Choose stocks carefully; positive on banks, auto: Axis Cap

He said that though the consumer sentiment has improved and people are more willing to spend now than they were 2 years ago, actual spending is still to pick up.

Axis Capital is positive on sectors like banking, media and auto and continues to prefer private banks over PSUs.

Below is the transcript of Dharmesh Mehta and Nandan Chakraborty's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: It has been great times for Indian equities and now at 28,000 on the Sensex, how are you feeling about this market, is this still a buy on every dip, whatever dip you get or do you think at this point, the market is looking for something more from the government’s end to take the next boost on the upside?

Chakraborty: Two points, one is the world is fragile. So obviously more fragile the world gets, the more liquidity that places like the EMs get. So one has to be a bit circumspect about the volumes of money that should be put etc. Having said that, while there are certain times to put in money, there are certain times differentiate between sectors and differentiate between stocks, which is precisely the reason why we are having a conference at this time. If you look at the results this time, within virtually every sector there has been a winner and there has been a loser. Obviously we are in a sweet spot. Very few countries around the world have 18 percent EPS growth coming and 18 percent is a great number. So I think one has to be circumspect and at the same time, one has to choose stock specifically which is why we have a very wide retinue of different types of sectors which are represented here from early cyclicals like banking and consumer derivatives right up till power, coal and so on.

Latha: I am reading your India grasps the Hand of God report and the combination of positive circumstances is unbelievable – crude oil, gross domestic product (GDP) base likely to be revised for the better, the rainfall is not a deficit after all if you looked at the kharif crop. All that is taken but sometimes the turn in the economy can take a very long time. The previous NDA government efforts started and started it was a long downturn and only in the last year of the NDA government we saw the growth ticking up. Is there a chance that this time as well it may not get worse but it may take a long time to get better, it may not happen in say the April quarter of next year which is where a lot of people are pinning their hopes even if the fourth quarter is a wash out? What if that doesn’t happen, are we likely to see some big negativity from foreign investors?

Chakraborty: Let me give you a short answer and a slightly long answer too. The short answer is I think by the time of the Budget you will have a little bit greater clarity because you see what prime minister Modi is doing, he is getting some of the best people that he has seen across spectrum, across from different political parties people like Piyush Goyal, people like Suresh Prabhu, people like Parrikar; lots of them. So, he is getting very good people at the center to see that our key issues are resolved.

So, I think we should give them a little bit of time till the Budget to see when there will be unity among the states to get the goods and services tax (GST) working for example. Plus to get the various reforms and the reforms are not so much about intractable problems in India but they are more about coordination. So, this coordination is what this government gives.

A little bit of the long answer, yes the world is fragile so one has to be careful and therefore one has to be choosy in stocks.

Latha: A year ago when we spoke to your team, probably the same day last year, there was already a bit of a cheer expectations that the NDA would do better than most people had thought or beginning to creep in, I remember it was only by December 4 when the states results came that the tide turned but still the cheer was there, how much better is it now, what exactly are the FIIs telling you, did the same number of people respond, did more people respond, from the quality, quantity and feel in your conference what is the sense you are getting?

Mehta: I noticed that the response has been fabulous especially where India stood in the global emerging markets. So there is a lot of euphoria, there is a lot of optimism and there is a lot of expectation for India in the current scenario. There is a big amount of work is going on behind the conference to get everybody’s one-on-one meetings done. But bottomline is I think, India is in a sweet spot and I don’t think I have ever seen better circumstances for India what it is at today.

Sonia: I was going through a report where you have done a detailed study on the urban recovery theme and how pricing power is returning to the consumer. How do you play this theme now in terms of stocks? Do you look at spaces like autos, do you look at spaces like FMCG, what is the strategy here?Mehta: I think it is purely going to play the ancillaries of whatever happened in the consumption so banking, media, autos, a lot of those kind of names. There is still more of a sentiment which has changed. The actual spend is yet to come into the economy which is kicked off right now as we did a survey, Nandan Chakraborty and his entire team flew all over India and did that survey. So what we are seeing is that people are now ready to spend which they were not able to do in the last two-three years because of bad sentiments not because they didn’t have money to spend. So I think that will flow down definitely to all the ancillaries or consumption.Latha: In your report you begin by saying banks and auto sectors will be the prime beneficiaries. Take us through some names first in the financials, what will be the pecking order, will you want to look at PSU banks now if you have a certain certainty about both the interest rate as well as the economy turning?Chakraborty: Interest rates are almost bound to fall. The question is whether they will fall in the first quarter of the next calendar year or later. I don’t think anybody is expecting it to come in the current policy. Question is obviously if interest rates go down, the prime beneficiaries will be those which are more levered to the economy among the large private banks as well as some of the PSU banks. The issue in PSU banks is while they are beneficiary of interest rates, they also have certain issues which are yet to be resolved. Hopefully, once this coal thing is resolved -- I don’t want to stock too much because we have Mr Piyush Goyal who will in a way indirectly answer about the PSU banking sector and the honourable minister is our first speaker.

