'Anyone saying PSBs have turned around is selling you a lemon'

Both experts also shared their preferred sector and stock picks.Below is the verbatim transcript of Ajay Srivastava and Ashwani Gujral with Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: It has been a phenomenal week for the market. At the start of the week if you would have asked anyone whether there is a 5 percent rally coming this week, not too many people would have said yes. How did you read into the momentum and what is the expectation now? Srivastava: I think the best part of the momentum, you captured it correctly, was it caught all of us unaware. We were all skeptical sitting there at the start of the week, Brexit was in the mind, Fed was in the mind, we thought monsoon was factored in to an extent but this was unprecedented. What Anuj said is correct, it is very good for the retail investors because over the last two years, they have made very paltry returns. You may say that the guy has been patient and so on and so forth, the fact is that the guy has made very little returns in the equity market. Debt has been a far better way to invest in the last two years in equity. Equity return even after this monstrous rally is not even double digit at the end of the day. So, it is a fair reward for people who were there in the market but even after this rally they are sitting on only 9-11 percent return over the two years which is not a good return for the market. So, yes let us celebrate the rally for what it is but also understand with caution that longer-term markets or equities are not giving returns which also tells you book your profits at various times, do not wait for the final hit whenever it happens and that is what the theme today should be that is it time to take some money off the table as market keeps progressing upwards or do you commit more money. Anuj: The other topic that I want to discuss is State Bank of India (SBI). Big surge, on second reading it clearly looks like the numbers were a bit better than estimates and also the fact that the management commentary clearly looked like at least they were seeming to put the worst behind them. Do, you think that is a fair argument and do you see stock sustaining above Rs 200 now? Srivastava: Of course not. It is a fallacious argument of the management. You were not there but we had a same discussion on Bank of Baroda last result which said that great things are going to happen to this bank, the stock went up to Rs 160-163, travelled back to Rs 130. SBI is the same. They are telling you a different story, the reality is different. If you look at the notes to accounts, what kind of slippages they are having is very different. So, anyone telling there is a turnaround story in the PSU banks is selling you a lemon.This is the beauty of this market, even in the bullish market as PSU prices go up they become good shorting opportunities. If you look at the last result, whether you look at SBI, look at Bank of India, Bank of India has gone to the extent of doing what, it has even changed the way they recognise their bad debts. It says that it should do 180 days, 190 days earlier, now it is 180 days. SBI is a same story.Last time the result, if you look at the interview of the MD, she said the same thing, nothing different. She is saying the same thing today, it is all over, everything is accounted for and you wait till the next quarter result and you will see more coming out. So, I don’t believe this story and I think this is fallacious. Every time stock market rallies and PSU bank rally, they give the best shorting opportunity, it has given phenomenal money on the shorting side always so never ever fall for this logic what was given out today by SBI Chairman. Anuj: Trend week clearly, all through the week the market kept making higher highs, I think the last remaining bears would be out but what next, is this market headed in a straight line towards 8,500 or do you see any kind of consolidation in between? Gujral: Consolidation is part of life but I am very clear that after many weeks this week has taken out six weeks’ worth of action. So, any time that happens, obviously the market is now expanding in one direction and you will have many trend days. So, the choppy day will be far and few between and more of trend days you will see even in the next week. So, probably by say next Friday, a lot of the gains would be on the table for people to take. I think one more good week is possible, like when we were doing the 7,700-8,000 range, we had many more narrow range days. So people should not take profits and let this thing run for at least another five days and chances are closer to 8,300-8,350 will be the first sign of a bit of profit booking, maybe closer to even the US Fed rate hike. Out there you will probably see some sort of pause but this kind of strong week only means that there is more ahead.Sonia: Why would you advice people to take profits at this juncture. Even if you look at something like L&T's numbers. It is not just about L&T, it is an indication that there is a genuine pick up in the domestic economic activity. Whether it is sustainable or not is a different question but don't you believe that there are some green shoots that the investors should capitalise on?Srivastava: We must understand in our belief that the economy below the tip tier is wobbly and wobbling a great extent, it is not in the most robust of shape but everyone will agree with that. The question is degrees. The market rallies perhaps anticipate a major turnaround which may will happen but the today the way the economy is it is wobbly. Certainly on the capital expenditure (capex) side it is great excitement of L&T result. If you analyse L&T result for the past year\\'s and this year\\'s what has really happened. Three bad quarters, a billing postponed and compressed into the March quarter. We will see what happens in June quarter. If there is a sustenance in June quarter billings on Engineering, Procurement, and Construction (EPC) revenues which are 5-7 percent earnings before interest, taxes, depreciation and amortisation (EBITDA) revenues then perhaps there is a need to rerate or they get large defence contracts. So, the perspective has been yes, there is a monstrous rally, yes, there is a liquidity in the system which is true. In fact if you see amazingly the last rally which is post Budget this rally both turned around on the day the US DOW also turned around. It could be co-incidence, but it could be related, I don\\'t know the answer. But you will see a major co-incidence. So, to read through the fact if there is a turnaround at such a dramatic turnaround in the economy perhaps would be an exaggeration. As Ashwani was saying correctly there is a momentum, you can\\'t beat the momentum but to translate the momentum into this fundamental change in the economy for perhaps over reading the situation and therefore I say book profits. Advice is well taken, maybe three days from now or four days from now but time to book profits because the last two years has shown us that we have