The domestic market will continue to move up as long as international markets remain stable. The recent liquidity rush will continue into emerging markets, says Ajay Srivastava, CEO of Dimensions Consulting. Investors are now hoping for an economic recovery. If results are not visible in the next one or two quarters, skepticism will return, he says, adding that a 5-10 percent increase on earnings per share (EPS) side is legitimate. “The current rally is simmering to a point where non-performing stocks are not getting penalised,” he says. It is time for investors to look at stocks that are performing well. It is advisable to now move from smallcaps to higher midcaps with valuations of Rs 200 crore and above, he says. Srivastava is bullish on oil marketing companies and the cement sector over a three year perspective. The cycle for pharmaceutical space is also changing and investors can start investing again. The value lag is the most in public sector banks, but they can give good returns in near-term, Srivastava says. The Good & Services Tax (GST) Bill is not relevant for the market now. If it passes in this session, some bump-up will be seen, but even if doesn’t impact it will not be great, he says.Below is the verbatim transcript of Ajay Srivastava’s interview to Latha Venkatesh & Sonia Shenoy.Sonia: Nobody seems to be worried about valuation. It is just the liquidity gush that is driving our market. How long do you think this could continue?
A: Till the international construct remains positive we are driving our clues from globally, money is abundant; people are investing, stocks markets are at historical highs. So, the rub-off effect to an extent is also on the emerging market and one good thing which has happened is the emerging market debt is now finding favour with the investors abroad and that is a big change which has happened. There was a little bit of turbulence in the middle. However, we are back to big chunk of money moving to emerging market debt which means liquidity is heading our way for a reasonable period of time. The exchange rate is stable. So, I don't think liquidity environment is going to change very fast. It has just improved a lot over the last two-three months and the view has changed that emerging market debt is back in favour. I think that is a great positive for all the countries including India.Latha: First the advice to the investor. Should a stock market investor be accumulating at this stage or do you think in the medium-term because of this valuation discomfort you will get better values for the longer term investor?
A: This question has been boggling us for years but the question is where the investor is positioned because we always look at from a standpoint of an old investor sitting with the stock but there is also a new bunch of people who are trying to enter the market at this point of time. So, addressing to the newer bunch of people, they need to be extra careful because now the rally is simmering down to the point where we are seeing that the non-performing stocks are not getting penalised, performing stocks of course get a 20 percent upside and that is very clear, but the non-performing one, if you look at the results, say of Indiabulls Housing Finance and so on, they have not been very spectacular. They have been flat absolutely. So, you have got to be careful where you are positioning.
The market positioning as far as we are concerned today, for instance petroleum marketing companies. In spite of a 100 percent jump over the lows you still could safely position yourself there. Perhaps those are stocks there.
I would tend to believe that we are on the expensive side of the financial services but you can live with that for some more time. So, you have got to carefully position that you need to find the performers in this quarter and create a position around them rather than looking at flat results because whenever they will happen there will be correction. The guys who did not perform well or a flat result will be the first to go down. So, even good names have not performed like Syngene International etc has not performed well compared to what we were expecting their results to be is kind of flattish. So, you have got to position yourself on companies performing.
However, some underpriced companies like oil marketing companies could be a safer bet. I would tend to believe that perhaps the cycle of pharmaceutical would change in this year. So, you could start getting into the pharma stocks again and as I said sprinkling of financial services, if you have got guts and you want to take a call, public sector undertaking (PSU) banks could give you a very healthy return although not everything is good there, I am not a great advocacy of PSU banks but it could give you a good bang for the buck in the near future because that where the maximum value lag is at this point of time.
Latha: What about the bunch of midcap stocks, we have got, for instance Transformers and Rectifiers India, we were discussing earlier, is doing very well. There are pockets; Hitachi Home & Life Solutions has done very well. Symphony's numbers are coming today. Some consumer durables, some minor, small capital goods makers have all done well. In the midcap space how do you sift the grain from the chaff?
A: The one important point is that the midcap space - we are positioning ourselves clearly that with a new S4 guidelines there is a bumper available for the debt laden companies. That is one sector which has high risk but can give you a multiple return and we have seen that happening in the past as well. So, that is one sector which you need to position.
The one sector where you don't want to be there at this point perhaps is a commodity stocks to an extent that they are overrun. But if you were to choose the stocks you get iron and steel sector downstream; there could be some benefits coming there. You have companies like Kirloskar Ferrous Industries etc, who might enjoy some benefit of a revival in the cycle of automobile or steel cycle. However, you have got to be careful that there are a lot of other smaller caps which are not doing well. So, specifically I would say gravitate towards the bigger midcaps then the smaller midcaps for two reasons, performance stability and your exit out of it. A very smallcaps, the exit will not come, it will look nice paper profit but when the market turns, will not materialise. So, bigger midcap is the name to go to rather than the smaller smallcaps even though the 20 percent upside in the newspaper may look attractive but I would say gravitate towards companies with a turnover of Rs 200 crore and above in various sectors and not below that._PAGEBREAK_Sonia: Your tone on the market has changed quite a bit since the last time we spoke. I am getting some feedback on Twitter that Ajay has become bullish from his bearish views that he had since the last time. What has happened?
