Earnings to be next trigger for market; steer clear of Bharat Fin: Dimensions Chief

He also cautioned investors over microfinance institutions (MFIs) which are battling issues of lower credit standards. “There is a sense of going back to the days where anyone could borrow money…credit quality of borrowers are going down,” he told the channel.

He suggests increasing the investment in Divis Laboratories. Though there are hiccups, it could see an upward movement. However, he highlighted the riskiness in the stock and felt that it may touch Rs 400-levels before going up.

Srivastava finds tyre stocks to be expensive right now. Though these are good stocks to be purchased, they would be giving an average return over the long-term, but will give a below-market return in a year or two. In this volatile market, there are many other opportunities that one could look out for, he said.

Among oil marketing companies (OMCs), he is very positive on the major stocks. From a three-year perspective, these are excellent buys as the companies have hardly any debt, among other positives, he said. However, he is not very sanguine on Oil and Natural Gas Corporation (ONGC).

Avenue Supermarts, the operator of supermarket retail chain, saw a bumper listing on Tuesday as the stock gained 104 percent on debut. Srivastava, however, thinks the stock is overvalued. The market has given it a phenomenal value, but it may not be a buy today. The company is a sensible one, but whether future will justify the multiples needs to be seen.

For the overall retail sector, he recommends distinguishing between different kinds of models and then choosing the right pick.

Below is the verbatim transcript of the interview:

Anuj: What next for this market. We had big reaction to the Uttar Pradesh (UP) poll outcome but we are now almost at those levels where we had that gap-up. Do you guess that we could be in that topping out process at least in the near-term?

A: My guess is that this market is waiting for the next trigger to see a movement upwards. I don’t think it is looking too much to go down unless the results of March quarter give a major surprise and which can happen, very clearly it can happen. The indications are that some of the companies definitely are looking at a very tough quarter including some of the auto companies are not doing so well in the March quarter. If you will find a major trigger being the results in the March quarter and which is what the market is waiting for to get a confirmation that what they thought was the demonetisation is over and now it is waiting for that little confirmation from the first few results and then it will start the next leg up or the leg down. I don’t think it is too much of flows anymore; it is just the wait for the results now which is going to put this market on tenterhooks.

Latha: Cigarette smoking maybe injurious to your health but cigarette stocks have been very positive for people’s financial health. Do you like that space now?

A: It is looking better, but the reason I am looking at this space is only one reason that there are basically two cigarette companies in this country where we can buy in. One is kind of a steady dividend paying company which you all know and the second important is that with the change of management you might see them stop flittering the money away on all the other projects or maybe even split the company at some point like what has happened in US with Philip Morris and so you might get a much bigger kicker not because the tax rates is looking to be lot better but because the restructuring would unleash, I think will double the value of the stock if you just split the company today. So, I think you need to wait for the corporate structuring, if it happens this stock is going to double your money in a very short time frame.

Anuj: One of your favourite stocks or favourite talking points Bharat Financial Inclusion, how to approach this one now?

A: Stay out of it. I am getting a feeling that we are at the first stage; when you go down the streets, when you talk to the traders and when you do little travel, you see the kind of money being thrown in the market. You just get a déjà vu sense that is it back to at least in a limited way, the days of the subprime where anybody and everybody would borrow the money. I think it is haunting the industry now, there is too much of money, not so much of borrowing, so the credit quality or the borrowers is going down and down.

I think it is an industry wide problem, so people who are investing in all the micro finance institutions (MFIs) and all you need to be aware that there is an industry wide problem of gradually lowering of credit standard. Where it ends? We don’t know, but definitely there is a stress point sitting there because the market is showing that now the standards are being lowered to a level which are unbelievable, were un-thought of two years back. So, well, all looks good, it might get merged with some bank and which can get a kicker but on fundamentals you need to be very careful now.

Latha: Would you worry only about the MFIs like Bharat Financial? Would you still be positive on the non banking financial companies (NBFCs), the ones that are doing very well, Capital First, Bajaj Finance?

A: Because they are strong pedigrees, so even if they have a wallop on their portfolios, they have promoters who can help raise capital, they got long-term debt sitting on their balance sheets. Therefore, if you look at it they have lot more reasons to finding support, let us take Bajaj for instance there is no reason for it to not have group support, its balance sheet is good, the ratings are strong, it can refinance itself out of it - that may not be for some of the other companies including MFIs which need to sell portfolios every quarter to recycle the cash.

Now that is a difference between the smaller companies and the MFIs and the bigger like Bajaj Finances, the need to recycle the money to securitise whatever they got and then they sell it off to the bank - that is what they are doing and get the cash bank and start the cycle again. Now that means then you get refinance every quarter or every month literally, which is not the risk you run with the bigger NBFCs.

Anuj: A word on pharma, Divis Laboratories told us that the impact of import alter is 5 percent. The stock is down 60 percent, so clearly there is a bit of a mismatch. How would you approach Divis and some of the other pharma names?

