Best to stay with pharma, IT, consumer stocks now: Religare

The dramatic fall seen in Indian equities on Thursday on the back of sell-off in Japan and US proves that fundamentally nothing has changed for India and it is still a liquidity driven market. So, the market is headed for a difficult couple of weeks, warns Gautam Trivedi of Religare Capital Markets.

"Japan has seen a total of about USD 80 billion YTD FII flow. Long-only and hedge fund mangers over the last few days were kind of concerned about given the quantum of money that has flown into Japan this year. What happened yesterday was not a complete surprise in the sense that a lot of people were rushing for the exit at the same time," he told CNBC-TV18. Continuing his bearish tone, he recommended investors to stay away from high beta sectors given the delay in domestic capex revival, weak domestic demand situation and poor fourth quarter earnings. "Sectors that are more or less disconnected with the domestic demand story have done well. Healthcare, IT and consumers were safe havens," he added. One should be very cautions while playing the market now and should adopt a stocks specific approach. Trivedi is not surprised by engineering major Larsen & Tubro's downfall after it posted subdued fourth quarter earnings. He says, in general the market has been punishing companies that have posted poor numbers or given weak guidance like SBI and Infosys. Below is the verbatim transcript of his interview on CNBC-TV18 Q: What do you hear and sense about whether there has been any turn in terms of sentiment of flows towards markets like ours, and whether we are setting ourselves up for a difficult couple of weeks? A: We are setting ourselves up for a difficult couple of weeks. Starting with Asia situation, and more so Japan - If one looks at the entire Japan trade, we have seen a total of about USD 80 billion year-to-date (YTD) flow. It is Foreign Institutional Investor (FII) money, which up 600 percent Year-on-Year. It is no surprise as an absolute number but the fact is that it is a very crowded trade. We spoke to a bunch of FIIs including both long-only and hedge funds over the last 10 days or so, and they were kind of concerned about given the quantum of money that has flown into Japan this year, what happened yesterday was not a complete surprise. In the sense, a lot of people were rushing for the exit at the same time. India YTD has been driven more by global liquidity than any improvement in domestic fundamentals, and that theory still remains pretty much valid. Yesterday was a good example of how India reacted vis-à-vis the rest of Asia. Q: For the last couple of days of the last week there was just a hint that maybe high-beta was coming back into vogue and again people have got slapped on the wrist with those trades. Do you think it is prudent to stay away from that kind of an orientation to this market? A: I think it is because if you look at the sectors YTD that have actually done well have not been high-beta names. It has been healthcare, IT, which has been more or less disconnected with the domestic demand story and you have got consumer names. Consumers to some extent were more safe havens versus people trying to play that and they have done significantly better than the rest of the industrials, even according to the last quarter's earnings that are getting reported. So, that has really been where most of the money has come-in, in the past three to four months. I do not think we are still out there, for the high-beta names; the overall domestic capex revival, the overall domestic demand situation does not significantly look positive. We have not seen green shoots at least coming out of the results that were recently announced. Q: Would you say that the rupee at 55-56 is presenting another headwind again? So far the markets till yesterday were overlooking it. Do you think it is getting in the way now? A: Our view on rupee really is that it is more yen driven and the impact of the fact that the dollar has appreciated against virtually every currency this month and also if you look at it over the last three months. We cannot be isolated from the rest of the pack and hence the rupee is reacting the way it is with the dollar, so that is a headwind. The other headwind is potentially another Rs 20,000 crore or so, of supply of stock still to come given the June deadline imposed by the Sebi. Unless Sebi relaxes that there will be a flurry of deals hitting the market and that supply at this point of time looks like a lot to be absorbed by the market. That is the second headwind I would look at. Q: We saw a correction as early as Monday last week, but that just looked like a short-term purging after which the market completely took off. At this point given the events of yesterday, what would you say is the downside risk present to the market and would you buy into that correction? A: I would be very cautious and be very stock selective. You have got to be careful, because while the money is coming in, we do know it has been concentrated with a handful of funds that have actually been putting money in the market