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Last Updated : Jun 13, 2016 04:02 PM IST | Source: CNBC-TV18

Disconnect between economy, mkt; keep booking profit: Dimensions

Stating that there was a "disconnect between the stock market and the ground reality", market expert Ajay Srivastava says recent gains in the market have been led by liquidity and the disconnect makes it important to keep booking profits.


Stating that there was a "disconnect between the stock market and the ground reality", market expert Ajay Srivastava says recent gains in the market have been led by liquidity and the disconnect makes it important to keep booking profits.

Speaking to CNBC-TV18 in an interview, Dimensions Consulting CEO Srivastava said the market was on a "drug induced high" and corrections were imminent.

He, however, added that a re-test of February lows was unlikely unless a catastrophe -- the monsoon failing for a third straight year -- takes place.

On sectors, he saw overvaluation in a lot of sectors, "including the private financials space which we love".

"You should buy strong franchises when they correct. Companies like oil marketing firms, or Page Industries, Havells or Kajaria," he said.

Below is the verbatim transcript of Ajay Srivastava's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: Not looking very good as we start off the week perhaps because of the fear with respect to the Brexit referendum and the Fed meeting, how would you approach this phase?

A: As I said in the last interaction, it is very important in this market to book profits because you have a situation particularly of India that our valuations are far ahead of the fundamentals, which means you will have frequent corrections, there will be market churn. So one is you need to book profits. If you have not booked it, time is to keep booking profits and re-entering. I know the whole paradigm, you cannot time the market and so on but if you look at it in the last 12 months perspective, 75-80 percent returns have come in a month and a half. So you need to find out ways to get out and revive the sector. That is one.

There is obviously lots of buying space is still left in the market even though there is a correction which may happen for a short time but long, we don’t know but there are lots of buying spaces still left in the market which offer value in longer-term perspective like oil marketing companies (OMCs). Now they have valued higher but they are still at a point where you can get in and get a decent return out of it.

So in my view, I think you need to encash whether you are building up on profits, you need to find spaces to use the correction to build up positions but not necessarily hold on to what you already have.

Latha: Basically all these globally driven sales have been opportunities to buy, will you keep that faith in the market?

A: There are two ways to look at it. I have just come back from a road trip to Punjab. When you travel around the road, you see the distress is acute. I met a couple of two-wheeler dealers. I stopped and asked them as to what is happening, they said we have been asked to purchase, we have not paid up but intermediate financing has been done for us. There are stocks of scooters and motorcycles lying in the fields today.

I think there is a disconnect and that we must keep in mind between the reality on the ground and what the stock market is doing. In that perspective what I said is that profit booking is imperative, you have to be in the market because sometimes reality will catch up, sometimes liquidity will come, sometime international events will impinge on us, all in all, it is a bullish set of segments no doubt about it but the fundamental reality sometime comes and hurts us. So let us keep booking.

Sonia: In your tour, did you notice any improvement at all in any other sectors, you spoke about the two-wheelers etc? What about cement? People are talking about a genuine pickup in demand over there, anything positive that you notice there?

A: Real estate was in the dumps, we met a number of builders in Punjab. The only thing which is working little bit, it is not too much of it -- which is surprising it is an election year -- was the roads projects. If that is what is going to take up the cement, perhaps yes, but all other segments were not looking very encouraging at this point of time and even roads for instance, it was not such an encouraging sign that it is a one-year from the election, you will find lots of projects moving ahead.

Latha: Then which parts of the economy will you take shelter in as the market starts falling because like it or not, there is liquidity, we have seen a decent amount of foreign institutional investors (FIIs) numbers coming in, so let us take the finance space, would you like the private sector banks, the non-banking financial companies (NBFCs), any bits and pieces that are not part of the larger decay?

A: We like finance for one simple reason. We have always said that the way the Reserve Bank of India (RBI) is positioned in India is there is a due transference of value and wealth from people and industry into the banking system.

It is a biased arbitrators sitting there, which is transferring wealth. The loan interest has not gone down, the deposit rates have gone down which means there will be higher yields for the banks. So to that extent, one would say that till the current disposition remains that we protect the banks against the industry or against the people, this is a wise choice to be in the financial sector. That is one.

Having said that, when valuations run ahead which is what has happened sometime like right now, NBFC we have sold out completely, we are out of the sector completely in the last week or so. You have got shares, which are very good shares even like Bajaj Finance, which is a standout performer but very expensive at this point of time. You like Yes Bank but we say it is too expensive. So it is a positional situation right now, we love the financial sector but we don’t like the valuations. So we will wait and watch to get into it again but on a whole, we have a great positive because that is the way the country is, we are going to analyse the depositors and benefit the banks. That is a policy. As a stock market guy, let us exploit it and use it to our benefit. So yes, financial space looks very good but too expensive to make an entry at this point of time.

