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Last Updated : Oct 30, 2015 06:29 PM IST | Source: CNBC-TV18

Dump junk shares in rally; economy struggling: Dimensions

Ajay Srivastava, chief executive officer, Dimensions Consulting, says the market environment won't be improving until atleast Q1FY17.


This is the best time to exit stocks that have disappointed on their quarterly numbers, says Ajay Srivastava, chief executive officer, Dimensions Consulting.


Speaking to CNBC-TV18, Srivastava says the current quarterly earnings (Q2) have been so far indifferent and hence, the time is ripe to exit badly performing stocks. The exit strategy is also based on his the belief that the market environment won't be improving until atleast Q1FY17.


On sectoral picks, he says one should invest into good pedigreed private sector banks as they are safe bets in the current market.

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He prefers HDFC Bank, Yes Bank, ICICI and IndusInd, adding that IndusInd was the only bank to announce stellar number this earnings season.

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

Latha: Markets have come a distance from the kind of lows we saw, how are you feeling about the markets at the end of half way through the results season? Are you buying more at all?

A: No we are not buying more at all. In fact wherever we find that the results have been kind of disappointing, we have been exiting because in a scenario like this where with good ample liquidity if the stock price can’t be supported then I don’t think in environment which we could see post December, the same shares could see a price support coming in inspite of the indifferent performance.

So, really this is a time to clean out the unworthy, the non-winners and so on because in this supportive environment is the best price you can get for them. The environment is not going to become better as we go down the path certainly not in the first quarter. So, I think this is a time to seed out, not to load up.

Latha: In your own analysis for the companies that you cover, how has the earnings season been so far, more upgrades or more downgrades?

A: Some of the results are still to come in, most of them are still to come in but broadly what we have seen is, it has been a indifferent  set of numbers; that is one. There have been no major surprises on the negative side or in the positive side. It is somewhere in the twilight zone where you don’t know where the companies are going. Some have been rank bad performers, leave it aside, but I haven’t seen a rank good performer except the surprise which you got at the IndusInd Bank.

I think that one was surprised on the upside to the results that we saw. However, otherwise, it has been more like an indifferent kind of a market, indifferent performance, economy is kind of trudging along and companies are just about managing their balance sheets. So, it has not been a very inflection point kind of a quarter that you can take a call on the company that things have changed or things have gone really bad.

Sonia: I thought you would talk about the pharmaceutical space and say I told you so about the good quality numbers because this time pharmaceutical has been exceptional.

A: I keep saying to everybody that people really ask me lots of time, even at the airport saying what is your problem with pharmaceutical? Actually question asked is ‘what is your problem with pharmaceutical?’ and I keep saying that with a country of this size and what is happening to US on the generic side, our companies are just gold mines waiting to be picked by the MNCs on the world. It is going to happen and we will have big bonanza there. So, these are companies which you do not sell; every correction you buy.

Sun Pharmaceutical may have indifferent kind of a year for the Ranbaxy but leave it aside for a year, it will pickup. However, you have seen the results, the Reddys’s, the Torrent’s, Lupin kind of disappointed but Lupin had a very good run if you look at the last year’s stock price. It had an excellent run last year so you will have those correction periods.

So, as a sector, you have got to be very clear that in the market that we are seeing today with an economy which  is struggling, Indian economy is struggling today, that is the fact, this is one sector which does not have demand issue and a pricing issue. It may have pricing issue down the line but today it doesn’t. So, do not dessert this sector.

Latha: The market punished Axis Bank, Yes Bank numbers have been well-received, where do you stand on private banks?

A: The genesis is market punished Axis Bank because of the integrity of the data what they have been spinning out. It was not the result. You cannot have a standard asset being sold at a 60 percent discount over night. So, there is an issue with the disclosure in the balance sheet. The reason you ask me what is the stay on private banks, I say look at pedigree. The pedigree is going to make the difference in your investment strategy where you put your money. Axis Bank head is the pedigree in ICICI Bank and you know about ICICI Bank, nothing more can be said about how poor the balance sheet is, how poor the performance is.

So, you have to believe in the fact that you are not in a banking environment, you are not investing with the bank, you are investing with the people at the helm of the bank. That is why you invest on Aditya Puri, you do not invest with HDFC Bank. You invest with Yes Bank with Rana Kapoor. IndusInd Bank, you never invested there till Romesh Sobti arrived there.

So, it is a people specific investment. You do not make institutions specific because there is a pedigree, the backlog which will have. So, if you are investing in private bank, I keep saying look at these 3-5 banks which have got strong pedigrees. Traders can do differently, that is alright, but investors should be mindful of the fact that people like ICICI Bank, Axis Bank leadership comes from the same bunch of people who literally ran the bank into the ground. Look that price to earnings ratio (P/E) of ICICI Bank, it is half of HDFC Bank.