and they have been very careful about the quality of companies and stocks that they are buying. I have had a chat with a whole bunch of India dedicated fund managers who are managing offshore money, and unfortunately they are not seeing any significant amount of inflows. They are able to convince a lot of their regional funds to actually allocate more money into India, so net-net they have come back and put more money to work in India, but it is not because of the fact that they have seen inflows into the India dedicated funds. Similarly on the domestic side the redemption pressure continues. Unfortunately there seems to be no abatement as yet. When you add these factors up, it is clearly not looking very promising from a short-term perspective. _PAGEBREAK_ Q: Last we spoke you guys had a list of slightly tricky midcap names that you were recommending to buy, things like Voltas etc. Would you say you are disappointed with what you have seen in the numbers this time? A: The numbers are definitely disappointing. Our view really is you cannot time these things. Hopefully, it does not get any worse than this. So if we are at the peak of the interest rate cycle and you have seen the Reserve Bank of India (RBI) starting to cut; inflation is coming off, the biggest boon that we have had so far has been the global commodity pricing which has remained sanguine. So, as long as that remains under control and inflation keeps edging down hopefully RBI cuts rates and you will see the capex cycle gradually reviving. Our call is obviously much longer term than short-term in nature. Q: Earnings season was chugging along pretty okay, till in the last five days we have had lot of disappointments from Larsen and Toubro (L&T), State Bank of India (SBI), Ranbaxy Laboratories, a lot of these midcap names. Do you think the mood might have been spoilt a little bit about this earnings quality and what lies ahead in terms of further downgrades? A: I am not sure about further downgrades necessarily, but L&T is a great stock that you pick. I do not think L&T has done this before where they have derecognised almost Rs 17,000 crore worth of orders and said we are not sure if whether these will finally come through. Of course, their order book is much bigger than that at Rs 1,56,000 crore, but the fact is that company is taking on its own initiative to actually derecognise Rs 17,000 crore of orders. I do not think the company has done that before. That is clearly not a good sign. The market too seems to be in a pretty bad mood, so a lot of stocks who miss numbers or gave weak guidance actually get punished pretty badly. We saw that with Infosys, we saw that with L&T - for two days in a row stock was getting hammered and SBI as well, people have taken it pretty negatively. The patience at this point with stocks that are not giving good numbers or weak guidance is very limited. So, unfortunately these stocks are getting punished. Q: Were you disappointed with Dish TV as well? There too the Average Revenue Per User (ARPU) and margins did not look great yesterday. That stock too got punished a bit. A: We were actually disappointed. We still have a structural buy on the stock, because of the entire digitisation theme but the quarterly numbers were clearly not positive. Q: The base for any move of this market has to be on what the banking space does. Yesterday, again SBI disappointed. What do you do with this entire PSU banking lot? By the end of it, it looks like there have been more disappointments than positive surprises. A: I agree. There is no right answer to this. The restructurings and the non-performing loan (NPL) numbers are not looking good, and potentially there are another couple of quarters of pain before we actually see that coming back up. However, I do not mean to suggest that start buying the PSUs right now, but having said that with SBI now trading at roughly one time FY14 price-to-book and about 15-16 percent Return on Equity (ROE). You have that on one side, and you have an Axis Bank which is trading at 1.8 times price-to-book with the same ROE, so what would you rather buy if you had a longer term view of the market? Some of these PSUs start to look attractive from a valuation perspective vis-à-vis the privates. So that is probably the way to look at them. Q: At this point given everything you have seen in earnings season where would you say the greatest positive surprise is or the positive skew has come in from? What would you go in most overweight on in terms of a sector? A: The consumer sector has been pretty positive. If you look at the average of the top-line growth, for most of the consumer names it has been anywhere from 12-15 percent, which is obviously clearly telling you that there is still demand coming in from tier-2 and tier-3 towns, where the penetration especially in tier 3 towns is still reasonably weak. So, that has been a big of a surprise. A lot of our investors have actually come back and said this is very positive that the top-line growth has not really receded to single digits. So, although valuations are not exactly cheap that is a place definitely to focus on.