Latha: What about this renewable energy space? Everyone seems to be getting in to it these days, now the latest we have had is even Tata Power acquiring Welspun Renewables, is this a space that one should start investing into and if yes, are these the stocks that you would be looking at, names like Tata Power?

A: Tata Power unfortunately has not given value to shareholders for a very long time. So leave it aside. But if you look at renewable source, the average price of a renewable energy output is not less than Rs 7 to Rs 9 a unit. In a current situation, where you got thermal power available at Rs 2 or Rs 1.20 in the spot and the government saying that for next two years, we see a power surplus situation. It is nice to have but who is going to pay Rs 7 difference or a Rs 5 difference from the consumers pocket or from the electricity board pocket to buy renewable energy? That is a key question.

When a thermal power is so sufficient in itself, why would you buy two-four times more expensive renewable energy? Nothing wrong with it, we need the sector but I think economics are telling us that the sector is not going to be viable for a very long time. You can buy, lots of people buy various assets for various reasons.

In our view, Tata Power purchase definitely will detract value not give back. The company is just coming back for the market, giving some returns and is going to slide right back.

Latha: In the consumption space, what do you like at all? We did see good numbers coming in from even some of the four-wheelers in several months and of course very good numbers from the commercial vehicle space. Two-wheelers, the domestic sales were not bad, even Bajaj Auto disappointed with its exports numbers. So while I take your point about the unsold two-wheelers in Punjab, somewhere it seems to be selling, you don’t like anything in that space?

A: Punjab could be even anecdotal, I am not saying it is a generalisation across the country that is happening. It could be one of the few dealers, it could be a place, it could be a locality, I am not saying that. All I am saying is, I don’t think there is -- what you called -- buoyancy reflected in the retail market. Before Punjab, I was down south travelling a lot. Visibly, the economy is not moving in a direction which stock market is telling you it is. That is the disconnect that we have.

Having said that, when you say what are the consumer spaces, the best consumer space to my mind -- I will still buy -- is the oil marketing companies, phenomenal franchise, you cannot duplicate it, it is going to continue, the government policy is very clear, they will make huge amount of profits, whenever they are privatised -- and they will be privatised eventually I am quite sure about it -- they will make huge bunch of money.

So in the consumer space if you look at it, rather than buying a stock, I would rather buying a guy selling out petrol and diesel from his petrol pump because with the payment bank coming, with lots of banking system going deeper into the country, these petrol pumps are going to be pivotal stations for a lot of deliveries or services including could be e-commerce as well.

So, one could see diversification of revenues apart from petrol. So petrol dispersing centres companies, I would definitely think petroleum, the oil marketing companies, one big bunch you want to buy.

Second is you want to keep buying things like Page Industries etc, whenever they correct. They are such a strong franchise at such a beautiful price points, you want to buy it. Wait for a correction, enter into it and cash it.

These are phenomenal franchises including Havells, phenomenal franchise. Kajaria, phenomenal franchise, so my view is it is not about whether you want to buy a franchise, it is about what is the entry point because that is going to dictate your ability to make profits out of them. You buy at a high, it is very difficult to make a profit.

Good quality companies -- Page has already gone down by 20 percent. So you wait, correct and you buy. So franchises are what we are buying into rather than consumer stories like biscuits etc, which is going to be very comparative down the line.

Sonia: You were telling us about how its most prudent now to book profits at higher levels but what about the downside for this market because the February lows were somewhere around 6,900 or so, do you think that given the kind of global headwinds, there is a possibility of the market getting back to those lows anytime this year?

A: I don’t think so in near future. Our memories are too short. We have seen how profits can be made, there will be buying. There is phenomenal amount of liquidity in the system, domestically as well as globally. So, I don’t think that we are going to revisit the lows unless something catastrophic happens. Things can happen.

However, the mood in the market right now and to the people is it is time that every correction should be used. Whether fundamentally it is a right strategy or wrong, I don’t know but liquidity tells us that people are willing to risk more at this point of time than they were in the early part of the year.

So if the monsoon comes out good, there will be more support. If the monsoon doesn’t come -- that is the Black Swan event, if the monsoon fails, there will be people exiting the door and the doors will be shut. So we must be recognizing the reality that a lot of this play is in a good monsoon, hopefully it does well. If it doesn’t, you have got the event of 6,900 looming on your face otherwise, I don’t think that is a near possibility given what we are seeing in the environment.

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First Published on Jun 13, 2016 09:51 am
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