Cautiously positive on Reliance Ind; like some NBFCs: Geosphere

After a laggard performance in the recent past, Reliance Industries, yesterday leaped almost 11 percent in trade owing to announcement of Reliance Jio's Rs 303 tariff plan, that will not only bring money into the telecom arm of Reliance Industries, but also ensure users hold on to their Jio sim cards a little while longer.However, Arvind Sanger, Managing Partner at Geosphere Capital Management is not entirely convinced. He remains cautiously positive on the stock. This, he said is due to lack of any clarity on the major energy and petrochem projects from the Ambani-led conglomerate. He is also concerned about the timeline in which the investments made into Jio will pay off.He is positive on the local market. He said it is currently a part of a 'globally optimistic rally'. He likes the domestic consumption story, adding that the pains of demonetisation are behind us. He is looking forward to D-Mart going public.He is positive on cement stocks and some non-banking financial companies (NBFC). At current levels, he likes Asian Paints.Below is the verbatim transcript of Arvind Sanger’s interview to Latha Venkatesh, and Sonia Shenoy on CNBC-TV18. Sonia: Before I ask you about the Fed, I wanted your thoughts on our own markets because now we are less than 100 points away from a 52 week high and we are seeing participation from the most unexpected corners, especially names like Reliance Industries. How have you reacted to all of this? A: I guess it seems like we are in a global optimistic rally and India is certainly participating in it. I think the fundamentals for India are that the demonetisation worst is behind us and there is optimism that the next three quarters earnings should start to show some acceleration. So, we are optimistic on that too and we were looking to use the sell-off as opportunity to buy into specific names we like. So, we are happy to see the rally. The Budget was a positive, so, that has helped the fiscal discipline shown by the government. However, we are a little nervous that the election results may not be as favourable as the market would like but that is only more of a trading action; it should not derail the earnings recovery and therefore the sustainability of the rally. We think FY18 should show meaningful positive comparisons versus FY17. Latha: Tell us about Reliance, has it ignited a brave rally for the next several months or was it a one-off; 10 percent on a giant like that? A: Remember the stock has done nothing for I think three years. So, it clearly has been a huge laggard. The two major issues that have overhung the story, one is the lack of clarity on when some of these major projects on the energy and petrochemical side are going to come along and the second and the bigger concern has been the massive investment that has been made on the telecom side, when that would pay off. We have not yet got clarity on the energy, refining, and petrochemical side because those projects are still somewhat delayed. However, I guess the announcement in the last few days about a major kind of pricing for Reliance Jio which was free so far has clearly igniting hopes that maybe we will get meaningful returns finally starting to show up, or at least some returns starting to show up in Reliance Jio and that has started a rally. However, I think we remain cautiously positive, but we think things might take a little longer to play out. Latha: So you are not buying? A: We are not currently in Reliance because we really are not comfortable with what the Jio is but we are trying to understand it better because so far it has been black hole. It could be interesting, but we are not there yet. Sonia: You did say that you would use the market fall as a buying opportunity, what would you buy now? A: We think that there are specific companies in the domestic consumption space, some of whom have gotten hurt by or had some disappointing numbers in the last couple of quarters, we like those. We continue to like cement and select NBFCs still look interesting to us. I think Reliance while we are not there yet, is one that is still such a laggard from such a long period of time that is one we are trying to understand whether this is something that could be a turning point. So, it is not out of the question for us. Latha: The other story that is playing out is something which actually CNBC-TV18 broke that there are informal moves made by Kotak Mahindra Bank trying to win Axis’s hand and that has spurred other private banks as well to seek Axis’s hand. The short point is the private sector area seems to be flexing its muscles for inorganic moves. You like anything in that space? A: We like NBFCs but we frankly currently have limited exposure to the private sector banks. However, I think that the private sector banks, if there is a consolidation cycle, of the two obvious laggards in the private sector bank have been ICICI Bank and Axis Bank, we are not sure whether something this large could happen because we don’t have any historical precedent of such large private sector bank mergers. However, if we were to see anything like that happen, I think that could be a catalyst for rerating some of the laggards if they are going to combine with some of the other banks. So, that is a very interesting story and it is certainly something that was not on our radar screens, but it could cause rerating of some of the banking stocks. Sonia: You just said a while back that you are looking at some of these domestic consumption stories to buy in the market, would it be stocks like Asian Paints because now we are seeing once again interest return into the paint sector, companies like Asian Paints are sitting at about five to six month highs, is that a space that you would be looking at? A: Yes, absolutely. Names like that which have gotten hurt or others who are generally in the kind of consumer space where we can find opportunities, some of the names that have been hurt by Patanjali’s entry have also gotten hurt a lot and we think that tide may turn a little bit and there could be interesting names there. So, we think in general domestic consumption is a story that is going to have legs. We also like some of the retail stocks that could benefit. Dmart is coming public and that is creating a lot of excitement in the retail space. We like some of the value options that might still be available at reasonable multiples, that one looks like it is going to be a really hot deal from everything we have heard so far. Latha: I finally wanted to ask you whether you are impressed by the domestic liquidity story, we haven\\'t got a lot of foreign money, domestic liquidity is fairly abundant and we just were reading out a Deutsche Bank argument which says that Indian investments in financial or household savings moving into financial instruments is increasing at a rapid clip. Is that something you would bet on to continue and therefore what would be for instance your expected returns from an index level on a 12 month frame? A: It certainly is a very interesting story which I think has huge secular characteristics as real estate as an asset class has gotten somewhat de-rated significantly and so have traditional places like gold. So, then it seems like for a long time the Indian saver was staying away from the stock market, for a long number of years and now it seems like that is returning and that appetite once it comes, can last for a long time. So, unless we get some shock which causes the stock market to correct sharply and scare people away, we think any minor pullbacks will be bought and I think this fund story will continue. So, there is a real chance. We don’t invest counting on that, but we keep that in mind. There is a real chance that valuations of Indian market could go pretty far north of what people are used to seeing, not driven by FII money which is kind of been historical one, but I think it is domestic liquidity story is absolutely one that has a lot of legs. That is likely to continue for a long time.