Hoping to see reforms push post Bihar defeat: Religare Cap

The Bihar verdict has given a jolt to the BJP government at the Centre and hopefully it should be utilised to accelerate reforms, says Gautam Trivedi of Religare Capital. Trivedi said there is no immediate trigger for market and the winter session of Parliament is unlikely to see any great reforms.  Sectorally, Pharma remains the most sought after. Automobiles, capital goods and consumer sector like housing — cement in particular — will see a lot of action after Seventh Pay Commission comes into effect. However, appetite for PSU banks is still not visible, he told CNBC-TV18.Below is the verbatim transcript of Gautam Trivedi’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: The question that everyone is now asking is how will the current government re-calibrate or re-strategise its agenda after the kind of thrashing it got in the Bihar elections?  What is the sense you are getting? A: It is early days and I am sure the government and the BJP in particular is going to sit down and figure out what to do next. We all hope that this only helps accelerate reforms and not slow them down because if that happens, we have got multiple reasons why the foreigners are shunning the market at this point. The fact that it is too expensive, the capex cycle has not revived and more importantly the earnings growth continues to disappoint. So, you have got a lot of negatives already priced in and foreigners and foreign institutional investors (FIIs) are just not very keen on putting incrementally new money to work in India. So, at this point, if I was the Prime Minister, I would press the pedal on accelerating reforms. Latha: You must have spoken to a lot of foreign investors as well filling in them on post your Bihar trips. What is the sense you got, will they take this as a bit of a referendum on the central government? Would Modi’s image have taken a beating and so people will sell out or merely refrain from buying? A: First of all, I won’t think Modi’s image has taken a beating. That is too strong a statement. However, what I think is that a lot of people believe this could potentially be an inflection point for the Modi government to step up on reforms. Having said that, I think incrementally, given the fact that valuations for example in China are much more at attractive than India, at this point I think investors, foreign investors are not really that hot about putting incrementally new money to work in India. Let us get real, there is no immediate trigger anywhere. The only trigger that really was ongoing, earnings, again they have been pretty slow and the Bihar elections which of course has been a complete surprise. The extent of the loss has been a complete surprise. Sonia: What is the sense you are getting about the sectoral approach one should have now because even some of the classic defensive sectors like pharmaceutical are starting to come under cloud? A: Pharmaceutical, first of all, I don’t think it is a defensive sector. I think it is very growth oriented sector. However, more importantly, pharmaceutical in particular is not under real cloud. It is just that you have seen Dr. Reddys getting the FDA warnings and maybe one or two other companies. Apart from that, the pharmaceutical storey remains very much intact. So, we continue to like pharmaceutical. We like the auto space and we believe that the 7th pay commission which will unleash a huge fiscal stimulus starting FY17 and FY18, spread over two years, we believe the amount could be as much as USD 50 billion that will be unleashed on to government employees – central, state and PSUs; I am combining all of the. So, that I think will be a massive inflection point for the Indian economy and also for the India market and more importantly for the automobile sector, consumer sector and also to some extent the housing sector. Latha: Banks is a tetra-headed monster, there are so many animals there, but the interview we had with Arundhati Bhattacharya after the results indicated that she was very positive on the worst being over and even spoke about a 13-14 percent credit growth in the next 12 months. Is there anything in the PSU bank space, probably the worst of kitchen sinking in Bank of Baroda (BoB) is over, do you read any of them that way and you will buy that space, some guys in that space? A: If you look at the project launch by the power ministry last week wherein the debt of the discoms will be taken over in a phased manner by the state governments that clearly is a huge step in improving the balance sheets of the PSU banks. So, I think people want to see execution of that before putting money to work on PSU banks. So, the appetite for PSU banks is still not back but the fact is I think from our standpoint the space could potentially look interesting if some of these reforms do actually kick-in. Latha: Anything in the consumption space other than autos? A: I think the wider consumption space and for that matter as I said housing again a direct beneficiary of improved consumption in housing would be cement. Cement of course has been going through a rough patch so I think the other way to play housing would be to play cement which of course you get exposure to infrastructure as well as a result. So, cement stocks are not exactly going to be performing too well even maybe for another quarter but now is the good time to do some work on them. Sonia: You want to give us your view on where you see the lows of the Nifty now as in how much lower this market could get if the trend continues to remain weak? A: Before I answer that, the other thing which a lot of people  at least on the institutional side have started to factor in is that do not expect anything significant in terms of reforms or legislations getting passed in the winter session of the parliament. As a result of that, that too is starting to get factored in and if something does get passed it will be great but it seems at this point pretty unlikely. So, as a result of that, I don’t see the Nifty falling significantly below 7,500. That is really where we believe could be a floor for this market.