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Last Updated : May 26, 2015 10:32 PM IST | Source: CNBC-TV18

India in 10-year bull run; use corrections to buy: HDFC Sec

Dipen Sheth says what would matter most from a sentiment perspective for another three-six months would be the progress of the monsoon and how it will play out on rural India.


The Narendra Modi government completes one year in office Tuesday but Indian shares appear to be losing steam and have turned flat for the year along with corporate earnings failing and showing no notable signs of any pick-up.


However, Dipen Sheth, head of institutional research, HDFC Securities believes the past one year has just been a milestone in what is a 10-year bull run and will give some serious opportunities to long-term investors to enter this market all over again.


According to him, the Indian bull run story is in no danger of breaking. “It is just that the weaker hands are having this re-think as we look at it. There are certain things to complain about and crib about and some risks which are visible to investors and that is why you had the pullback,” he adds.

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Speaking to CNBC-TV18 on the sidelines of The Building Materials Investor Forum, Sheth says what would matter most from a sentiment perspective for another three-six months would be the progress of the monsoon and how it will play out on rural India which is a part of the core constituency that still needs to express its faith in the Modi Sarkar.


Below is verbatim transcript of the interview:


Q: Since you join us on the 1st anniversary of the Modi government and I am reading your views and it is quite interesting and I am quite intrigued by what you say, you say that ‘we are in the midst of the first serious re-think on the Modi India story’ what do you mean by that and in that context would you believe that what we have just seen is not just a correction but may be something more than that?


A: It depends how you interpret what I have said because you need to read on and see where that claim lands into. This re-think right now is something that is part of our normal process in any sustained long-term bull run. I don’t think this story is in any danger of breaking.


It is just that the weaker hands are having this re-think as we look at it. There are certain things to complain about and crib about and some risks which are visible to investors and that’s why you had the pullback.


It is during times like this that people sit down and do some serious analysis and figure out what is good and what is bad and then the bull run resumes. So it is just one of those phases, it is just that you have a confluence of near-term negatives whether that concern on unseasonal rains and monsoons, whether you had the global economy slowing down, the threat of money getting pulled out of India a bit.

It is just a one year milestone in what is a 10-year bull run and if anything, this so called pseudo rethink is going to give serious opportunities for long-term investors to enter this market all over again.


Q: How much lower can the market get, even if this is a year in which the markets fall, consolidates even in a multi-year bull market is there a risk of this pseudo rethink taking the Nifty below 8,000 again may be even towards 7,500 even if the longer-term texture of the market remains intact?


A: The sensible answer to that is that trying to predict market levels is like trying to predict the outcome of what will happen at the races. Let us not look at it that way, let us look at what are the factors that can drive down the markets and are those factors sufficiently visible as of now.


For another three or six months what would matter most from a sentiment perspective would be one the progress of the monsoon and how it will play out on rural India which is one part of the core constituency which still needs to express its faith in the Modi Sarkar.


So there could be a bit of a push and pull there especially because the opposition is now trying to project the Modi Sarkar as being a elitist Sarkar which I don’t think is entirely true.


You can always find fault and do nitpicking. If rural India does come in for stress owing to a weaker than normal monsoon then we might see markets heading downwards for sure. This will be tempered by the fact that agriculture is not as bigger part of the rural economy itself let alone the national economy. There are lots of other levers in the rural India. That is one real risk factor.


The second risk factor would be whether the US Fed decides to hike interest rates and whether that will lead to money being pulled out of emerging markets particularly India. So, again there too that risk is real but that has been moderated by the heeling in India’s economy which will prevent a mass outflow.


Last but not the least it is also going to be dependent on what this government does next. The entire press and media and analyst community has got too obsessed with looking at what has happened in the last one year. I don’t think we need to wear backward looking glasses here.


We need to look into the future and say what are the next few things that are still remaining or next many things which are remaining undone for this Modi Sarkar to now let its dream for India play out over the next 4-5 years and arguably over the next 5 year after that as well.


Combination of all these three will affect what happens in the markets. I don’t think we are in any major risk of the bull argument breaking down seriously for sure.


Ekta: Wanted to get more perspective on the Building Materials Investor Forum which you are holding. Tell us more about it, which are the companies featured and why this topic and theme?


A: The topic and theme makes perfect sense because there has been a lot of harping around ‘Make In India’. However for making in India you first need to make India or build India out and hence building materials.


So, the obvious building material to focus on is cement because it is a core part of construction. We have stayed away from the largecaps in this event. It is a very conscious effort to focus on some of the smaller cap companies and figure out what role they have to play in the Modi-fied India if we can call it that.


One of the big arguments of the Modi sarkar has been that we are trying to establish a meritocracy; we are trying to establish a rule based and merit based way for businesses to flourish.


A lot of businesses which were earlier flourishing or growing or even surviving in a licence permit quota raj, in an over regulated and arguably under governed raj may fall by the way side and a lot of the truly deserving talented hard working and diligent managements which are currently looking smaller than what they should be, will get a chance to grow faster than the industry in the years to come.


It is with that perspective that we have called these midcap companies to our event. For example, if you look at the two reasonably well known cement guys that we have called, one is Orient Cement which is adding and about to commission a 3 million tonne capacity on its existing 5 million tonne capacity. We had flagged Orient a long time ago for investors. It is up some 2x at least from those levels.


