anybody’s guess when it will happen. Q: Are you looking forward to a pre-Budget rally?
A: I am looking for a pre-Budget rally to be sold into. I maintain my stance that towards the first fortnight of March or may be towards end of February, the market will reach its peak for the year which will be sold into by most participants.
And globally, fund managers will be happy investing funds anywhere but pm India at this point of time irrespective of what the foreign merchant bankers and analysts might announce. No one is interested in investing funds in India, given the way things are happening at this point of time. Q: After the first quarter, will it actually be a difficult grind for 2013?
A: Absolutely. It would be definitely tough till the structural hurdles that plague the economy are addressed. I am very skeptical about deregulation in diesel that mandates a monthly hike of 40-50 paise a litre because soon the government will start to prepare the ground for the elections next year and the initiative will be shelved.
There is still a lot that needs to be done to make the economy conducive to investment via FII and FDI and that is the reason for India to be one of the worst performing markets in the past one year. Q: How do you approach some of these consumer stocks like Jubilant Foodworks on which there was a trace of disappointment post earnings, stock collapsed and some buyers evidently are buying it this morning again? Would you buy it here?
A: I would sell. If there are buyers buying you should be selling because there is no reason to buy such overpriced stock in the market where you will not have sustained earnings. I think the company's model itself is now turning into a bit of a problem where it is spreading out from a very profitable and a very good lean model of the initial pizza delivery into a retail model which is normally rent heavy. I am not optimistic from the current price. I would definitely love to sell the stock in case I owned it at this point of time. Q: The big trade most investors a few months ago were PSU banks which posted paltry earnings. How would you approach the PSU-bank basket? 
A: I would look for the stocks to correct 10-15 percent from the current levels and whenever a collapse comes that is the time to buy into them. Banks are really struggling with two issues- issues relating to structured assets, NPAs and issues relating to inadequate liquidity and capital. All of they are doing after the RBI policy's token rate-cuts of 10 bps - 20 bps which is pure lip service as it is not going to benefit neither the bank nor the borrower. There are very few banks that are healthy and I am pretty skeptical of buying at the current price. I would look to buy at 10-15 percent lower. Q: Would you say this grind is probably going to be the direction for all parts of the market in the sense the Nifty and the broader market or would you expect to see sharper cuts for the broader market through the course of this year?
A: I think it will be a grind but till the structural issues that plague the economy such as poor rates of growth, weak balance-sheets and lack of liquidity are not addressed aggressively nothing is going to happen in India in this particular calendar year as the completely consumer is risk averse and retail investors don’t trust anything in the market,.
This is the kind of worse combination I have seen in the last five-ten years in the market and global investors have better opportunities to invest in other than India. So on a broader basis, I don’t see any incentive for any global investor to come and put a huge amount of money here. Q: What kind of a broad range do you see the market in if you suggest a grind? For the Nifty, what could the markers be for the next six-to-nine months?
A: As things stand today, I don’t think anything beyond 6250-6300 and on the downside about 5600-5500 is what will be the base because that is where valuations start to turn attractive if you breakup the Nifty.
But once again I would say the Nifty is deceptive. Look at the broader market and you will see the kind of damage that happens if the Nifty falls 100 points and on a relative basis, the broader market has actually fallen down three or four times. So that is a a much better indicator than looking at the Nifty. For example, the smallcap index is at a five-to-six month low which means going back to August or September versus the Nifty, it is just about 2 percent down from its highs. Q: How would you approach the second half of the year? Would you look to accumulate in this grind or a fresh call only close to or after the elections?
A: I am very clear that this is a traders' market - every pop needs to be sold into and every extreme correction needs to be bought into. There is no structural or secular trend in place at this point of time till the fundamentals change. This means that at the upper end of the range investors don’t need to even think twice, they just have to sell and stay on cash. When you see a panic into the market, come buy and keep trading. That is the only way to play this market. Because it is a time to rent and not to own stocks. Q: What do you do with some of these stocks on which the market seems to have had a huge leap of faith such as Suzlon Energy? Would you buy those kind of stocks ?
A: Leap of faith? A company that has been a complete disaster in terms of debt, committed absolutely wild acquisitions abroad and is now sitting on a totally restructured balance sheet, does not offer a leap of faith. Q: What would you buy because conviction seems to be low on some of these defensives as well as the number showed through on pockets like FMCG? If you do buy through the course of the year, what is the preferred list?
A: I would only buy in extreme situations. I would buy companies where there is very little or manageable debt and there is traction on the offtake in terms of sales. If I get extreme levels in banking, automobiles I will buy. But I wouldn’t be in a hurry to buy. I would be more inclined to keep selling on every rally than to be inclined to buy on a breakout. Q: Last time we spoke you were talking about taking a punt in Kingfisher Airlines (KFA). Have you cleaned that out or have you still managed to hold out in hope?
A: No, I was stupid. I am sitting on it and I lost money and that taught me another lesson. But you learn from these lessons and understand that you have to walk the talk. If you don't do it, you get hit and have to eat crow.