A: I am here to make money in this market. I am not here for my ideological reasons. But you are right. We were lot more sceptical about a month-and-a-half-two months back on this market for various reasons that fundamentals are not growing, which is true even today, but I did not expect the kind of liquidity change in the environment which took place, globally as well as domestically. Even for old veterans like us it caught us by surprise that the resilience of the investing public is amazing today and one thing which we missed out perhaps in hindsight was this liquidity rush coming from overseas as well which we saw, we were looking at a little bit more turbulent overseas market, that didn't happen at all. So, even post Brexit we were saying it is looking decent at this point of time. People wanted to put money back in the riskier assets. This liquidity rush is what we missed out to be honest but there is no harm in acknowledging.
Sonia: The cement space, the cement stocks are actually the biggest Nifty gainers now and we have seen an improvement in prices in the north and the central region. So, the expectation is that Ambuja Cements, ACC will deliver good numbers but these stocks are not cheap by any means. How do you approach this space?
A: You have got to be cautious because UltraTech Cement has not done as well as we all thought it is going to do. So, cement space in a longer term perhaps yes, for the reason that new capacities are limited in coming. So, if you look at three years perspective, there is a great boom happening there because you will not see too much capacity additions over next 24-36 months coming into the place. On the current, immediate scenario, you are looking at a little bit of overvalued scenario. So, if you are looking at something that is going to happen into three months in cement and give you a better than market return. I don't think it is going to happen in cement.
Cement is not going to give above market return in the next three months in our view. But if you look at a three years perspective, the valuation could give you a decent return over a three year perspective because capacity is not coming down. So, immediately I am not so sanguine that yes these returns would be over the market compared to other sectors that perhaps could give a better return.Latha: If for some reason the Goods and Services Tax (GST) is not passed or if it is passed with clauses which can be ugly like probably indications of a higher GST or that too much has been ceded to states that 1 percent levy which manufacturing states want to maintain is continued. For whatever reasons the experts find it a bad GST combination, how do you think the market is going to react, first to the passage and then to the quality?
A: At this point of time market is rallied up based upon a GST in my view. GST may come, may not come. I don't think it is too much of relevant factor for the simple reason that even if it gets passed, it has got a year for it to get implemented; the states have to pass legislation, there will be a give and take happening over a period of time including on the rate of GST. So, on immediate market impact I am not so sure whether there is a decent amount of money riding because GST is going to be passed. If there are ugly parts of it, ugly is a relative phenomenon, to some it is ugly, to some it is beneficial and so on and so forth, but the fact is that GST as a whole has a cost impact, has a cash flow impact on companies that is very clear.
So, there are positives and there are negatives both in GST of coming through and in what form and shape it comes through and how does it get implemented. So, in the current context of where the market is today I don't think GST is going to move the needle one way or the other. If it gets passed, maybe little bump up. If it doesn't get passed, I don't think it is a great negative to the market. This is a different market altogether. GST is anyway a longer term phenomenon. So, I am not too concerned that GST -- and I very much doubt that the government will compromise on the GST if some provisions are put there which are not amenable to a general GST which is acknowledged world wide as a model.
Sonia: What is your own estimate of where the valuations of this market could be headed because at this point if you take the consensus earnings per share (EPS) of say 1,600 for FY17 on the Sensex we are trading at 17.5 times which is much higher than our historic valuations. Do you think it could get better than this?
A: I don't think it will get better than this. I think there is a lot riding. When you talk to investors, people, they are all hoping that the revival will take place and results like Maruti Suzuki today would kind of give a broader indication of the economy, how it is panning out. So, far the results have been okay, IT has been bad, Axis Bank has been bad but we can live with it. However, people are today really hoping for an economic recovery, the monsoon has been satisfactory and if this quarter results or next quarter's results don't come through there will be lot of scepticism - that is one.
Second, at this point of time our trigger is going to be the global liquidity flows coming into the system.
Third, the threshold return -- 17 times or 14 times we look at an absolute terms without looking at the interest rate. Now 14 times, 15 times was good; 17 times was very higher value when interest rates were 14 percent or 13 percent. Now we are looking at interest rates of 6 and 7 percent. So, the gap between expectations, what you can return on fixed income is also growing. To that extent people are willing to pay higher premiums.
Therefore, my guess is it is a combination to a large extent based on economic recovery but a 5-10 percent increase in expectation on the earnings per share (EPS) side or valuation multiple is possible purely because on the alternate side the yields are also falling every day and global yields are down to 1 percent and below, Indian yields are down to 7 percent. So you are seeing the gap also changing dramatically. So, to that extent people are willing to pay higher premium because on the alternate side fixed income, they get much lesser income.
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