One year ago exactly in the last week of May when we had invited Sanghi Industries which has got a plant in Kutch in Gujarat to our event, they were trading for less than half their market cap today and this was the company which was sitting on 1 billion tonne of limestone and had been repaying debt diligently over the trailing three or four years. It is just that investors were too skeptical of whether they could shrug off all that debt and get back to becoming the kind of compounder that they look very clearly now.


So, Sanghi is now commissioning a 1 million tonne grinding capacity in over the next few weeks. Sanghi looks good to multiply capacity from 3 million odd to maybe about 7-10 million over the next five years if you ask me and that is the reason we had called Sanghi. So, that is just two of the companies we have called.


Anuj: Couple of other companies that you have invited in that conference Star Ferro and Hyderabad Industries (HIL), you don’t have a rating on that but what is the story here?


A: We don’t have Star under coverage but Star Ferro and Cement is very interesting company because they operate under a variety of incentives and tax break structures that work for them specifically because they are operating in the Middle-East.


They are working on humongous margins of something like Rs 1,500 EBITDA per tone, most driven by these incentives or at least partly, Rs 500-600 should easily be attributable out of that Rs 1,500 to the kind of profitability that they make. It is attributable to the fact that they are in the north-east and enjoy these incentives.


Star is still something like a 3-3.50 million tonne nameplate capacity story and if they are able to now use these Rs 1,500 per tonne of EBITDA that they earn and the tax breaks should help them retain a lot of this in the form of cash earnings.


If they are able to compound their current 3 million tonne capacity into a larger capacity 4-9 million tonne over the next 5-6 years then you arguably have a fantastic story.


This is why their headline valuation of more than USD 200 a tonne, is not so costly. They look like a very interesting company. It is all a function of what they do in next two years with the money they make.


Do they make it cleanly enough and do they re-invest it and do the same incentives continue to work for them in future, which are the reasons we have called Star.


On HIL, this company is below the radar of most institutional investors for two reasons – one is it has got a market cap of less than 600 crore and two they operate in the asbestos roofing sheet business which is a widely cyclical industry and which has widely stated concerns on whether asbestos is a safe roofing material or not.


On both these fronts this company and the rest of the industry are going to prove the naysayers wrong over the next few years.


There is a reason to believe that asbestos, in the way that is if used in roofing sheets, has got absolutely no harmful side effects. The fact that these companies as and when they become more prominent in the minds of investors and compound over the next few years as rural India gets build out both HIL and a very smallcap company about Rs 60 crore market cap Sahyadri Industries that we have called to our event should be very interesting for investors.


Ekta: Anything that you like in terms of may be valuations or an idea from the broader markets something that you like maybe on earnings and may be the earnings trajectory going into FY16 which you would like to share?


A: We have been talking about a lot of stocks and if you could specify a sector then I might tell you what we like there in terms of the largecaps or the midcaps.


Ekta: Say banks, IT?


A: IT again we are doing some research and it is not yet complete. However, you have seen the big crack in KPIT Technologies after a very disappointing Q4.


For example, here in KPIT we believe they are a very high pedigree company and they have got a very clean management and high quality promoters and there is no doubting the DNA of this company.


However, they seem to have gone through a couple missteps and the stock is halved from peaks. There is some work yet to be done here but at some point of time we would like to stick our head out and say that this is a story that is worth buying into.


We have put it into our midcap model portfolio and paid the price for it. However, something tells me that all is well at the business and the SAP part of their business, which stumbled badly over the last couple of quarters, might make a stronger turnaround than what people might believe.


On IT, the broader take is that the fear is around the digital and social, mobile, analytics and cloud (SMAC) initiatives leading to easing of growth opportunities for Indian IT may well turn out to be misplaced as many of the Indian IT firms gear themselves up for the opportunity.


Also, traditionally IT services are not going to fall off in volumes as quickly as people might imagine.


Anuj: You would stick your neck out on KPIT but would you do that for PSU banks as well? I believe you think it is very close to bottoming out?


A: It can always be close to bottoming out and we can always get the call wrong but I would wait. So, this is one part where I would go out on a limb and say that the Modi Sarkar has got a lot more to do whether it is in terms of empowering their managements or in fact even having managements in some of these PSU banks – some of them are headless even today as we speak.


Whether it is in terms of empowering their managements, whether it is in terms of enabling a bankruptcy law or a loan recovery structure which can help them chase some of their errant borrowers legally and more meaningfully to salvage some of their bad loans, whether it is in terms of capitalising some of these banks so that they are fit to lend more and aggressively grow in the new India that is emerging now. A lot of work needs to be done in the PSU banks before which we will develop structural faith in them.


That said, the high quality and well capitalized headline names amongst the PSU banks such as State Bank of India (SBI) and Bank of Baroda (BoB) clearly stand out as being value picks at today’s prices.


However the broader story whether it is banks like Oriental Bank of Commerce (OBC) or Canara Bank, which came out with numbers and the entire malaise of NPA accretion into their books yesterday, do not have the ability to do something about this NPA accretion. That will have to be changed somehow.

The rules of the game need to be changed for PSU banks. I think this is one of the large levers that Modi Sarkar is yet to meaningfully exhibit action on and once that happens PSU banks are going to be an amazing pick. However, till then I am going to hold my horses.



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First Published on May 26, 2015 01:47 pm
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