A: Divis is one stock at this level of market to book of four you need to double down on it. It may go down further, so be it, but this is a stock which has built up capabilities. They will have their hiccups in a 5-10 years cycle, they will have one such large hiccups but as you saw in the Food and Drug Administration (FDA) notification, their market share is so large that in spite of all the issues 8 products in which they are market leaders FDA had to exempt them. That tells you the story of the market dominance. However, that may change over time and so on, it can’t change overnight. So, psychological impact is much more devastating than the financial in my view.

As an investor we have increased our holdings in Divis when it went down yesterday. So, that is my personal opinion, but it is a highly risky stock, you may see Rs 400 on it also before it turns around, but this is a capability and a market share which cannot be duplicated in a short period of time. So, FDA issues are there it will affect it but they more now hitting the market, psychologically the stock and it was came in a background. Let us understand Divis came in a background of so many issues with Wockhardt, Dr Reddys Laboratories, Sun Pharmaceutical Industries. It was just like – is one of those companies again, this has gone down let us get out of the pharma space. So, it was not a Divis decision alone which got 60 percent meltdown, it is also pharma space evacuation by investors in mass and say listen this is not building where it is safe enough for us to live in. Let us take our money and get out. So, it is both Divis and Pharma, we have doubled up let see what happens.

Latha: For any buys, are tyre stocks on your radar?

A: Right now we don’t have a holding. I find them very expensive at this point of time. But yes, there are institutional who are buying tyre stocks, it is a good steady stock to buy in. Rubber prices are not exactly going away in a hurry. So, for investors for a longer-term -- but again the point is that if you have got limited capital, will these stocks give you better than market return? My feeling is no. They would give you an average return over a period of time, will take longer to give returns and therefore in a market as volatile as this you got lot more opportunities that you sit and you can deploy a capital. So, it is all about capital allocation in a market which is kind of buoyant to an extreme and therefore I would not say negative about tyre stocks, but I would definitely believe that they will give a below market return in the next year or two years.

Anuj: Wanted your thoughts on couple of more important market movers. Public sector undertaking (PSUs) specially oil marketing companies they have corrected. We have seen Brent go down to back below USD 50 per barrel and there is of course a buzz of mega merger which could be keeping some of these stocks a bit soft than they would have been, but anything that you would want to buy right now?

A: These are the stocks which have given dividend. You saw what happened to Indian Oil Corporation (IOC), it went up, adjusted against dividend, came back much below. So, people who want to play the dividend story must understand that the capital value may depreciate more than even the dividend that they get, so that is a rider.

I think in a three year perspective these are excellent stocks to buy. Hardly, any debt, lots of cash, good dividend track record and market share which cannot be taken away from them and if privatisation is the order of the day, I am not sure it will be all the way, but our guess is that with the consolidation move taking place they would do something about it. Oil marketing companies definitely.

However, I am not so sanguine about ONGC because the recent buy of ONGC was not the very wisest deployment of capital. So, ONGC has deployed money in a subpar asset, which will be written off eventually at the end of the day. So, I am little careful on ONGC right now but oil marketing companies is thumbs-up.

Latha: Final set of stocks if you please Avenue Supermarts (D-Mart) how would you approach it? There is so much of latent desire for the stock after the initial public offering (IPO) getting oversubscribed by 100 percent and the stocks that shown in the penumbra the Future Group and other retail stocks?

A: It is an overvalued stock; definitely it is an overvalued stock. I don’t think I will buy it today. This market has given it a phenomenal value and that also goes about the promoter at the back of it rather than just the company per se. Sensible company, but whether the future holds in this manner and it will justify the multiple that is getting today, my doubt. So, I am not a buyer in this stock today.

Yes, penumbra wise you will see the biggest of course gainer is going to be the PVR Group story because that has got the biggest retail footprint more than future consumer at this point of time and a more visible footprint I would say so. So, you would see some spin off happening to PVR, it is not a cheap stock, but it is growing far more aggressively than all other peers. If you look at even Future Group etc, PVR has a fastest growth story there around it. So, it will rub-off on it, but you got to be careful that these retail stories should be given to companies which hold an advantage in terms of location. That is the most important point and that's where D-Mart got scored, they owned the building and the shops that they own it. Not all retail companies own it. Future Consumer for instance is on rental everywhere. So, it is not on the strongest wicket, rental will do get re-negotiated and so on and so forth. So, you need to differentiate and say this is owner driven.

PVR is an anchor in most malls therefore it can’t go out of it. It is a preferred buy. So, you have the differentiation in a clear advantage of holding the best location and that is the key in any retail stock. Does it have the advantage to hold the best location? If it does it is a good long-term buy. If it does not -- and D-Mart has to buy more buildings, the difference is that D-Mart has to buy more shops unlike a PVR model where they just have to go an rent it and people are lining up to sign it. So you need to differentiate the model it is an expensive stock, I am not buying it but yes, retail did get re-rated and some of us got back to the business again doing the normal work which a normal person does rather than stock market.