to live with volatility and volatility means bringing profits back in cash back to the kitty.Anuj: But what if actually the Goldilocks scenario plays out. You have FII buying, you have DII buying. We have clear signs of monsoon. Today the monsoon has hit Kerala as well. So, after two sub-par monsoon you will have a normal monsoon or above normal monsoon. Do you think this market could surprise a lot of people just the way it did on the way down could this market surprise on the way up?Srivastava: Of course it can and it has in fact - why this is a surprise because I don\\'t think so many of us were expecting this kind of rally. We were all in long positions but not expecting this kind of rally. So, it can surprise you. But also the fact that you look at the market relative to the valuations which may not matter in the short term. As you said you allude to the fact that at some time they lose sense of perspective. But the fact is that the valuation is not cheap. Post this rally you will see market to book value, replacement value, Price-to-Earnings Ratio (PE) multiple, whatever parameter you want to use. That is a pretty steep multiple the market is trading at. So, you want to be a little bit taking profit off the table than committing yourself to more capital at these valuations. Yes, there are some sectors undervalued in the market. National resource sectors are undervalued, I would agree to that. Maybe even cap goods stocks are perhaps a little undervalued if you have a great faith there. But the number of stocks are also reasonably priced or overvalued. So, you got to keep that valuation perspective in mind as market travels upwards.Anuj: We saw a big rally in BPCL,HPCL. IOC of course was bit of an underperformer, but oil marketing companies at current levels would you buy?Srivastava: Yes, two years favourite, continue to be the favourite, they are underpriced if you ask me personally and with a little bit of privatisation or vigorous management they can do lot better in terms of performance, so instead of two years we continue to say these are good buys, whether you should buy it tomorrow I am not too sure but any correction happens or you think you don’t have it in the stock this is a must hold for 4-5 years at least, because a long rally to go its way under price to the fundamentals, so I would still say good ahead. I think the price to book is about 3.5 or somewhere around that for BPCL for instance. Fantastic, just go and buy it, it’s a clean stock, clean company, good margins, fantastic business, perpetuity of business. The real estate itself is a control in terms of the company and the dealerships. You can’t get access to that again, so any other three companies buy it including of course BPCL is number one.Sonia: We have seen two stocks that hit the iconic Rs 1,000 mark this week, one was Yes Bank and the other was Asian Paints would you buy either now?Srivastava: Not know, Asian Paints perhaps yes still but not Yes Bank and I think some stocks I like to buy I am always long contrary to what you think I am mostly short, I am not. The only difference was I thought before we had a conversation is I thought for the last two years bonds portfolio will be better and we have been advocating that, that’s done perhaps satisfactorily but having said that I think Yes Bank to mind I am little worried about Yes Bank because I don’t understand the business model very well to the extent that who are they lending to. I don’t see them in retail presence, I don’t see them too much in various whether it is personal loans, retail loans etc., obviously they are lending to some set of customers which are giving them fantastic returns so just a little bit worry on that side perhaps keep me away from Yes Bank at these levels. Asian Paints is always a buy if you must have in the portfolio because anything which happens to the economy this stock always performed. This held steady over the last 3 years, performs very well but having said that I don’t think it will outperform the index in the next one year. I think it will be an underperformer because it’s a well owned stock, its run up quite a bit as well over the last year, so it may not outperform the index.Anuj: Your weekly ideas, what would you buy right now?Gujral: See I believe Tech Mahindra has bottomed out given the size of the move and given that it’s been through a strong bear market. Possibly in the next few months you will get targets closer to Rs 650. Also Hero Motocorp with this monsoon etc., happening chances are you will get targets of Rs 3,800. Both these two-wheeler stocks Bajaj Auto and Hero Motocorp are showing good traction and Reliance Industries Rs 950, Rs 930-950 is a strong bottom and from here if the market has further to go possibly Reliance will get right up to Rs 1,050-1,060.Anuj: Anything that you are bullish on right now in the pharma space?Srivastava: Four months back we sold out everything in the pharma and we thought and we still believe that it is going to be a very trouble time for pharma. Pharma is to be our favourite for years and years and we thought we never sell it aware, but about four months back we just liquidated everything in pharma including for customers. I think pharma is going to have a very trouble time, they are expensive stocks, they are facing lot of headwinds, I would say today’s rally in pharma was possibly a chase up rally saying these stocks have not gone up so let’s buy these stocks. I won’t read too much in the rally in pharma stock at this point of time. There I don’t see the traction, see more of headwinds, too many issues with the USFDA, generic market is sluggish in the West and their R&D spends are going up. You saw it Cipla already declaring 8 percent R&D spends so this is going to be a period of next 2-3 years of underperformance for pharma before they built up to the next level again. Indian government is now rapidly putting price controls. India was the most profitable market with all the price controls come in we don’t know where the profitability will be, headwinds in US, headwinds in India, R&D spend higher too many issues not a good place to be if I would say so and I keep saying from the perspective of investors to say that limited money, we need to focus on buying shares where we can outperform the index by a wide margin. I would doubt that pharma as a sector would do it in the next 24 months.Sonia: The other space that did really well this week was the NBFCs space names like Ujjivan and Equitas would you like that?Srivastava: I like it, too expensive for my taste at this point of time. If the rally is over, if you want to buy into now, then you are really taking a very high in this stock if you ask me, because if you really wanted to buy those stocks then larger institutions are available. Yes they are flavour of the day, lot of PE interest is there, but if you look at the valuations they are really expensive valuations what you are buying into a build up story. So I am not a great buyer there at this point of time. I like it but I don’t like to buy it at this valuations.