The inherent characteristic of the market continues to be bullish, says Ajay Srivastava of Dimensions Consulting. Investors, according to him, are focussing on calendar year 2016. It is unlikely that investors are factoring in an uptick in earnings before Q1FY17, he adds.
He says the sell-off in good quality stocks has been limited.
He is bullish on midcap pharma stocks on attractive valuations. He also feels that PSU banks may start looking attractive next year onwards.
On companies such as Tata Motors that have exposure to the Chinese market, Srivastava says it is better to exit these companies. He says the recent meltdown in the stock market in China is indicative that the government there managed the market to the hilt, but is failing to do so now. The resultant wealth collapse or compression will hit luxury brands first, he adds.
Below is the verbatim transcript of Ajay Srivastava's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: Are you positive on products like that Jubilant FoodWorks?
A: Positive on product, not so positive on the stock, too expensive. On Vikas Khanna, we all love him so my wife drools on him so that is a great positive. Forget the Pizzas all around the chef is good enough.
Latha: Exactly which pocket of the consumption basket you like, we know you like the liquor guys but is there anything else in the consumption basket that attracts you?
A: Consumption basket by and large as we said, positionally we are pretty short in the market in terms of as broadly on a consumption theme. So I don’t think so there would be literally any pocket maybe buy one or two players which have done well. You can identify them as winners, you don’t want to short them but I don’t think it is a great buy at this stage. That is why I said it is more a short then a purchase or a conviction in terms of their turnaround story.
We will wait a while; we will see the results of June quarter coming through and possibly even next quarter before we take a view differently. However, for the time being I think there is a great overvaluation of those stocks, the PEs are stratospheric at this point of time, the performance is going to be mediocre if not say unsatisfactory. So, no reason to be in that basket at all if you ask me.
Sonia: I completely second your wife’s opinion on Vikas Khanna. I am a big fan as well. What about the markets, we have been in extremely choppy waters for the last couple of weeks? How insulated is India from the China’s shocks you think?
A: I would say differently, I would see the market today after correcting from the 9,000 levels have now reached a good level for the simple reason that we don't see a selloff in good quality stocks. That is a hallmark of a healthy market. So if you look at these stories in terms of the cellular operator, if you look at the stories of key players in the industry even in auto, one or two winners in auto etc. you will see that there is no selloff that is taking place in the stock.
In fact there is buildup on every correction so in terms of market construct the liquidity is humungous. People are willing to invest and the good part people are willing to invest for the longer tenure. Everybody has shifted the goal post now to 2016. People have already given up 2015 and said listen it is not going to happen this year. We are investing for 2016 so two good things strong domestic investment. Number two – horizons have now moved to 2016 which kinds of cushions the market. In my view we are still in a pretty bullish mode vis-à-vis the performing stocks. The non-performers will go up and down depending on arbitration and trading. For performing stocks you will see that this is a very strong bullish market.
Latha: Is the earnings trend likely to change in this quarter at all or have we to push it to several quarters down? Have we to see a lot of earnings estimates come down further?
A: April to June is going to be pretty bad quarter that is what my estimate is. Next quarter will be also reasonably poor in my view. Everybody is hoping the fact that this revival when it takes place will take place in the festive season or the last quarter that is what most people are expecting it to happen or may be the next quarter first year. Earnings wise, I don’t think anybody is looking at any great shakes before first quarter of the next year. So leave it at that I think that by and large we should be willing to live with disappointment.
Let us be honest, the government fiscal compression, austerity policies akin to European policies, economic policies is a necessary follow out, has to be the economic performance of companies, the demand has to slow down, the compression will take place and this whole model of trying to revive capex first is not going to work because capex comes and people need products and services; it is not going to work. So, when the government realises it is not working and they open up the closed gates, they do something to real estate sector, fine, earnings will change.
One sector which will see a dramatic difference in earning in my view will be the PSU Banks because literally everything is now 30 year loans. So I don’t think they will have any bad debts left on their book by the next two quarter. So, optically these companies would look really solid whether reality is different. But everything restructured 30 years means don’t worry for next 20 years on these loans. So PSU banks in my view would give a very strong optical performance in the next two quarters.
Sonia: You were telling us about PSU banks what are the other pockets that you think could be a good place to venture into for the next two to three years?
A: I think pharma midcap is excellent place to be in. There have been some severe corrections in many stocks, good quality stocks, some have not corrected but the story is building up there. So, forget the mainline, that is a good investment per se, but the smaller names, the midcap names are the place to be. I think there is a need to build up your portfolio very strongly and do not worry that the stocks have gone up by 40-60 percent in the last one year.
There is still a long way to go but stay away from bulk drug companies. If you are staying with formulation, branded companies, pharma companies you are doing well. So, if you are staying in to research companies you are doing well. So, by and large baring one segment midcap pharma would constitute one big segment that you can build a portfolio for three years and sleep peacefully after that.
Latha: A logical question to that PSU bank tongue in cheek buy that you gave is the private banks? You are positive on that piece in a more immediate sense?
A: These are good stocks for a 20 percent return. If you look at historically, 20 percent return and they are good stocks and the reason being that there is a grandfather called Reserve Bank of India (RBI) sitting there to protect them in terms of their earnings and their net income yields. Which is why you see that government bond yields are not coming; which is why you see the credit transmission has still not taken place. The credit is not going to the small and medium sector. All in all it is a regulatory scenario unlike mutual fund, insurance etc which was a regressive scenarios if I were to say so for the market players.
RBI is one regulator which is greatly positive for the banks profitability so not only banks if you look at the non banking financial companies (NBFCs), look at micro finance institution excellent places to go with on every correction. They will see a strong trajectory of performance.
Sonia: What do you do with some of these companies that have exposure to the China market? I am going to say the name Tata Motors, you don’t have to but you can still tell investors how to approach some of these exposed companies?
A: I think you need to be out of these companies. This turmoil which has happened in China is not temporary, it also tells you the inability of the Chinese government which for last 25 years managed the economy and the market to the T. It is the first time in the history of China in the last 25 years, the government failed. That is an inflexion point for the economy and that is why we have to take our listen that the government is not able to control the economy and their demand compression there again in spite of all this happening will be huge.
The wealth collapse is going to directly impact companies like Tata Motors that you mentioned, so wealth compression will exactly affect the luxury companies first. If you look at the European luxury makers, they are already seeing the first cuts in the purchases out of Hong Kong and out of China. Same will travel for Indian companies that who are exporting and are in the luxury or premium space will see demand compression and a cut going forward.
Latha: Coal India has seen a lot of positive vibes primarily because the government seems to have got its act together. Is that a stock that attracts you?
A: Generally PSU stocks by and large are very good buys in today’s scenario because for two reasons one the government has put attention in them, correctly they deserve that attention which they have not got so far. Number two, they are forced to perform. Number three; there will be a strong dividend payment out of these companies as we go forward. So there will be capex, there will be performance monitoring and there will be dividend payments.
As a block whether you look at oil, whether you look at natural resources, barring may be one which are into say iron ore because they will feel troubled but anything domestically focused is a great story to be in. So, PSU for the first time if you look at it barring oil marketing became a good pick last year as a block for the first time PSUs represent a very strong investment idea.
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