Booking profits on rally; prefer to avoid holding cos: Quantum

Most of the expectations of a good monsoon driving rural demand and in effect earnings has been priced in feels Nilesh Shetty of Quantum AMC who prefers to raise cash levels by trimming stock positions if the market continues to rally.

Quantum also prefers to stay away from holding companies, he says declining any comment on AB Group restructuring.

Pashupati Advani of Global Foray, however, believes the rejig will prove positive in the long run. He believes one reason for the current pessimism could be that investors expected AB Nuvo to demerge the insurance business which would prove immediately beneficial instead of the entire financial services business.

Advani believes current market rally is liquidity driven. Typically, net inflows get absorbed but currently there is more on offer side than on the bid side, he says.Below is the verbatim transcript of Nilesh Shetty & Pashupati Advani’s interview to Prashant Nair & Ekta Batra on CNBC-TV18.Ekta: Your thoughts on the Birla restructuring?Advani: All these conglomerates that are out there in the market have been sitting undervalued and I guess peoples are looking at themes for what they should buy next. This may be the trigger for people to start looking at all the others that are out there. There are a number which has got a myriad of businesses and mixtures in the actual mix when you actually split it. I think that it is positive in the long run and I think that AB Nuvo is down today because I think the issue is that AB Nuvo they are talking about demerging the whole financial services business. I think people were looking at just demerging the insurance business which should get a win-win immediately. We are in India and so a merger followed by a demerger is not going to take place in a hurry. I am guessing the timeframe for this will be probably two years. I guess they will be lucky if they do that short. However then if you do back of the envelope calculation because of the fact that they are taking the entire financial services business in it is probably a blah. It is not like this is a 30-40 percent leap higher and therefore traders who look at it and analyse it. It is just something that will give market return and provide the big cap that is required and that is going to be required to stain the indices that is the other issue that Grasim wants to be there. Prashant: Any thoughts on this transaction?Shetty: The investment team at Quantum is always sort of shied away from looking at conglomerates. The holding company discounts is always sort of reduced when bull markets are in favour and increases when there are bear markets. We would rather directly own the underlying companies when they are listed. So, we have never sort of tracked holding companies that closely.Prashant: Each of these are different companies, do you think there could be some impact? For example Hindalco traded at a bit of a higher multiple than compared to say Vedanta because of the group that each of these companies belongs to? Hindalco does not have anything to do with this transaction but do some of the businesses get affected, the fashion business for example which is separate now or you don’t think so?Shetty: Again there is lot of perception value built into holding companies and assumption built into, again it is very tough to visualise monetisation of these assets. A lot of holding companies continue to remain holding companies for decades so really if you just value dividend these companies would not get the valuations that they are getting. So, we have sort of never focused on holding companies that much.Ekta: We have a whole host of numbers which are coming out today, so if you have to pick between Bosch, Sun Pharmaceuticals and State Bank of India, which one would you bet on in terms of delivering?A: I really cannot comment on individual stocks.Ekta: Okay, sector-wise, if you had to talk about auto ancillaries as well as banks?Shetty: We have added large public sector undertaking (PSU) banks to the portfolio recently, purely on valuation. Auto ancillaries again, these companies tend to do really well when there is a cyclical upturn. But by and large, they tend to have very poor bargaining power with the auto companies. Whenever there is a downturn, you see their margins getting squeezed first. So, only when there is a cyclical upturn around the corner, you see value unlocking or valuations rising, but they again correct quite sharply when the bear run comes. So, we have never had major exposure to auto ancillaries and we continue to shy away from them.Prashant: So just a quick word on the market itself. You are saying earnings have not picked up. I am looking at your view. Market is already building in a fair bit of positives and if we see more rallies, you will continue to take money of the table? Could you talk about that?Shetty: A year ago, we were at very similar levels in the market and that time, the fund was almost at 30 percent cash and we just could not see any catalyst to take the earnings number higher. Since then, markets corrected quite sharply and by February, we got valuations that we were comfortable with and we deployed most of the cash that we had. And markets continue to rally, but the earnings numbers do not move. The major expectation is that the good monsoon is what will drive rural demand which will drive corporate earnings. But a lot of it is now getting to a level where it is already priced into the market. So our cash levels have again started moving higher as we have started booking some profits in the stocks. If the markets were to continue to rally, then our cash levels could again start moving quite higher and we will continue to trim out of stocks.Prashant: Your thoughts, market continues to push higher.Advani: I am a great believer in the markets moving because of liquidity and on the one hand, you have got global liquidity coming because rates are close to zero in a lot of major countries. And that is pushing, you are seeing that in the US market particularly where the DOW, Standard and Poor (S&P) and NASDAQ all closed at record highs which is a big first and employment numbers were also good in the US showing that they are actually coming out of a recession. Btu against that, India is also receiving some of that liquidity, but on the other hand we have also got a huge initial public offering (IPO) pipeline, so that is also going to temper it a little bit. We have got RBL Bank coming next week and then there is a whole slug and then of course the government disinvestment will come later on in the year. So, typically, the net inflows get absorbed. This year, it looks like there seems to be currently more on the offer side than on the bid side.