The overall theme for the market remains being selective while picking stocks, Nilesh Shah, MD, Kotak Mah AMC.
The Nifty and the Sensex ended the week marginally higher but the Nifty Bank outperformed even though the Reserve Bank of India left the key policy rates unchanged.
However, the MPC committee softened its stance inflation by slashing its future projections hinting at rate cut in the coming days.
Nilesh Shah, MD, Kotak Mah AMC says this week the benchmark indices did not show big movements but the underlying stocks showed huge movements, which tells you that the index is in consolidation phase but within that the constituents will give wide range of returns.
The overall theme for the market remains being selective while picking stocks, says Shah.
Within IT, Shah says the house would look selectively although they are overall underweight on the space as a whole.
However, the house is very upbeat on the automobile and auto ancillary space. Autos saw reasonable growth driven by consumption on back of lower interest rates, easy availability of credit and aspirations of middle class rising, says Shah.
All the above plus including expectations of good monsoon are going to drive the auto space.
With regards to banking space, he says for core portfolio it is private banks and NBFCs and for satellite portfolio we have select public sector banks.
He says the broad theme for them both in the large and midcaps is shift of businesses of market share of unorganised to organised sector- across specialty chemicals, auto component, garments and textiles and building material. So, this shift in the long run could become value accretive to organised companies in these spaces.
Below is the transcript of the discussion.
Nigel: Let us focus on the sector of the last week, pharma stocks. They did very well, what is your sense over there? It ended high with a gain of close to around 2.5 percent, various stocks did quite well, your sense on the pharma space as well as the Nifty going ahead?
Shah: I have been bullish on pharma stocks for some time with a clear caveat that one cannot invest in one single stock because you have to create a portfolio. Second, one cannot invest in lump sum because there are events which are shaking pharma sector upside down.
If you adjust pharma companies for legal expense and research and development cost, then many of the bluechip pharma companies are trading at a very low valuations. So, many of the concerns which investors have on USFDA, in terms of margin loss in US market, in India branded generic coming under pressure because government is insisting upon writing generic names and not branded generic name, all those concerns are getting priced into pharma sector. Clearly there are opportunities for companies who can comply with USFDA regulations, there are opportunities for companies which can move into newer therapeutic segments. So, pharma sector continues to look attractive. It has rewarded last week, probably next week it will not reward. So, don't take a weekly call, built a portfolio of quality pharma companies which is focused on domestic market, which is focused on US generic market and are taking corrective action and invest on a regular basis rather than one shot and then give time to this portfolio. In today's market that looks like a reasonably good bet.
Surabhi: One keeps hearing the valuation argument in this market and the market to be fair did run into a bit of perhaps congestion zone if you want to call it that. Friday at least towards the afternoon, trend started getting a little more clear on the upside. In your opinion is there case for a further up move or do you see this consolidation continuing?
Shah: My feeling is that what we saw in this week, there were hardly any big movement in the indices but underlying stocks delivered fairly large movements. So, we are going to see that kind of consolidation where underlying stocks will still give you 30-50 percent returns and some stocks will also give you negative returns.
If you see over the last one year the private sector banks, the metals and commodities space which were beaten down sectors have delivered great returns. On the other hand the favourite of the market like the IT and pharma have delivered negative returns. So, we will see index in a more consolidated phase but within that constituents giving a fairly wide range of returns.
Nigel: In the last couple of weeks who have you spoken to, what is your sense, what is the appetite like? Valuations are getting a little frothy. Also I wanted to ask you, is this IT space becoming a bit of value trap. People are now saying that even TCS at around 17 times it is still expensive. I remember people talking about 23-24 times and still going to buy TCS. So, is the IT space becoming a bit of a value trap?
Shah: Within IT space my recommendation will be to go for those companies where one can see serious unloading of cash. We have seen companies doing little bit of buyback but what we need is a more aggressive buyback. This will automatically put support to IT stocks because the RoE of rest of the business is pretty good.
The second thing what we need from the IT companies is kind of venture capital investment. Many of their talented employees are leaving their companies and starting their own enterprises. They take money from the IT company promoters or their friends and associates in IT companies. What people are doing within IT sector in their individual capacity, why can't the company do it in professional capacity? Giving infrastructure and giving management bandwidth to this venture so that their chances of success become higher. Maybe one of them will become Mu Sigma kind of data analytics company, one of them will become Hike or Whatsapp kind of company, one of them who knows will end up creating a Google or Amazon of India.
So, we need IT companies to start investing for future through their employees or from outside.
The third thing which is required in the IT sector is the acquisition on a global scale in sectors which are promising for the future. We haven't seen any great product being launched out of India. May be it is time to go and acquire a product and then scale it up all over the world. We are hardly there in Cloud computing or artificial intelligence kind of things which will shape the future. Can we go and acquire start-ups are companies in overseas market there and give the advantage of low cost man power from India. So, companies which take steps for the future they will definitely break the value trap.
Lot of concerns which are there are already priced into the valuation. However to come out of this low valuation trap, you need to show that you are making investments for the future.
Surabhi: So as of now, are you staying away from IT or would you selectively look at some sort of bargains?
Shah: We are looking selectively at IT sector, but on an overall basis, we have been underweight this sector. But as I said earlier, this is a more stock specific game. Companies and managements which can give you confidence that they are preparing for a future, they are investing for a future, certainly one can look at them.
Surabhi: Let me ask you about a difference sector now and the other big event this week was the RBI policy and at least that one day there was a lot of hope that the body language seems to suggest that there is a rate cut possibility around the corner. So that day, coupled with the way we saw banks move higher on Friday, what is your sense on banks and which side of the banking universe would you buy?