So, really, it is a question of integrity, pedigree, not of the institution per se. However, stick to investment; I think they are good proxies for the economy. They are doing well, you may not get spectacular returns, because they are not cheap stocks, but they are steady stocks which give you steady returns. So, that is a strategy steady stocks, steady returns. You will not earn above the market with these banks in the next 12 months, but you will certainly stay with the market.

Latha: I wanted to ask you also about the fast-moving consumer goods (FMCG) stocks. Emami’s numbers at 17 percent are good, but Emami always gave us much better numbers and Dabur I would think was a steady set of numbers. Today, ITC is round the corner, that segment itself?

A: This is again the same story of the promoters and the pedigree. Dabur is a must invest, always invest, good quality promoters. Godrej, excellent. Emami was good till I believe they bought something pretty expensive, if I am not wrong. I think they bought something very expensive off late, if I am not wrong and that is the time we exited Emami at that point of time.

So, Emami has an event which was linked to it, not necessarily to do with the promoter or the operation, so maybe that overhang has come on to it, but for people at Dabur and Godrej, you do not need to worry about. ITC, I always stay away. I will be the first buyer when leadership changes in ITC. I will be the last buyer with the present leadership in ITC.

Sonia: What are you recommending investors to do now? You started off the conversation by saying do not load up, but there are still so many opportunities, even credible stocks are falling 5-10 percent post their numbers just because sentiment is bad. Do you leave this opportunity?

A: Sentiment is very good, that is why I said, I have a contrary view is the sentiment is very good today because the liquidity position is abundant today. Sentiment will turn bad, come January, if the December hikes take place and that is one. I will tell you why sentiment is very good. When a stock like IndiGo gets subscribed with a zero net worth of the company and promoters, and I did not even know how you can pull out dividend more than net worth, it is a lesson for me also in corporate finance but, if that stock gets promoted in the manner it has at this pricing, it tells you that the supply of the money is so abundant, it does not care about company and the ratings. So, contrary to what you think, I think it is a good time to be there, because the money is abundantly available.

However, having said that, our strategy is as follows. In fact, we are going to release a note very soon is, take 25 percent of your portfolio illegally, or legally if you can, outside and invest in the US. That is the first strategy now, because India is going to be an indifferent market and it is going to be a stock-picker’s market, it is not going to be a sector-picker’s market. In India, you stay with the winners, not the losers, that is the second strategy. Third is, identify a concept called risk capital which you do invest in, what is your “turn-around stories” and hope they give you mega-blaster return.

So, it is 25 percent US, 60 percent investment idea and 15 percent into what I call risk investments at this point of time. That is the way we are releasing a note for investors to break up and do a lot of money – in the whole portfolio, put 50-60 percent in fixed income because that will give superior returns than equities in the next three years.

Sonia: I had the same argument about Indigo initial public offering (IPO), even I did not understand why there was so much subscription when there are serious corporate governance issues staring at your face, but what did you recommend investors to do and now post listing, what kind of returns do you see because the numbers that they have put out for the last many years are quite good?

A: Numbers are good, but you are starting with a company with zero equity, only leverage, that is the starting point, and at a pricing which is at the top-end of the performance even in the best case scenario. So, as I said, in an abundant liquidity scenario, even this is bought into, but we have not recommended a buy on this investment at this point of time.

It may still go up at the end of the listing because the float is going to be very small in the market but, that does not take it away from the fact that such IPOs and go back to the memory of Reliance Power IPO was an inflection point in the market. It was something identical to what Indigo was. It was a start-up, it had projects in pipeline, it had huge premium of Rs 60 or thereabouts and I think that is the kind which tells you the exuberance of liquidity, invest in everything which comes your way. Maybe Reliance Power was a negative inflection point, I do not know whether Indigo portends to the same way or not.

Latha: You are saying Indigo will be a negative inflection point? I completely agree with the Reliance Power. It was January of 2008 and indices were at their height and already we had seen the best turn’s event behind us in the US, so that inflection point had a lot of factors to it, as well Reliance Power did not have any projects. Indigo has already been run for a goodish bit of years, under difficult circumstances with profit. I am not taking away from the corporate governance issues that you raised, Sonia, but I am just saying that it is a company which has proven that it can run profitably. Reliance Power had not any implemented projects at that time.

A: The issue is not proven, issue is at the premium which the company is asking you to invest in. That is the issue at the stake. If it is a normalised premium, yes, it is a zero net worth company, and the premium of the valuation reflects it. The valuation premium is at the top-end of the company’s performance. Let us also not ignore that. That is why I am saying, relative to the pricing at which the issue is coming out is not per se the concept of a zero net-worth company having a good business plan and operating on the ground. It is the valuation which is at the extreme end of what the best performance would look like. That is the issue.



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First Published on Oct 30, 2015 09:47 am
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