Infra, power could boost H12016; like midcap pharma: Expert

A: From mad bulls we have all become sad bulls, so 2016 tells us that we got to follow the same strategy, hide behind the sand banker, look for place where you find growth, it is not a buy across the market concept. When it is winter and it is freezing you got to be with the Eskimos with his Igloo rather than try and be under sun with the polar bear. We are going to have another grinding 2016 at least the first half.

Again, I say the same thing because we don’t want to say 2016 second half would be bad; we say we don’t know. However, right now there are no signs of recovery, but two or three things are happening which should make us think that the second half of 2016 could be better. That is again conjecture at the moment one is the power ministry, the road transport and to some large extent railways and defence. We will cross the bridge when it comes, for the moment it looks tough.

Going for the themes the old favourites, dull and boring housing finance, consumer finance remains there. The midcap pharmaceuticals, where you sell mostly to the US and business-to-business (B2B) space - that is the theme. One theme which I have been looking of-late is the internet of things concept. I think this concept should be very big over this next five to seven years. If I just can take you around there is a report which has about 30 billion devices with unique IP address would be connected by 2020 and about half a trillion online business transactions would happen in the B2B space and business-to-consumer (B2C) space.

Two days back Jio was launched and I remember 2003 there was a tagline which used to 'Karlo Duniya Mutthi Mein', I think with the smart phone around, in five years the smart phone will become the apt representation of how you can take the world in your hand and do the 'Karlo Duniya Mutthi Mein'. So, internet of things could be a big thing to watch out both in the private as well as the public space.

Latha: Let me look at smaller themes, less explored themes. Among the surprised performers were actually a lot of chemical companies – SRF performed, Navin Fluorine International were the kind of stocks that did very well in the last couple of quarters. Are there some undiscovered gold mines in that space?

A: SRF and Navin both went up on the contract research and manufacturing services (CRAMS) space. It is not a recommendation; we are just discussing stocks. They have both went up on the concept of CRAMS and on the CRAMS space also there are several concept, I mean it is a broad theme of the pharma segment. So, either you can make the molecule over here or you can do the research from here.

So, SRF, Navin Fluorine, PI industries not a recommendation so they are all in the CRAM space, they did well. It is a broad sense of the global outsourcing theme whether you can do it from pharma or you can do it from anywhere else. However, pockets like these would always be there because there are 6,000 listed companies and for a person to get five-seven-ten companies out of which eight or nine could perform well, is not a tough job, but buying across the market 20-30 companies and then hoping to do well that is the things which I think would be tough in 2016, at least for the first half.

Sonia: The space to be in 2015 was some of the midcap pharmaceutical names. So, names like Aurobindo Pharma, Wockhardt had a great performance this year. You continue to be bullish on that space and if yes what are the stock to look at?

A: In the pharmaceutical space you have to look at companies, there are two ways of analysing. I mean a broad theme for a retail guy out there who is looking at it try and buy companies that are selling mostly to the US market because once you sell into US are expected to have a certain amount of quality in your products. So, if you are selling quality products, if you are Food and Drug Administration (FDA) approved then you can charge higher also.

If you are selling to African countries you can get away with a little bit here and there also. So, if your company has been USFDA approved or World Health Organisation (WHO) approved then you have a sense that this company is for real and the things that they are doing should make money over the longer period of time.

In pharma you can play anything, you can play anti malarial, you can play anti-aids, you can play anti- hepatitis. There is so much of pain and suffering and it is wrong for us capitalists to say money out of pain and suffering with people going ill but that is how it is. I think midcap pharma, small-cap pharma, large-cap pharma, pharma would be a space to be in 2016 and with the Fed increasing rate the same old concept and the Reserve Bank of India (RBI) looking to decrease rates and obviously it is dollar bullish, so dollar can stay for a while but then ultimately it is dollar bullish. So, I think midcap pharma is a space to be sure._PAGEBREAK_

Latha: So midcap IT as well?

A: Midcap IT is good enough but the point is if you wanting to make 15-20 percent return that is okay. However, the days of IT of making big returns are behind us. I think internet of things is the new things which we have to see. Not too many listed companies there, few in the private space as such but that is the theme which is just evolving and over the next two-three-four years that should be exponentially huge.

Sonia: What is your view on how to approach private sector banks? Is it a good time to buy some of these beaten down names like ICICI Bank?

A: Not the beaten down names, the old favourites. The fully prices private sector banks look better than the apparently cheap ones because it is the same boring names in that space, because in the beaten down names, you are not too sure about the asset quality and banks are valued by how much they can recover as well as how much they can make, not just by how much they can make. Latha knows this more than anybody else.

However, the problem there and if you could call it a problem, is they are priced well, so they will not give you out-sized returns, they will give you the standard 20-22 percent compounded annual interest rate (CAGR). The growth from 30 percent types is coming down, so that is one thing we have to take. But then this market, if you have a largecap liquid name that can give you 20-22 percent then that is a good bet. So, that is how it is.

Let me tell you, if the Nifty goes back to 8,800 or 9,000, I am not saying it is going to go back, but if it goes back, the outperformers will be the banks with bad assets, that is because that is how it happens all the time. But then, you want to play this game for a longer period of time, rather than just for a quick two month punt, so that is how it is.

Latha: What about non-banking financial companies (NBFC)? They are likely to have another avenue of selling because of the payment banks. And actually, even those digital companies, their loans can be sold through the payment banks. Payment banks themselves cannot give loans, they do not have the authority as well the digital markets space, the Flipkarts and Snapdeals are actually tying up with NBFCs to give loans for both their consumers and their sourcing entities. Is there a new dawn for NBFCs? Is that a theme at all?

A: That is a theme and NBFC with niche businesses should do well. But the times where, I mean payment banks, people who have got those licences, they can cause some disruption in the overall setup like, I see you mentioning this quite frequently and I would concur with that. But, we can look at our ways and you can buy your own stocks and say okay, these companies will not be affected because Flipkart will not be giving home loans, Flipkart will be giving consumer loans. So, that is how it is. So, you find your own segment and do it that way.

Latha: I am asking you if NBFCs will therefore have a new market or a new avenue to sell.

A: Absolutely, and there also, you have to see the e-commerce market in India. I mean most of them are bleeding and they are losing money. I am giving you a small anecdote, allow me one minute for that. In the great California Gold Rush where people were digging for gold, the guys who sold pickaxe and shovels made more money than the guys who were digging for gold. And Levis Strauss came up with the brilliant strategy of having a thick cloth pant called jeans. So, that is how it was invented.

So, whether Flipkart makes money or not, whether Snapdeal makes money or not, we can all debate. So, the big theme should be around these players about the guys who are catering to them. So, NBFC, like you said falls in a classic case where Flipkart could be discounting something more than what it should, but if I have got my customers, if I can find out their habits, whether they are paying back or not through analytics, then I am through with that. So, to that extent, of course, that is how it should be.