Shah: Unlike the debt market which has to really survive on every quarterly policy of RBI, the equity market has the luxury of taking longer-term call. Whether RBI cuts rates today or tomorrow or day after tomorrow, it does not matter that much to equity market because clearly by following aggressive monetary policy or tighter monetary policy, RBI is reaching closer to its goal of 4 percent inflation. If RBI achieves 4 percent inflation as targeted, inflationary expectations will come down and that will give more room to RBI to cut interest rates. Whether they cut this quarter, next quarter or a year down the line, it does not really matter that much to equity market.
In some sense, today's equity market are pricing lower interest rates based on RBI's commitment to 4 percent inflation target and that, in some sense, is going to be positive for financial services company. Within financial services company we are more overweight private banks and non-banking finance companies (NBFC), but in NBFC as well as private banks you have to take care of valuation as NBFC sector is reasonably expensive.
On the public sector banks' side we are selective in our approach. Clearly there are issues to public sector banks in terms of consolidation, in terms of NPA resolution, so one has to be selective over there. So you could say that our core portfolio remains private banks and NBFCs and satellite portfolio remains towards select public sector banks.
Nigel: Let us talk about the auto space then. Maruti, I remember the company at Rs 1,20,000 market cap, people were calling it expensive even at that point of time. Today, it is at around Rs 2,20,000 market cap. A lot of positives being factored in and in the last week itself, the week that has gone by, the stock did quite well, but the auto ancillary space really was running along. How do you play this theme? Do you believe that the auto space is still attractive? If yes, four-wheelers, two-wheelers, what are you looking to play over there? Also, what about the auto ancillary space? Would you play that theme?
Shah: In the auto sector, I am sure when we did that show in Ghatkopar, we had put one chart of how to own Mercedes by owning Maruti shares. And the way this stock is continuing, I hope one day in the future, I will be able to tell that if you wanted to own Rolls Royce, you should have bought Maruti shares. But that was more on a lighter way.
On a serious note, clearly auto sector is sowing reasonable growth primarily driven by consumption demand in the country. There is lower interest rates, there is availability of credit for consumption related things like auto financing. Combination of lack of public transport, easy interest rates, aspirations, middle class and availability of finance, all creating good combination or good support factors for automobile sector, be it two-wheeler, be it four-wheeler.
Now this year, monsoon is expected to be good and generally, we have seen when monsoon is good, then the rural demand recovers and that is healthy for two wheelers as well as for company like Maruti which has a much larger rural presence vis-à-vis its competitors. So overall we remain bullish on auto sectors and proxy to auto sector can also be played via auto components sectors and within auto components sectors, clearly we will have to make an impact for those companies which are export oriented and where rupee appreciation is impacting their margin.
So overall we remain fairly bullish on auto and auto components.
Surabhi: Anything else that you can leave us with? We have been talking about this big midcap resurgence as well. So apart from the ancillary plays, is there any particular midcap? We have seen a couple of clothing stocks move up because of favourable goods and services tax (GST) rates coming through, we have seen that in some of the liquor stocks or the spirit stocks from time to time. So any particular pocket, any theme that you like in midcaps?
Shah: One broad theme which we have been playing around in large as well as midcap, but more in midcap is this shift of businesses or market share from unorganised sector to organised sector across chemicals and speciality chemicals, garments and textiles and auto components, in building materials. We are seeing that companies which are in unorganised sector, by coming into the tax net via GST will end up losing market shares in favour of organised sector and this is a fairly long-term shift. It will happen gradually over a period of time, but that is going to be volume as well as accretive to these companies in this organised space. So across our midcap portfolios we are playing this theme.
Nigel: What are your views on Infosys?
Gujral: The best of the company is behind it. Now, whether they can move into digital, cloud, etc. that only time can tell. So when a market is past its prime, when a stock is past its prime, company is past its prime, you need to move on. So instead of watching Infosys go down every week, every month, it is time to move on. Maybe it will again come back. Great companies sometimes come back, but at the moment, I do not see any light at the end of the tunnel and the advice is just sell.
Surabhi: What are your views on SBI for those who want to get in fresh? You usually like financials, but does SBI make the cut with its current trend?
Gujral: Often people advise on the stock that is asked for. But I do it a little differently. If I do not like the stock, I say move to something else. SBI is a dog. It has not done anything for the last couple of months. Meanwhile, if you love PSUs, Can Fin Homes, PNB Housing Finance have done much better. So if you want to make money, those are the stocks to go in. these guys, corporate lenders, first they give those loans, then they run after people to return them. PNB Housing and Can Fin Homes, their borrowers return money much more easily. That is the place to be.
Nigel: What are your views on Vedanta?
Gujral: That too, has corrected from about Rs 270 down to about Rs 220-230 and it has been moving sideways for a while. Very near its 200-day moving average. So decent time to invest into Vedanta. Basically, keep a Rs 200 type of stop loss and in a good metals market, maybe you will get even Rs 300-320.
Surabhi: How are you going to approach trade tomorrow? What do you think of the Nifty and the levels you have in mind and individual stocks? Any ideas?
Gujral: The Nifty, it had a temporary breakdown today, but recovered and can move higher. But this is not the place to buy. I would like to buy Nifty or Bank Nifty from a positional point of view. If they correct towards there, 200-day moving average which on the Nifty is about 9,550. So not a positional buy.Obviously day trading calls vary from day to day, but in terms of individual stocks, Piramal Enterprises next week could get to about Rs 3,500. These are next week so probably 3-4 days it could take for this target. L&T Finance Holdings, that has had a fresh move, that could see a target of about Rs 155. And real estate came back strongly, so maybe Indiabulls Real Estate could also look at a target of Rs 195.