Buy select largecaps, retail-focussed pvt banks: BNP Paribas

With markets correcting as much as it has, it is difficult to comment on where it might be heading in the short term, but select largecap stocks are trading at attractive levels, is the word coming in from Manishi Raychaudhuri of BNP Paribas.

He is advising investors to buy good quality stocks available at lower levels. He says some of these stocks have declined more than 20 percent and hence if picked selectively, there is money making opportunity in the long term.

As far as the banking sector is concerned, he says there has been asset quality erosion, but private banks have been relatively immune. However, some banks such as ICICI Bank are not quite up there. He advises investors to go in for private sector banks that are focussed on consumer lending. Similarly, he adds that if one wishes to invest in industrials, then one should pick companies with less leverage.Below is the transcript of Manishi Raychaudhuri’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: We have a seen a lot of market capital erosion in the last three weeks, that is since the New Year began. What is the sense you are getting? Are markets now becoming attractive? Is 7,241 a reasonable bottom or will they plumb lower depths?A: As I have said before, in the short-term it is very difficult to comment on where the market would be, but at these present levels, there are important stocks, which are largecap frontline stocks that are beginning to show up on any of the valuations screens. Some of these are good quality stocks, which have been secular cash generators and cash distributors and which are possibly trading at not exactly at their all-time lows but pretty close to those levels.Therefore, what one should advice investors at this point of time is to look at those good quality stocks, which have eroded in value quite a lot and there are many stocks which have declined more than the market. If you look at where the market peaked, that was about 20 percent higher compared to where it is today, there are some stocks that have declined more than that. So, if one picks stocks selectively then over a long-term, there is a reasonable chance of making decent returns in this market.Sonia: So, when you say good quality stocks, what do you mean? Some of these companies are great businesses, but they are going through a long period of slowdown, for example, ICICI Bank. How do you decide?A: The example that you gave. In the entire banking sector, we have seen erosion of asset quality. Private banks have been relatively immune from this trend. In fact, it has affected more the public sector banks. However, some of the private sector banks like ICICI Bank have not be free from this. So, on the other hand, we do have, even in the private banking space, the banks which have been more aligned to consumer lending and therefore, that is where one's focus lies.So, I would say that if someone is more selective about selecting this segment of business -- so within the private sector banks, one selects more the consumer focused banks or within industrials, one selects those, which do not have too much leverage on their books.In fact, avoiding leverage is a constant theme that we have been thumping the table on or even within consumer staples or consumer discretionaries, one chooses those which have a wide reach and therefore a significant degree of pricing power and therefore, who tends to benefit from this commodity price downturn that we are seeing then, within these selective pockets, there is still significant degree of money making opportunity.Latha: Where would that lie? Would you like companies like Maruti Suzuki despite the fact that they have been priced to perfection and there is faltering? In exactly the categories that you pointed out, there is a problem of valuations.A: That is prevalent in almost all markets across Asia or emerging markets. The good quality companies have been priced to perfection, they have not declined as much as maybe the market has and even in many cases, even though they may have corrected, the valuations still may look egregious to some of the investors.Having said this, I would also point out that if you have a secular cash generator and the cash distributor then the chances are that despite the fact that it may be relatively expensive compared to the sector peers, the chances are that it would still generate super normal returns.I will give you an example. We looked at companies across Asia, which have historically over the last 10 years, been increasing their dividend per share each and every year. It is quite an onerous criterion, because during this period, Asia has gone through the global financial crisis, it has gone through the European debt crisis but still out of a very large universe, there are about 50-55 companies in Asia which meet this criterion and if you are relatively slightly selective, you can choose about maybe 10-15 out of them, which would actually form a world beating portfolio. They have generated more than 500 percent return in the last 10 years enough to beat any benchmark.These are not inexpensive stocks, many of these trade at possibly dividend yield of 1-1.5 percent or even lower than that. There are many companies, some from the private sector banks, some from consumer discretionaries, some from engineering and industrials from India in that space but those are the kind of shocks that one should focus on at this point.Sonia: Vedanta has been in focus for the last couple of days on the back of this news flow, as an investor, how do you approach this story?A: Honestly, I would not want to comment on this. In particular, on Vedanta I am not permitted to comment. In general, if you look at the metals and mining sector, we have not been positive on that. However, this is of course a different story. This combines the fundamentals of two sectors, but on this specific issue, I would not like to comment.Sonia: I wanted to ask you about some of these companies. Today, Maruti is reacting negatively towards earnings because of the weak margins. However, how do you approach a company like Maruti that is investing in a strategy to increase its premium car portfolio, but compromising on margins at the same time? Do you keep the faith or do you churn out of these companies now?A: Keeping in mind that this company is one of the market leaders, it has one of the best reaches in all of India, over the long-term, I would still be positive on this. There are two main reasons. First of all, urban consumption as we have known has been relatively resilient in India. Second, Maruti has a dual tailwind. We have seen it benefitting because of yen depreciation which tends to reduce the cost of components that it uses. It has also benefitted from a relatively better product mix, historically, because it has been selling the slightly higher-end cars, and that is the direction in which it seems to be going. So yes, the most recent results for some of these companies in the consumer discretionary space have been slightly disappointing. However, a combination of the fact that their product mix maybe improving going forward and there could be a tailwind from commodity price moderation which still seems to be in force, would possibly keep us positive on the consumer discretionary space in general.Latha: We saw the midcaps doing very well in 2015. Is there anything, any gem over there that you would still pick after the earnings?A: I would not name any. I mean, we tend to look at companies on their own merit, not just because they belong to some bucket like midcaps or largecaps. However, there are certain sectors, I must point out, where the midcaps are possibly doing better or at least there are reasonable number of midcaps that one can select. Take IT services for example. There the largecaps are clearly better placed. These are the companies which possibly have a larger probability of getting large contracts from their US and European counterparts. However, in some other cases, like engineering and particularly in the context where the government sponsored projects are now being accelerated, there is a possibility of a multiplier effect kicking in, or in other words, the smaller orders going to some of the, even companies down the value chain in terms of market cap. So, some of those sectors would possibly be interesting from the midcap perspective.