Bearish on consumer sector; bet on power, oil & gas: Emkay

Indian markets have been underperforming of late and Anish Damania of Emkay Global Financial Services believes huge selling from domestic investors are to be blamed for the lacklustre performance. He added that there is a huge amount of selling in many of the midcap and smallcap counters, with only a few stocks holding the Nifty up.

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As far as the consumer space is concerned, Damania remains bearish on it and feels growth is not expected to pick up in the near term. Looking at the government initiatives, he is positive on the power sector and is of the view that oil and gas too has chances of booking profits. Here is the edited transcript of the interview on CNBC-TV18. Q: What is the sense you are getting with India’s underperformance in the past week even before that deep cut came from Wall Street? Last week was a singularly underperforming week for India. Are you getting a sense that we might languish here till the budget and people will move in only after they see fresh action?
A: If you look at year to date, we have seen huge selling from the domestics. I have not seen this kind of selling coming from the domestic front, which almost matches in the last one week as to how much foreign institutions have bought. So that is the reason probably why you are seeing that market remaining lacklustre.
At the same time, while some of the Nifty names are holding up, a lot of the counters in the midcap and smallcaps are giving away. What I can see is that there is actual selling in many of the midcap counters with a few names in Nifty holding up the index. Q: What have you made of the slowdown that we have seen in many of the consumer stories? Something like HUL, Titan or even Jubilant Foodworks which was the recent disappointment from the entire consumer space? What's the call now that you have on names like these? Is the run up over and are they in for any kind of a correction?
A: We had been saying that consumer as a story is going to slowdown. Over the last two quarters we have seen that happen gradually. Though, in this quarter we started seeing a bigger impact of that and slowdown was more pronounced. Also, the ad and publicity spends shot up substantially in this quarter.
If you look at what has happened, there is a slowdown. It was not noticed very well because it was gradual. Now, the slowdown is getting noticed because we are seeing margin erosion along with the slowdown. I think this trend is expected to continue because I don't see any chance of growth picking up in the near term or six month or three quarters.
In terms of consumers, what we probably are going to see is the same phenomenon that we saw in quarter three of this year. It will probably repeat itself or manifest itself for the next two quarters or three quarters as well. So consumer stocks are going to remain under pressure.
They had run up quite a lot. If you look at our six month performance, we are still better than the Nifty but, if you look at the last three months, they have started giving away some of those gains. I would like to see the consumer stocks actually underperforming on a one year basis. There is more room to go. We would still continue to remain bearish on the consumer sector. Q: What are you bullish on? Would it be IT, would it be telecom?
A: The reason to look at stocks now is moving towards how the government is shaping itself up and what they are doing towards lifting the mood. So, one sector which comes to my mind is power sector. If you look at it, there have been a series of steps in the last one year and they are now gathering pace in the last three months, in terms of taking various steps. The recent step has been an increase in activity towards coal pooling.
If this were to happen, then the power sector looks good. Secondly, among the weightier sectors, oil and gas space is looking quite okay because still you have oil marketing companies like HPCL trading at 70 percent of their book value. So there is still some 30 to 40 percent to go to add book value which is where they could trade if the government really carries out what they have said.
So oil and gas is one space where we will be comfortable. Utility is another space which we will be comfortable with. By utility, I mean power sector. Q: What is the call that you have on the entire banking space? Punjab National Bank (PNB) numbers were okay, but Bank of Baroda (BoB) was a complete howler and after PNB numbers some people were talking about the possibility of the valuation gap narrowing between the private and the PSU banks. But we have got such confusing signals from the PSU bank side. How would you approach them now?
A: I think the polarization with respect to private sector and public sector continues and I am not seeing anything on the ground in terms of economy and things doing very well, though a lot of announcements have been made. It might have lifted up the sentiment, but if I were to take a business decision based on this, I am not at that stage.
If the income growth continues to falter then we are going to see the banking sector face more trouble as we go ahead. There might be softening up of the NPA cycle in this quarter as compared to the previous quarter. But, mind you, the NPAs are still high. They are not yet down to levels which are very comfortable and public sector is showing that stress.
Private sector, on the other hand, seems to tell us that they are doing business much better than the public sector and at this point of time, as long as the capital adequacy ratio for private banks is strong we would continue to like the private sector banks.