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Last Updated : Sep 23, 2015 03:29 PM IST | Source: CNBC-TV18

Great time to invest; overweight banks, autos: Axis Cap

According to Nandan Chakraborty, MD-Institutional Equity Research, Axis Capital Fed rate hike is symptomatic of the world doing well but it is unlikely that the Fed will hike rates because the US economy is still weak.


Nandan Chakraborty, MD-Institutional Equity Research, Axis Capital, is of the belief that India unlike other emerging markets is a case where one has to buy when times are bad, especially keeping in focus government’s long-term growth plans.

“Next six months are a great time to invest,” he says. "My recommendation is if the long-term is fine, what you will see over the next few years is that the macro cannot be as good as it is today. So, obviously it will deteriorate over time and the micro which cannot be as bad as today that will also come up. So, the twain shall meet," he adds.

In the next one year some of the positives for Indian economy could in terms of  cut in interest rates and government’s focus on infrastructure capex leading to boost in corporate capex, says Chakraborty in an interview to CNBC-TV18.

However, India in isolation cannot continue to outperform if the world is not doing well, and currently the world is not doing that well, says Chakraborty.

According to him Fed rate hike is symptomatic of the world doing well but it is unlikely that the Fed will hike rates because the US economy is still weak.

He advises long-term retail investors to have systemic investment plan (SIP) and not put lumpsum amount because the bottom for the market is still not in place and niether is the market going to up in a hurry. He recommends investing in banks, autos and oil marketing companies.

His overweight stance on banking, especially private banks based on the fact that there is potential of foreign direct investment in banking, which would be a positive trigger, likelihood of an interest rate cut by RBI and various other short-term positive measures taken by the government.

Oil marketing companies remain a net buy, says Chakraborty.

He is also bullish on the auto space going forward.

Below is the transcript of Nandan Chakraborty’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: First up what is the sense you are getting about the markets itself? We thought that 8,000 would be conquered just about 24 hours ago but things have slipped badly.Is 7,500 in danger of getting breached?

A: Within the short-term nobody can answer such questions but I will tell you what our felling is from our customers as well as from our own strategy report. We wrote a week back in our weekly product that we don’t expect the Fed to hike rates. The reasoning is that the global growth is still quite weak. However, in our hearts I was hoping that the Fed would actually hike rates because ultimately it is symptomatic of global growth so we were basically hoping that the people who are wise and who know things expect the world to actually do well.

So, when people talk about Fed hiking rates and how it will affect India - they have missed the point. The point is if the Fed hikes rates it is symptomatic of the world doing well. Which brings me to the basic point which is India doesn’t do well unless the world does well. This is the basic misconception in the markets. When the world does not do well obviously commodities and interest rates and all that is in our favour but what what happens is basically while our margins go up, our volumes go down, our capital flows come down and more important than all that our corporate confidence and our government confidence, and our Reserve Bank of India (RBI) confidence in doing things come down. So, that is one part of the picture.

The second part of the picture is that this government has done whatever was possible to be done in terms of all long-term measures whether you look at banking, whether you look at infrastructure whatever was possible it has done.

As a matter of fact whatever was needed to be relegated to the states has been relegated to the states for them to make up their mind and compete and so on. Now India unlike most of the other emerging markets (EMs) is a case where you have to buy when the times are bad because you know it will never crash out because of the nature of India; demographics and all of that, what does it mean?

You can crash out mainly when you know that the government in place as a long-term plan but obviously in the short-term it has certain things that it cannot deal with. It cannot deal with the fact that there is a global recession on. It cannot deal with the fact that there is a pay commission which has to get out. It cannot deal with the fact that good and service tax (GST) has to be postponed by one more year so they cannot garner the taxes.

My recommendation is that you buy selectively. Selectively because you can't catch a falling knife; it is very difficult, in things like metals and things like that irrespective of the price. You can't get into a value trap. So, my recommendation is if the long-term is fine, what you will see over the next few years is that the macro cannot be as good as it is today. So, obviously it will deteriorate over time and the micro which cannot be as bad as today that will also come up. So, the twain shall meet.

So, the next six months is a great time to invest because what you are going to see over the next one year is three things. One is interest rates are going to go down. Now whether it goes down by 25 bps or 50 bps in the next week, I don't know. It is too complicated. However, as far as the targets of the RBI is concerned, they have inflation target of 6 percent even if there is drought that will be met. So, interest rate cuts are a surety.

