Investors better off holding than bottom fishing: Edelweiss

Vinay Khattar, Edelweiss, warns investors against bottom fishing and suggests they wait till the Budget plays out to take the next step. After the Budget, the government will focus primarily on infrastructure spending. There are many companies which would directly benefit from this, but he did not disclose their names.When asked whether the auto sector is a good option to invest in, he says their exports have taken a beating and that is bad news considering the fact that various companies like Motherson Sumi rely on their exports. He suggests looking at the more domestic facing companies in this space.Sharing his views on the banking sector, he says it is not in a very good state and is under a lot of pressure. He advises investors to stay away from public sector banks for now.Below is the verbatim transcript of Vinay Khattar's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Sonia: Three experts have told us in the last two hours that you should be looking for quality stocks, you should be looking to cherry pick but the question is that people have lost so much money in these markets, is there more to go on the downside and would you just advice waiting a bit and waiting for the Budget to play out before taking the next call? A: That is exactly our advice at this point in time. We have been telling our clients and investors to avoid doing bottom-fishing at this stage. So, there is some chance that 6,800 could hold and that looks like a reasonably okay support but there are quite a few events including Budget, which are just lined up and our sense is that, probably investors are better off holding rather than doing bottom-fishing at this particular stage. Latha: Post Budget, which are the areas that are looking profitable to you or potentially promising? Let me start with auto ancillaries, those were the big kings of 2015, is there value in any of those stocks now? A: Our sense is post Budget -- the big ones are going to be where the government is going to focus, which includes infrastructure spending. Now in case of autos, there has been significant pressure because of exports. Exports constitute very significant numbers for autos. The likes of Motherson Sumi and all, a large chunk of their revenues come from exports and exports have clearly taken up beating in that particular space. So bottoms-up, you will get ideas, we like companies like Jamna Auto and all which are very significantly focused towards commercial vehicle (CV) space and CV has been doing very well. Is it going to be across the board? I think no. You should take a deeper look at what are the business models, where are the revenues going to be coming from. If it is going to be domestic facing or export facing and some of those answers will decide where you should put your money in case of auto ancillaries. Latha: So you would prefer the domestic facing guys? A: Right now, yes. Sonia: What about some of the banks? What is the realistic expectation in the Budget? We were doing a panel with Neelkanth Mishra of Credit Suisse where he said that this Rs 20,000 crore recapitalisation will do nothing for the banks. Banks will continue to post losses for the next many quarters. What is your realistic expectation from the Budget and if it does not come through then do you see more de-rating for the banks? A: Banks are clearly under pressure; the kind of hits they have taken in terms of gross non-performing assets (NPA) and the write-offs in the last quarter are very substantial. Even prior to that kind of a write-off banks were not in a very good state. So, this Rs 70,000 crore kind of capitalisation over next three to four years Rs 20,000 crore happening this year was clearly an inadequate number. With what has happened in last quart that number drops even further. If you were to look at gross NPA across the board Rs 70 lakh crore is the total bank book size. Almost 70 percent of that bank book size is on the public sector side which makes it about Rs 50 lakh crore. Almost 70-80 percent of the gross NPAs are on the public sector side which means that the pressure on the net worth of the banks are very substantial. Having said that does government need to recapitalise aggressively? Our answer is very clearly yes. Where are they going to get funds from that is a big question and there in comes the point that what is the kind of fiscal deficit targets that they will maintain. If they try to crush it down to what they said last year about 3.5 percent our sense is that bank capitalisation could take a back foot and that is not going to be good for economy. Latha: So don’t touch the public sector banks? A: At this stage, no. Latha: Private sector banks? A: Private sector banks again the better names are richly valued and now you have seen that the money exiting Indian market. Those rich valuations are kind of correcting down for the likes of HDFC Bank and Kotak Mahindra Bank. On the other banks like ICICI Bank, Axis Bank and so on there is value in terms of absolute prices. However, again the risk remains how much more in terms of write-offs and NPAs and whether you could recover any of those NPAs going forward. For entire discussion, watch video...