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Sonia: What is the sense you are getting about the coal and power sector reforms since you do have Piyush Goyal speaking at your conference and how would you approach sectors like this now? Mehta: Government has made their intention very clear that they want to get around this entire mess and ensure that people who have invested money in this sector start investing in further plans which they have stopped because they are not clear on what is going to happen to the coal block allocations. So, we are expecting that auctions and all should be much earlier then what people expect. I think one has to look at the intention of the government more than the action right now because the action can take sometime because of legal issues and all that but the intention is very clear, that is to get back this sector on the track and ensure that the money starts investing in this kind of sectors which is very important for India’s economic growth. The entire 8 percent or 6 percent growth what people are now talking about is going to be dependent on what they do on these two sectors. There are lot of stocks which we can play but there is a lot of uncertainty which is around that and the stocks will keep on reacting based on what announcements keep on coming. Latha: Anything specific that you like in the PSU space in the non-banking financial companies (NBFC) space, private sector space, what is the hierarchy, can’t you name names? Chakraborty: I can’t name names because I am a part of one of them which I like. The private sector has to be number one because they are the giants which are taking market share; that is the obvious one. After the private sector comes the PSU banks and the NBFCs and between the two NBFCs while they have a better valuation there is some optical risk because of the recent regulations. However, having said that, in any cycle the growth story is come from NBFCs rather than the PSU banks. Having said that, again in an early cycle, the PSUs do better. So, for PSUs one has to be a little more circumspect and wait a little bit till the reforms are a bit underway. Sonia: As a part of your speaker list you have Akhil Gupta as well. Telecom is a sector that has not outperformed this year. What is the sense you are getting about the next 6-12 months and how much telecom could start to participate? Mehta: Stocks like Bharti Airtel and Infratel have outperformed the markets in a big way. However, again that also is dependent on what happens on the spectrum auctions, what kind of money these people are supposed to invest to get their licenses or to get extra spectrum from the government. Based on that news it will keep on reacting accordingly. However, as I said the power is coming back to the consumer. So, people like us or anyone else is going to spend more and more on telecom especially with data coming in, in a big way; 3G and 4G in play. People are going to spend more money so the telecom should also do very well in the longer term perspective.

Latha: I noticed there are a lot of South based cement companies in your list. Would you want to take that you have India Cements, Ramco Cements as big beneficiaries also Dalmia Cement, J.K. Cement?Mehta: People want to meet cement companies because they are a way to play the India growth story because you don’t have directly any large companies in infrastructure space currently today without the leverage issues and all. Hence people are trying to play this theme, buy the cement companies. That is the reason we have a lot of the cement companies which investors are dying to meet today. Latha: I wanted to ask about the consumption theme more. You did speak about autos being one way to play it, what else would it be, would you buy any of the retail formats, would you buy Titan, the discretionary sales variety? What is your pick in terms of the entire consumption basket? Chakraborty: What typically happens when a economy recovers is first the discretionary spend goes up, after that comes FMCG. So, it is obviously that all forms of discretionary spend will go up. Number two is the discretion spend players also expand so you have a double benefit of that. Prior to that, the banking sector improves because of sentiments because their balance sheet and their profit and loss improves. So I would play banking and after that I would play consumer discretionary. Having said that, every year has a retrospective multibagger. So, let us say year before last it was agriculture, last year it was logistics. This year it will be infrastructure, EPC companies like that. Which of these – attend our conference and you will meet a lot of companies and then we will figure out which ones. However, there is where the multibbagers come from; usually it is in retrospect that you knew which one otherwise everybody would have put their money in that one or two stocks. That is where the searching for multibaggers comes from. Also remember that when Dharmesh talked about cement that couple of the larger companies are in a grey period so we have not mentioned them in our report. So, they are also equally important. South India specifically is a completely different dynamic from North India. North India is the one where over the longer term you will have a great amount of industrial corridors and so on. So, there is a lot of stock which will happen in North India also apart from South which is coming out of its capacity utilisation problems.