Earnings push absent; worst over for Tata Motors: Prime Sec

Earnings growth continues to be absent, says N Jayakumar, president of Prime Securities. Indian markets have come off the day's highs to trade in the red. Heavyweights like ITC, SBI, among other, have dragged the markets today.

ITC, especially, saw heavy selling and it cracked over 7 percent on news of a 'sin tax' — rate of a steep 40 percent (GST) that would be levied on select items such as tobacco products. But Jayakumar says regulatory headwinds have always existed for ITC.

Another space that was neglected till now is the aviation sector, he told CNBC-TV18. But it is now seeing good interest due to lower oil prices. He believes IndiGo is expensive at current valuations. According to him, all companies with oil and oil derivatives (raw material) such as oil marketing companies (OMCs), paints, plastic, plastic packaging and aviation are likely to benefit from the lower oil prices.Below is the verbatim transcript of N Jayakumar’s interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18Sonia: You have been commentating on the markets for the last 16 years what has changed since the first time you spoke and now?A: What has changed is the ability to look at information. I think information today is accessible and sometimes we tend to believe that we suffer from information overdose and that is the real issue that for a lot of people who watch channels to be able to take away saying this is what I am supposed to do based on all that I am reading and getting I think is a big issue.So, if you go back in time, we used to struggle to get information which used to be three-four days late. We used to talk about things that happened last week and how that will impact us and today we talk about something that happened literally few minutes ago that is impacting us. So, I think that is one big thing but what hasn’t changed is probably the fact that valuations finally and stable mind is what is needed and in the daily hurly-burly of markets we tend to forget that. So, one of the big short comings over a period of time, because money has changed ideas and information, the concept of momentum investing is taken on and crowded trades is taken on a very serious meaning. If you think logically today what markets are suffering from is good companies and crowded trades is where investors tend to put money in which is where short-term returns don’t come by. So, if you see the way the markets have moved also, they are telling that story. Anuj: You spoke about crowded trades and good companies, I am thinking of ITC right now, it is a stock which has not done well all through the year and today we have seen a big decline on this one, down about 7-8 percent. How does one approach companies like these which are going through tough regulatory times? A: The fact that ITC is going through regulatory headwind is not true for just today, it is not 2015. Since 1985 when I entered the markets, I know that every Budget used to mean a higher excise duty imposition on this company. Today you might have it in the form of a goods and services tax (GST) where the rates seems alarmingly high, the demerit rate. However, if you go over the last 25-30 years, we are talking about headwinds having existed right through and what has ITC done in the interim, just produce more and more cash flow. The reality is that probably the valuation has not been unlocked but if there is and I am not specifically commenting on ITC but if you were to look at a trade like ITC which is a company with cash flows not getting valuations, I think there is a almost near consensus that it will be an affected party in the short run and yet the market cap is not small, there is a Specified Undertaking of Unit Trust of India (SUUTI) holding held by the government. I am sure you ask the number one shareholder British American Tobacco to come and take a stake, he will do it tomorrow morning and yet sometimes it mystifies me that the government continues to hold on to a stock like ITC which year-after-year keeps getting beaten by the same government which goes against the concept of cigarettes as a big evil of the society if you will and yet ITC continues, the big shareholders I am sure are interested. So, it is sometimes mystifying but I don’t think ITC is about to roll over and play dead kind of thing. I think it is fine, it dropped 7 percent, it has been a wealth creator for long period of time, not necessarily in the last two years. Sonia: The problem I think now is that the cumulative impact of the taxes is being felt on the volumes and this time around if this GST rate comes through then there will be a big price hike that they will have to take which will once again hit their volumes quite a bit. So, for a long-term investor who has ITC do you think that there could be more downsides in the stock?A: There can always be downside based on perceptions. Now the question is, in something like ITC what is the right price to earnings (PE) for it is a big issue. However, ITC also has refashioned itself. It is as much Fast-moving consumer goods (FMCG) today as it wasn’t two decades ago, its hotels and a lot of other things. So, I am not saying that it can’t go down by another 10-15 percent, sure it can, these are markets and markets tend in short run to over compensate.However, if you ask me, given all that is happening, the basic theme is that in the front liners everybody knows everything there is on the street. So, there are no earnings upgrades so clearly the markets are feeling the pressure of money getting pulled out. Thank God for the local funds who are kind of compensating for that in some measure but the real returns are not here. At the end of the day, the returns are where not more than two researche houses have focused on; that is the kind of rule of thumb that I use. I don’t even say midcaps because midcaps also there are midcaps in midcap but the rule of thumb personally that we are taking is if there are more than two people covering a stock, it means it is already getting to be a crowded trade in some sense, forget the ITC’s and the ONGC’s and the others. As I said I can’t talk stocks but definitely like aviation as a space which is completely neglected, people felt nobody in the world had made money.I felt that IndiGo was way too expensive at the time of the IPO and I still believe that compared to IndiGo if IndiGo’s valuations are now the way the screen is telling you then the others have a lot of catching up to do. I think the larger theme here is IndiGo or the aviation space has come good because of oil and if that’s a sort of systematic thing that is benefiting us, I think there is one space that is big beneficiary whether it is oil marketing companies or it is aviation or paints or plastic packaging anything which is an oil and oil derivative. Anuj: We have seen this in the past, there was one phase in which the oil fell quite sharply but had an equally strong bounce back as well. In this are you taking a call that crude prices are now not going to go back say above USD 62.80 per barrel because it is a one trick pony, if crude changes, the whole equation changes.A: If crude changes, hopefully a number of other things have also changed which is if there is a fundamental pick up, I am not denying the fact and I have always maintained that the underlying derivatives trade in the oil market far exceeded than the physical supply. So, on the way up, it was overdone, on the way down maybe it is overdone. If there is a crowded trade worldwide, it is an oil short trade. So, maybe it has got some kind of a pullback. However, whether it is a lasting pullback, I am not too sure. So, the way I would see it is that up to USD 60-65 I think we are pretty okay. Anything beyond that there is a huge trend reversal which is in danger of coming good. Otherwise all sectors linked to oil and polymer inputs have benefitted not because of pricing but because of demand turnaround. Sonia: I wanted to ask you about Tata Motors since you track it very closely and we generally have these discussions offline. This is one stock that has fallen 20 percent this year but now things look like they are improving on the Jaguar Land Rover (JLR) front. On the local front, the new Tata Zica is getting a good response. Do you think that this is an attractive valuation or attractive price to buy Tata Motors for the long haul?A: There these disclosure about stocks and I own Tata Motors as well and that is disclosure which is important. Not that I am marketing the stock but I think it is amazing that in the same space you have one stock hitting new 52 week highs and one stock consistently hitting 52 week lows which was the case. Again if that wasn’t a crowded trade I don’t know what it is. So, may be that is reversing but fundamentally you asked and if just look at the way JLR is being churning out brands and churning out new launches, I would be very surprised and that big elephant in the room which was China that factor seems to have been pretty much dissipated. So, there is Europe that has stepped into pick up the volumes. America has picked up the volumes; year-on-year sales are 50 percent plus and India too. I mean the thing finally is that you need to have an light commercial vehicle (LCV) turnaround; that is still illusive .For the first month they seem to have given Ashok Leyland a sort of run for its money in terms of the medium and heavy commercial vehicles (M&HCV) segment. So, may be things are turning around and I definitely believe that if you go by what the chairman and other people have said it has bothered them much more than it has bothered anybody else. So, definitely there is a turnaround in Tata Motors which is already underway and perceptible. I personally believe the worst is over.For entire discussion, watch accompanying videos