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Last Updated : Aug 21, 2015 04:13 PM IST | Source: CNBC-TV18

Don't bottomfish yet; midcap scene to get uglier:Dimensions

Srivastava feels the Indian market will struggle as long as the mood in global markets remain bearish.

A mix of fundamental and technical factors are dragging the market down, Ajay Srivastava, CEO, Dimensions Consulting tells CNBC-TV18.

"It is not as though the fundamentals have given away overnight; it is also that the structure of the market has changed," he says.

"Lots of margin calls, lots of people getting out, lots of people failing to meet their obligations on the midcap stories that they have bought into," he says.

He says the perceived insularity of India has been tested over the last three days and found wanting. He says there are problems in the global economy and India cannot remain isolated from it.

"Indian investors must accept the fact that we are part of the global markets, no matter what the politicians tell you, what the central bank tells you," he says.

He says it is still not time to bottomfish and sees the Nifty falling below 8000. According to Srivastava, a GDP growth of 6-7 percent and a price earnings multiple of 30-40 times is just not sustainable.

He feels the Indian market will struggle as long as the mood in global markets remain bearish.

He advises investors to steer clear of midcaps, and says buying them now would be like catching falling knives.

"Our economy is not geared to address the valuation issue with those stocks; there is no turnaround happening. It is going to get worse; it is going to get more ugly," he says.

"Most people thought ugly is over, but watch what happens in next 6-9 months to these companies, their share prices and the economy. I think you got to be safely out of the place," he says.

And while mutual funds are receiving steady inflows, Srivastava is not comforted by it. According to him, increased retail inflows indicates a correction ahead.

"This (retail) is money chasing returns, not money investing for returns," he says.

He advises investors to stay invested in pharma and IT, and sees both sectors outperforming despite problems in the economy. He is more bullish on pharma, but expects IT also to do well as the rupee could weaken some more against the dollar.

Srivastava recommends sticks to the leaders in sectors that are doing well.

"The leaders will always win the battle, and I think that has been borne out in this carnage," he says, adding, "I am not getting my good stocks at a good price even today, because they have not fallen enough."

He tells investors to keep away from stocks that are linked to a recovery in the market. He says government response to the problems in the economy has been inadequate, and that is a key risk for the market.

Srivastava is also bullish on the telecom sector, as he feels this sector will be able to pass higher costs on to the consumer.

He is not bullish on FMCG despite the sector's defensive nature.

"It (FMCG) is a place to hide, but a very expensive place to hide," he says, highlighting their price to earning multiples of aroud 50.

He is also bullish on liquor stocks as he does not see too much competition for the incumbents.


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

Sonia: Is your enthusiasm in the banking space still intact or has some of that dipped after the fall that we have seen in the last couple of weeks?

A: I still feel that at the end of the day -- we discussed the fact that the growth rate at 6-7 percent, price to earnings ratio is at 30s and 40s, it is a pretty unsustainable mix, that is one.


Secondly, it is not necessary that the fundamentals has given way overnight, it is also the structure of the market, lots of margin calls, lots of people getting out, lots of people not able to meet up the obligation on the midcap story that they have bought into so it is a whole mix which is coming together of fundamentals on one side, that is one.

Number two is let us not forget, globally there is a problem in the market. The takeaway from this whole last three days is that the whole concept called insularity of Indian market has been tested and found wanting. So I think Indian investing public must understand and accept that we are part of the global markets, no matter what the politicians tell you, no matter what the Central Bank is going to tell you. We are part of the market, we will go up and down the way the global markets do.

Latha: Would you bottom fish now for the simple reason that we are getting a lot of money into the mutual fund kitty and they will have to deploy it somewhere, so are we anywhere near the bottom, is it time to fish or is it time to wait?

A: You have to be sectoral plays and the problem is -- and I have always maintained -- that history of last 20 years of equity investing has told us that when the actual retail money arrives, that is the time to exit the market in those sectors. That is a given and I am always proved right because this is a money chasing return, not money investing for returns. I would still say that it is not about bottomfishing economy sectors. I would say please do not touch it -- the power story, the mineral story, the reconstruction story of the economy, the roads, do not touch these stocks, these are not going to get revived. Your safe havens still continue to be what we were speaking last six months to one year -- if you look at it, those are the best havens that we have found. That is one which is pharmaceuticals and IT.

