Bet on cos with strong balancesheets; bullish IT, pharma: Emkay

Latha: What is the sense with the markets itself? Have we put in a near-term bottom? Are you asking your clients to fish in?

A: Last 20 days have been very challenging with almost 9-10 percent downtick on the indices and maybe 25-30 percent cut on various individual stocks. Having said that, this is primarily driven by global reasons; there was nothing local in this kind of a correction, whether it was currency, oil or China slowdowns which probably all of us were aware. Therefore, now the question is that from here, where? So, what we are saying to our clients is that this is a time to be cautiously optimistic. When I say optimistic, on a longer term timeframe, the benefit of lower oil prices, etc. should benefit domestic economy and various corporate.

We believe that the government of India would also be proactive in terms of the various initiatives that they would require to take to stimulate the economy if there is further global slowdown. But, in the short-term, there will be lot of collateral damages because of the sharp oil correction and each and every corporate earnings estimate, etc. will have to be revaluated in terms of whether they are impacted in terms of inventory or loss of demand, etc.

So we are telling our investor clients that it is a time to invest but the return expectations should be tempered and it should be more a time when you invest throughout 2016 for returns to be in 2017 and 2018. So, any investor expecting an immediate pop-up or a sharp return, we are tempering those kinds of expectations.

Sonia: I wanted ask you about a couple of sectors. Let me first start with the aviation sector which was the darling last year and now, today, we have Interglobe Aviation (IndiGo) that is down almost 12 percent post its numbers. I know you do not want to comment on individual stocks, but just wanted your thoughts on how investors should approach some of these high valuation stocks like IndiGo.

A: First of all, we do not have coverage on that sector, but still on a broad understanding, we believe that the capacity utilisation in the sector is doing very well. And also, with the benefit of lower aviation fuel prices, etc. they should be. So, the numbers are expected to be good for all the airlines. However, any individual stock correction could be a function of maybe; the stock had run ahead of valuations. But, on a medium-term basis, I believe that sector should deliver good returns.

Latha: You said that you have been telling your clients to buy with expectations of returns end of FY17 or FY18. What exactly are you asking them to buy now?

A: Obviously, you have to be very careful in terms of what kind of company. We are recommending to focus very strongly on the balance sheets of companies because if there is further global turmoil, then only those companies which have very strong balance sheets will be able to survive. We do not know what kind of growth assumptions we are factoring in various companies. So, focus is more on the balance sheets of companies with good track records. That is the first criteria for any stock selection. Having said that, sectors which we believe should deliver good return, I believe that the whole IT majors, despite the slowing growth, but still they have very strong balance sheets and many of them are in low double digits kind of growth expectations. That should be a safe haven for investors to invest in. Also pharmaceutical companies, we believe should continue to deliver good returns. No doubt, individual pharmaceutical companies have some challenges on regulatory, etc. but on a bottoms-up basis, they should be the opportunities to invest in.

We also believe that the whole private sectors banks. The major, the large private sectors banks, wherever there has been sharp cuts in anticipation of various non-performing assets (NPA) issues, we believe that in the next few quarters, all those issues, as far as cleaning up their balance sheets of these large banks would be done with. They have a very strong retail franchise and the margin of safety and current valuations is very good. So, those are some of the sectors that we believe investors should be investing in from a medium-term perspective.

Sonia: Telecom is getting hit very hard today. Both Idea Cellular and Bharti Airtel are closer to their 52-week lows and we have seen the kind of pressure that these incumbents are facing because of competition. Would you completely stay away from this sector or does it become attractively valued enough to buy at some point?

A: We have a negative view on the sector for some time, primarily driven because of the huge amount of capex that these sectors are required to make and also expected more competition from one of the oil majors whenever they launch their products. So, the sector, yes, it is a business to consumer (B2C) sector, but the return on the capital employed, etc. those parameters do not exactly make us confident.

Latha: What about this midcap versus smallcap versus largecap comparison? Some people have gotten stuck in midcaps and some midcaps were overvalued. Do largecaps get a better look-in in 2016 or will it still be, as you said, balance sheet, the touchstone?

A: Initially, at least, what is going to happen is that the largecaps by definition, by default attract incremental inflows from current existing investors or new investors because that is where the sector where you feel more comfortable. But having said that, mid market segment, yes, last two-three months there was a lot of over exuberance and some of those stocks have corrected by 30-40 percent. But once things stabilise in the overall global environment and local environment and then midcaps will again attract investor interest, because midcaps of today will hopefully become the largecaps of tomorrow and investors would love to invest where you can multi-bagger return which is only possible in the midcap segment.