Globally risk-off trade could continue for a some more time on back of weak Chinese data, devaluation of Argentina Peso, persisiting weakness in US economy and fear of FII outflows from emerging markets, says Rakesh Arora, Head of Research, Macquarie Capital Securities in an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy. This could rub-off on India too, he cautions adding export sector continues to be safe havens.
If market were to rerate sharply post elections then cyclical stocks could outperform. He advises owning Larsen and Toubro and private banks like Axis Bank and ICICI Bank .
Investors would also continue to focus on sectors like IT and Pharma.
On Ranbaxy, he thinks its EBTIDA margins could be hit by USD 50-100 million post the USFDA ban on its Toansa API plant but one should wait for more clarity from the company and remain on the sidelines till then. Post clarity one can look at buying the stock after it settles down. However, worst seems to be over for Ranbaxy, feels Arora.
Moreover, the news of RBI aligning NBFC loan restructuring norms with banks would be positive for infrastructure NBFCs like IDFC, L&T Finance though Arora is not overtly bullish on them.
Edited by Vaishali Karulkar
Transcript on next page
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Below is the interview of Rakesh Arora, Head of Research, Macquarie Capital Securities with Latha Venktatesh and Sonia Shenoy on CNBC-TV18.
Latha: We are seeing the scaling back - the Chinese data coming in weaker and US also belabouring under some economic weakness. Is this going to mean a bit of a selloff that could prolong or is this just a one-day bad news?
A: If you add to that what has happened in Argentina overnight where the currency has collapsed 13 percent I think the risk-off trade is pretty much on for the next few days probably and that would have a rub on effect on India also. In any case for Indian economy, only export sector will starting to do better.
I do not think there is any major improvement in the economy otherwise. Investors are also largely focused on IT, pharma and those kind of names. So I think that trend will continue and pretty much get reinforced over the next few weeks.
Latha: Would that really impact us so much? India has detached itself from the Fragile Five. Yesterday even the Turkish central bank intervened, but that was a positive intervention which has helped that currency. Do you think India will be impacted much since our currency has been a clear outlier?
A: I do not think we will be impacted too much on the currency side. It is more Indonesia and Myanmar countries which will be more impacted. Sentiment-wise emerging market as a class might see little bit of cash outflows. So that is what is going to bear on Indian markets too. Remember that bulk of the emerging market stories are based on exports to developed market, so if there is a little bit of hiccup in data in US etc. that is going to make emerging markets a little bit more riskier trade to play.
Sonia: We have a lot of stocks that will react to news low in our own markets. Ranbaxy is the top of line there. Its fourth plant now also has been banned by the USFDA. What in your mind could be the damage to both the stock as well as to the earnings for Ranbaxy?
A: It is difficult to quantify because this plant was supplying Active Pharmaceutical Ingredient (API), so you are never sure whether they have alternate arrangements to get API from some other units which could be third party units. So until and unless company comes out with a clear estimate as to what they think would be the impact it is difficult to foretell. The impact would be anywhere between USD 50-100 million on the EBITDA which could be 15-30 percent of their current EBITDA. I would say that stay on the sidelines for sometime. Let the clarity emerge and probably post the clarity people can look to buy when the stock has settled down. You never know what levels it would be, but once the stock is settling down then probably the worst is over for the company.
Sonia: Many analysts have pointed out that once this near-term problem settles, perhaps you can look to buy, but don't you think that would be a bit cautious? You should be a bit cautious about Ranbaxy considering that these issues have cropped up several times in the past and significantly deteriorated wealth for investors?
A: Now we are reaching a stage where everything has closed down, so it cannot get any worse from hereon. Toansa was the last facility which was operating and had approvals, so now there is no other facility in India which was left apart from their US facility which recently got endorsement and was approved only in October-November. So we are hoping that that remains to continue. I think the growth prospects have taken a hit, but once everything has closed down how bad it can be from hereon.
Latha: Should any kind of non-banking financial companies (NBFC) take a lot of joy from the Reserve Bank of India (RBI) easing restructuring and provisioning norms?
A: It seems to be a little bit positive for the infrastructure NBFCs, largely the private sector side, so Infrastructure Development Finance Company (IDFC) and probably L&T Finance are the ones which will benefit from these norms. I do not think there is a clear-cut bullish move in these stocks which we will see, probably a little bit of bounce, but I do not think the trend is changing here because of these norms.
Sonia: What about Larsen and Toubro (L&T)? Would you buy that now?
A: That comes to second part of our portfolio selection. Elections are a big trigger. While economy might take its own time to recover, but if election results are favourable you would definitely see a sharp PE rerating in the system and some of the cyclical stocks are going to outperform massively. So to account for that kind of a possibility we are pushing for little bit of cyclical exposure. L&T had a good set of results and things are looking better, so I think L&T is definitely one of the picks and apart from that we are pushing some of the private sector banks like Axis Bank and ICICI Bank, so that gives you a kind of balanced exposure.
If the markets were to rerate sharply post elections these are the stocks to really own and with much lower risk profile.
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