Number two haven we have found was market leaders. Even in this carnage you look at the market leader automobile, whether you look at Maruti Suzuki, Eicher Motors, MRF, you look at all these stocks, they are not falling by 10-20 percent, they are still where they are or by and large in the zone. So I am not able to get my good stocks at a good price even today because they haven’t fallen enough.

Sonia: I remember the last time when we spoke, the Chinese government had just devalued its currency and you were the first one to get quite worried and cautious about that, do you think that that negative trigger has played out or is there lot more to go which could perhaps drag our markets lower as well?

A: I think lot more has to go for two reasons. One globally, still things are not settling down because we are not knowing where it is going to end because the first round of yuan, the second round of devaluation had been met with other EMs also devaluing their currencies, the ringgit is down, Indonesian Rupiah is down, Indian rupee is down. So in a manner of speaking, the gap has now narrowed to the yuan devaluation benefit which China had. Question is will it continue and I think the Central Bank governor correctly said yesterday, if they continue this process, there is more mayhem.

The problem is not there, the problem is that our government response is too slow, it is just saying we are done, we should do something, let us think about it. It is just too slow. We need to respond much faster. So worry is that what is happening down the line if the responses don’t come through this season is a washout. March 2016 is a washout and that is the worry.

Latha: So the place to hide you began by saying pharmaceutical and IT, it stands to reason that there will be mutual fund managers with money, it stands to reason that there will be retail investors with the usual savings, do you go and buy the pharmaceutical stocks now or do you think that the ferocity of this fall will enable people to buy things cheaper?

A: If I were to understand the question correctly, there are two parts to the question. One is can you still buy pharmaceutical stock? I am a firm believer you can buy pharmaceutical stock anytime. The return horizon may expand depending on the entry point but end of the next ten years you can buy pharmaceutical anytime, let us not time the market on pharmaceutical stocks.

There are reasons for that, structurally the pharmaceutical market is consolidating globally including in India, the returns are exceedingly much above return on equity which you want from the market and there are safe havens to the extent that they are not vitiated by competing imports coming into the country. In fact, we are better off by exporting out. So there are a lots of positives for the pharmaceutical story. So I think at any point of time, you could buy pharmaceutical.

IT we have been circumspect but I think with the rupee devaluation steering us in another Rs 1.5-2 more to go, there is big leg up in earnings so you could take an opportunity cost of investing in IT, exit out in six-nine months or maybe one year time but stick to the pharmaceutical story.

The other part is do you go into the midcaps and other story which is falling by the day? I keep saying that again and again that our economy is not geared to address the valuation issues with those stocks. There is no turnaround happening. It is going to get worse, it is going to get more ugly. As most people thought ugly is over, you watch what happens in the next six-nine months to these companies and the shares and the economy. So I think you have to be safely out of the place. It is not going to be bottomfishing, you might be just having a knife falling on you once again.


Sonia: What do you think the downside for this market could be? We are at the lower end of our trading range, we are somewhere around 8,250 now, you think this 8,000 psychological mark will get protected this time or could that be taken off as well?

A: In my view I think 8,000 will be taken out and there are three reasons, one is I see a certain lack of government response to the crisis, which is emerging in the economy. The employment is falling, the economy is stuttering around that is one.

Number two, if you have this one rank one pension time bomb ticking away, that is accepted. You are looking at a big fiscal issue coming into the economy which the rating agencies are going to look at it very seriously. The government will jump in and say, all the government employees, they love it to say give us more money. So that is going to be the fiscal problem, it is going to be acute.

The third is if and when whenever we see the government able to spend the money because I think fiscally still they are not in a mood to spend the money, therefore if this continues, the way they are, I think there is a problem there. So question of 8,000, I think it is a matter of 200 points now to go, that is not all about it, so it is looked very far away once upon a time but it is looking around the corner now.

Latha: Now with the way the rupee is depreciating, concerns have yet again emerged about these companies that have dollar denominated debt and exposure on that front, how worried would you be about these names?

A: Very worried except for the companies which can pass through the cost and I think telecom companies are the ones which will be able to pass through the cost. In an infrastructure company, in a cement company where you are not able to pass the cost, it is a big worry but for sectors where you can pass the cost, there is quasi monopoly status, I think there is a less of a worry. Worry of course because it is a negative on the profit and loss (P&L) account but I think what is going to happen is that these companies are going to pass on the cost increases.