Two, the government has seeded government capex in defence, railways, roads and these are very large orders over the next 10 years. So, that is going to seed into corporate capex.

Three is there will be some trigger for the pay commission and One Rank One Pension (OROP). So, these are the general trends that you are seeing over the next one year.

Sonia: You said buy selectively but that is for the savvy investor, what about the retail investor who has perhaps not got a chance to participate in this market yet? Should one go ahead with a lump sum investment at these levels of around 7,500-7,600 or do you get a sense that perhaps one should continue to invest or rather get into the market with Systematic Investment Plan (SIPs) in mind?

A: As far as the long-term investor is concerned who is a retail investor, he should definitely do SIP. There is no question of him putting lump sum. This is not necessarily the bottom of the markets neither is it a case where market is going to run away immediately. So, SIP would be fantastic for now.

Latha: What kind of stocks would you advice picking?

A: I would put my classifications into five categories. I will be most overweight on banking. Unfortunately for an institutional investor, you cannot be overweight on banking because 30 percent of the Nifty is banking. So, it becomes difficult. However, for a retail investor, yes I would recommend and there are three reasons for that.

One is the interest rates are sure to be cut which will ease some of the pressure. However, that is partly discounted in the banking stock valuations. So, that is the least important of the points.

Two, basically there are thoughts in the government increasing of foreign direct investment (FDI) in the large private sector banks. That I think could be a good trigger.

Three, last week the government announced a lot of short-term measures in power specifically. So, it announced measures for subsidy in gas based power projects, for coal so to ease the coal shortage and some sort of bailout package for state electricity boards (SEBs). So, yes there may be some sort of haircut or whatever taken but at the end of the day there will be some sort of revaluation of these assets.

So, these are the three reasons why banking specifically I would still steer towards the private side because you do not know what quantum of things are there in the public sector side and also power financials. So, all power financing companies would benefit more than the others in this thing. So, first is banking.

Second are oil marketing companies (OMCs). There are two things, one is I don’t expect oil to again go back to USD 70 per barrel. So, maybe USD 50-60 per barrel, I don’t know but at these levels it still remains a great buy, the OMCs. They have come down sharply over the last one month.

Secondly, as time goes on unless you think that the government is going to change its mind when oil goes back to USD 70-80 per barrel. However, there would be a revaluation of the OMCs because the subsidy burden is more transparent now. Unless we go back into an era, and then the government can’t do anything about it and so on but that is off the chart sort of an event. So, that is the second one.

Three is auto. If you look at the last 12 months, auto is the only sector which has shown any glimmer of hope. There are multiple reasons for it so there are yes’s and no’s to that but essentially cars and commercial vehicles (CVs) have done well. There are companies which we have recommended within the CV sector where because of multiple reasons for example company restructuring and so on that you have a good place which are stock specific also.

So, autos, the margins would be phenomenal and generally speaking what happens, margins always surprise, volumes don’t surprise as much. Volumes of any industry give you an indication of when to buy because if the volumes are going up in a time when it is bad then you know that the margins would follow; that is for a long-term investor. As far as the margins are concerned, it always surprises. So, that is third which is auto.

Sonia: I was going through some of your top stocks that you are recommending Tata Motors and names like Motherson Sumi are in your portfolio. These are stocks that have been subjected to some amount of pressure because of the impact that we have seen in the global markets be it China, be it the issue with Volkswagen what do you do at the times like this, keep the faith?

A: I wish you would also mention the other stocks which are there in my recommendations. So, can you mention them because I am not allowed to mention them? I can’t talk too much stock specific so I will talk in general.

The volumes in China are about 30 percent odd and the stock in question has crashed more than that so that is one part of it.

Motherson Sumi, I agree is a problem. This is an event which has occurred after I released my strategy report. We have to be careful of Motherson Sumi now but there is a price at which you buy. So, maybe it is a falling knife and over the next few weeks if it reaches a decent enough point I think it is a great buy because the company is fine. It is just that a significant part of its EBITDA is obviously gone into this thing so there will be a delay. However, Volkswagen is not closing down so, I guess over a period of time it will be taken care of.

So, you are going to reach a price soon in Motherson Sumi which it will be a buy because nothing wrong with Motherson Sumi per se. A growth stock, if anybody has read Philip Fisher, his work, he is a father of growth investing you get a good stock only when there is some issue otherwise you don’t get it. So you have to have faith in his ability and resilient to comeback.

one can also look at power transmission and distributions (T&D) and pharmaceuticals.

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First Published on Sep 23, 2015 11:18 am
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