P Lilladher says worst of macros behind us; lists top buys

The worst for the Indian macros is over, says Sandip Sabharwal of Prabhudas Lilladher, citing falling gold and crude prices.

"I would believe that the downside risk from the current levels should be limited but the upside also does not seem to be very huge given the fact that on the ground activity in the economy still remains subdued," he told CNBC-TV18 in an interview. Meanwhile, defensives continue to outperform, despite the fact that the valuation differential between defensives and the rest of the market has kept on increasing. "Frankly, alpha generation at this point largely depends on the cash position one takes than what stock one is buying at this point of time," Sabharwal says. Below is the edited transcript of his interwier with CNBC-TV18: Q: What is the sense you are getting of the market – it is a breather, you will brace yourself for more falls? A: We had a significant sell-off which has been led largely by global events. I think that was the biggest risk for emerging markets that developed markets have been moving up and emerging markets are underperforming. So, a fall would always lead to a continued fall in emerging markets. That is something which we have seen today. However, all said, specifically looking from the Indian context, the worst of the macros are behind us now. If one sees gold prices, they are down 25 percent from the beginning of this year. We have seen crude being subdued given Chinese concerns and lot of consumption concerns globally. Given the dynamics of the crude market combined with the fact that we have a moderate leadership in Iran now. We could see the geo-political risk reduce we should be positive. The monsoons have been normal and are continuing to be strong all over the country. Taking all the macro aspects into account as well as what has happened in the recent past, I would believe that the downside risk from the current levels should be limited but the upside also does not seem to be very huge given the fact that on the ground activity in the economy still remains subdued. To that extent we could see the market bottom move up and then remain in a range till we get some more clarity on the direction in which the economy is going. Also Read: Adulterated drugs: SC dismisses PIL against Ranbaxy Q: How does one generate alpha or returns when the market is moving in a trading range- which stocks would you bet on to generate that extra money? A: The market becomes very tough in this kind of scenario because typically whatever is the logic and going by the logic whatever stocks get bought in terms of what might look cheap – given the fact that maybe inflation is peaking out, maybe the growth recovery should happen going forward. But that really does not happen so, largely what we have seen is that defensives have continued to outperform despite the fact that the valuation differential between defensives and the rest of the market has kept on increasing. At some point of time, it obviously does reverse but at what point of time it is very difficult (to say). Frankly, alpha generation at this point largely depends on the cash position one takes than what stock one is buying at this point of time. Q: How have you tackled the rupee depreciation and its impact on your stock picking because of the higher value of dollars some products will get a natural protection from imports. Exporters should logically do well and those with dollar debt will look worse. How are your buys or sells influenced by this 10 percent depreciation? A: Clearly the two sectors which benefit out of the rupee fall are technology and pharmaceuticals because most of the large pharma companies today get a majority of their earnings from exports. _PAGEBREAK_ Q: If you take a look at valuations as well can you give us an idea of which stocks you may have added as buys or deleted from your buy list? A: The deletion has not happened in a big way. The stocks, which one is looking to buy, remain largely the same. For some companies, which have greater overseas operations, this could add to earnings. On the midcap side, we have larger exposure to United Phosphorus. It has a large global presence. On transmission basis, it could benefit out of the currency movement. There are other companies on the consumer goods side or maybe the tyre industry. We have also seen is that there has been a demand slowdown, so it is a mix of both of them. Few companies are there, which benefit, but a large number of them, because of their balance sheet risk, do not benefit so much.. Q: Ranbaxy has almost come to Rs 300 mark, it is at Rs 313 in today’s trade from levels of Rs 500 in a span of about maybe two months odd – at what point would you perhaps start considering Ranbaxy as attractive? A: What’s happened here is that Ranbaxy has turned into a stock where most investors including us have typically avoided the stock. I haven’t even followed the company for some time. What has been coming out of the company in terms of what the management says and what actually comes out later there is a huge differential between the two. I think it is better to avoid this stock at any given price at this point of time till more clarity comes and focus on the companies which are actually doing well. Q: What is your top buys at this juncture? A: In the portfolio we have top 3-4 holdings in terms of the largecaps are ICICI Bank, Mahindra & Mahindra. We are looking at Tata Motors at this point of time but we don’t have a hold. In terms of midcaps our exposure is in companies like Mahindra & Mahindra Financials. We have got United Phosphorus and we are looking at some stocks which have got battered recently to add into that. Q: You spoke about considering Tata Motors would you be concerned because of the slow down in China and therefore what impacted Jaguar Land Rover (JLR) sales in China will have and therefore on Tata Motors. At what price would you start recommending a buy on Tata Motors? A: Tata Motors because of these concerns it has seen a correction in the stock price. The impact in China is something which we have to see how it plays out because my personal view is whatever is happening in China is largely to control macro economic risk rather than create a huge downside economic growth out there. We will have to see how the data plays out. But I think Tata Motors has benefited due to the weakness of the British pound over the last four-five months and that should continue going forward. Although in recent times the pound has bounced back so, taking all that into account I would say that around current levels should be good levels for Tata Motors. Q: Have you been looking at a small bank like DCB? Do you see this as a future IndusInd? A: I really don’t think so. My investment strategy in banks is that it is greatly being restricted to the larger banks. One should get into those banks when one thinks the financial should outperform and get out when one thinks they shouldn’t. I have largely avoided some of the midcap banks.