You already saw yesterday a vehicle manufacturer Maruti increasing price, we will see telecom rates going up and definitely they will pass on the cost. So I think these companies will withstand the pressure of the dollar devaluation much better than the companies borrowed for the basic sectors of the economy.

Latha: Next to the pharmaceutical and the IT stocks usually a place to hide are the staples. You wouldn’t like any of the consumer stocks now?

A: The staple is a funny kind of place to be because yes it is a place to hide but a very expensive place to hide. So, when you talk of market climb down, market cutback and all, they are still quoting at P/Es of 50s and thereabout. So, how do you hide in a place where you buy into at a PE of 50 in a country which is expanding maybe at 4-6 percent? Very difficult, so I am not sure it is a right place to hide because even if you are safe, let's assume the worst scenario of the capital gets safe, I don’t think the returns are going to happen.

We all know market will turnaround, we will see an upside, we will see government interventions. Whenever that happens, these stocks are not going to be on the upside in a manner that the more high earnings before interest, tax, depreciation and amortization (EBITDA) stocks will be. So, I am not really in the school of thought to say let’s hide behind into a Nestle and FMCG stocks and Hindustan Unilever and ITC because they are just too expensive right now even after all the cuts.

Sonia: So apart from IT and pharmaceuticals that you just mentioned, where else do you see safer opportunity?

A: Now you will be surprised if I tell you, telecom is a right place to be because that is the next sunrise sector, you must be in that space because that is going to become the -- even though the share price is falling of all the stocks, I would still say that that is the right place to hide.

Sonia: But aren't you worried about Reliance Jio and the disruption that Reliance Jio might create?

A: This is consumer market, this is not an industrial market where you draw the pipe and expect people to come and draw water from the well. You have got to literally take the water bottle to the guys, this is consumer business and the franchise created by an Idea or an Airtel, everybody is just too strong, you have dealt with it.

How many times do you change your numbers? How many times do you change subscribers? Only at the lower strata of consumers, yes that is possible. So, I am not too sure that it is a very serious competition is going to be from these people, these people have enough franchise to make their money.

Latha: Liquor stocks such like discretionary buys, would you like those kinds of stocks at this stage?

A: Always a consumer and always a buyer. This country is trying to put prohibition all around us but we are the proverbial alligators and the crocodiles who will survive for millennia and will find a tipple. You are right, you named it correctly. These are the spaces where there is no competition because there is nobody coming in. Now if you look at the consumer space, the new brands are coming in, the e-commerce is taking place, the retail companies are putting their own products in the shelf. So, if you see the Big Bazaar format or the Pantaloon format or the Shopper's Stop, you find they are putting their own products in the market, food products. They are not putting the big brands alone. So, there is a competition there which is coming and India is getting more -- money wise I would say, not brand conscious wise -- competition.

So, yes if no capacity is coming like liquor, you obviously have got to be there but consumer companies are going to face the tough competition as we go on.

The last part is and this is must for every investor including us ourselves, the leaders will always win the battle in the end and that has been borne out in this whole carnage that I named five stocks to you and some of them I may have holdings but they are market leaders who have tested the market for every single downturn and come out as a winner. You look at last five crashes of the market, these five stocks, they have done fantastically well.

So, you have got to stick with the winners, in this scenario you are not going to bottomfish with the losers because this is not the place for them.

Sonia: You said the alcohol stocks, United Spirits doesn't have competition but it does have many political roadblocks, the latest is that Tamil Nadu might also become an anti-alcohol state. Wouldn't you be worried about that?

A: Yes, you are right but let's take the present states which have prohibition; I travel to those states as well. You find it all over the place, every single house has it, every single house has a beautiful bar out there. That is the reality except it is a little more expensive to maintain the bar, that is all. There is some middleman who makes extra money, so I am not sure this prohibition concept works, anywhere in the world it has not worked, it is not going to work in India but the concept is that if you don’t allow supply –- it is like the banking industry, why it is so valuable franchise, why the PEs are 40? Because the reason was no competition. Two banking licenses in 25 years, that is what RBI did to this system.

Today when the banking system is opening up, you watch what will happen to the private sector banks, their valuations will go down because they are seeing a threat from payment banks, the small business banks are going to come, two new banks are entering in the month of September, things are hotting up, they lose people, they lose customers-saving bank interest rates already announced by Infrastructure Development Finance Company (IDFC) if I am wrong are going to be half a percent higher than every other bank. So, now you see what is happening in the market.

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First Published on Aug 21, 2015 09:50 am
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