Currency ban to benefit banks; like Motherson Sumi: IDFC Sec

Markets are feeling the pinch after the government last week decided to ban Rs 500 and Rs 1000 notes.Throwing some light on this, Anish Damania of IDFC Secuirities, says that Non-Banking Financial Companies (NBFCs) could be majorly hit. Auto and consumer discretionaries will be impacted too.But, Damania maintained a positive stance on the banking sector. He said banks could be the primary beneficiaries of the demonetisation scheme.He also suggested to buy in sectors which are insulated. As top picks, he suggested Motherson Sumi and Ashok Leyland.Below is the verbatim transcript of Anish Damania’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Anuj: A bit of a deja vu kind of a situation for the market. We have seen the 8,100 level back again do you think we will be back to 8,100 so soon?A: I think very difficult to talk about the market in turbulent time because it is an unchartered territory and not many people would understand exactly how much impact and how long will that impact last. Clearly, those are the key questions which would be there in people’s mind and obviously, another question there whether the unorganised market will shift to the organised market.We have closed to about 200 odd companies plus at our conference. I think the investors will learn as we kick off the session which has kicked off from 9:00 am in the morning as to what their thoughts are about how is it impacting their business, whether it is impacting at all or whether it is positive or negative for them. So, it is across sectors, across largecap, midcaps and smallcap,so we will get to know by the end of the day and over the next two days. It is a three days conference, where in close to about 700 odd investors have signed up. Also, we have close to about 7,000 odd meetings which have been scheduled. So, I think it is going to be an exciting time to understand from the companies as to what kind of impact we are going to see because of the demonetisation. I think this will be the primary theme which will run across all the corporate and most of the questions and suggestions would be centred around this theme.Latha: What is IDFC Securities’ initial sense? Avoid what and latch on to what as this flood of selling happens?A: The idea would be to find out who would be the beneficiaries of this demonetisation and clearly it appears to me that the initial stages the banks could be the primary beneficiaries of demonetisation. The selection of stocks is going to be now divided who is going to be more impacted and who is going to be less impacted. So, clearly, as we see the export-oriented sectors are dominated sectors which will be the one which will be much less impacted than the ones which are retailed facing consumers etc. Clearly, discretionary spend, consumer facing industries where there is a large amount of cash transactions for buying those goods from the people that is what is going to get most impacted. Our stances would be to buy into those sectors where you are insulated for example pharmaceutical and IT are the ones which are relatively insulated from this demonetisation impact. There are some issues on the global side, but they may not be as severe as what we could see on the domestic side. Secondly, there would be a lot of utilities which will give you enough cushion as they are regulated return drivers, so companies like Power Grid could benefit quite a lot from the fact that interest rates could be lower, yields could be lower and they would be relatively insulated from earnings in this scenario. I think in interesting times what I have seen is that about 30 percent of the index which is banking which will be relatively better off. If we take out NBFCs where major hit could come which is about 8 percent of the total weight, so about 22 percent of the weight will be relatively insulated in the form of banks and about another 20 percent in the case of IT and pharma would be relatively insulated.I think the sectors which can get hit would be autos, consumers discretionary more than staples and a lot of stocks in the midcap and the smallcap space which are catering to the unorganised markets.Sonia: You made this point about how the pharma companies may be insulated from demonetisation, but you have still downgraded many of these pharma companies. I was just going through your note. The pharma sector has been downgraded from neutral to underweight. What is the reason for that is it to do with the USFDA issues and would you stay away from this space completely? A: No, so that was the time when there was not much larger impact and you continue to see a lot of positive momentum on the income side both on the rural and the urban side lifting up the retail stocks and other relative domestic oriented stocks. So, any downside which we saw a slight with high valuation was hammered down. So, pharma and IT was a part of that we had downgraded IT to neutral and we had also downgraded pharma quite a while ago about six to nine months ago, we had downgraded to neutral and then to underweight. Now the scenario probably would have changed and we are in the process of seeing whether those underweight positions for both IT and pharma stand good or not. My initial assessment is probably they may be relatively more insulated in this scenario. Anuj: Housing as a theme has seen a bit of a hit clearly whether it is housing finance whether it is paints whether it is some of these other companies NBFC related to housing. Any particular subsectors where you would want to build positions which have corrected 30-40 percent?A: This is a turmoil market and till some clarity emerges I don’t think we should try to be brave because a lot of stocks had very high valuations on the fact that growth is going to be resilient. However, with this kind of a thing growth has taken a bit of a beating and one doesn’t know how long it will continue. The expectation still is that it will continue for a short duration and it will pickup. We would like to wait it out rather than buying something on a 30-40 percent correction, I would rather like to wait it out and see exactly where the impact could be. Latha: You said that probably export sectors would be save the blushes, so what about the auto ancillary? IT is one space, but the Motherson Sumi and the Bharat Forge are also big export sectors so what would be your pick of the pack?A: There I like Motherson Sumi, it is a structural play on the fact that they have capability to actually take on assets in distress which are there in plenty in the global scenario and they have been able to actually cross sell within that. Nearly, 85 percent of their turnover now is from the global things which are happening for Motherson’s. So, I think this will continue and I would say that growth in Motherson will continue at about 20 percent earnings compound annual growth rate (CAGR) for next three to four years. Therefore, I feel that is a sector where structurally you should be in and that will be my top pick in the auto space.