Leveraged stocks gained this year; like aviation:Dimensions

The likelihood of Nifty going to 7500 is high and can happen anytime, but the general market may not fall in tandem, says Ajay Srivastava, CEO of Dimensions Consulting.

The worse thing is all the beaten down, highly-leveraged stocks had a party this year, thanks to the Reserve Bank's benign view on NPAs and the 'most obnoxious' legislation called the 5:25 scheme, he told CNBC-TV18. "Wherever there is a high debt in the system, you need to find them and invest in them and HNIs are doing exactly that. They know that banks are going to rollover the debt and returns are going to come to equity holders," a frustrated Srivastava says.

He feels value now lies in midcap sectors such as aviation. He also says Syngene has done exceedingly well.Below is the verbatim transcript of Ajay Srivastava’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: The market is not able to cross, the Nifty is not able to cross 7,950 mark. The earnings season gone by was nothing much to write home about. Would you still say that top-down the market can go all the way to 7,500 or do you think the domestic money power is going to keep things protected?  A: Index going to 7,500 is a likelihood which can happen anytime if you ask me. However, whether the general market would fall in tandem with the leading indexes, as you rightly alluded to, that perhaps may not happen. I think one of the reasons if you look back in this year, the Chinese, pardon the language, but it is actually the year of dogs. All the beaten down stocks, all the high leveraged stocks, everybody, they all had a party this year thanks to the Reserve Bank of India (RBIs) benign view on the non performing assets (NPAs) and the most obnoxious legislation called 5:25 which tells you that wherever there is a high debt in the system, you need to go find the companies, invest in them and HNIs are doing exactly that. They know the banks are going to rollover the debt, returns will come to equity holders. So, I think more than step beyond the index, everybody has the same favourite, some like Axis Bank, HDFC Bank – nothing has changed, the narrative has not changed from January till now. One day you like Lupin, the second day Lupin falls, the third day you like Torrent Pharmaceutical. So, we can go back and forth. The real story has been aviation; the real story has been the leveraged stocks of the year. Sonia: Let us get back to some of the safety stocks of the year. You would repeatedly say go back to the safety of pharmaceutical, go back to the safety of autos but pharmaceutical doesn’t seem like a very safe place anymore, what with Dr Reddys falling 20-25 percent in a month. What do you do with some of these bigger names? A: Pharmaceutical I still hold it, it has a very wide spectrum. If you look at the same year, Syngene has done remarkable; first time listing in the country and we have a holding in that; that is for the disclosure purposes, but that is a services company in the pharmaceutical space which has done exceedingly well  compared to the others. You are right the pharmaceutical call was little bit condition also on the fact that with the government over reached to the United States we would see less pressure of FDA than what has happened actually in the year. This year perhaps has been the worst year of FDA intervention in the history of pharmaceutical industry. However, at the start of the year, with the PMs initiative, you thought that it is going to change a lot. However, it changed on the other side. Pharmaceutical was purely a FDA intervention issue which is seeing it but even in the pharmaceutical space, there is enough stuff even today that you can see like we saw the services company, etc that you can safely invest. However, as I was going back to the theme I said, I think the theme of safety has not played out in this current year because what we were thinking was that the RBI will go big bang on NPAs, they were going to move out the promoters, liquidate assets, sell companies, all those things never came true. What really happened was, the same old dogs, the same old companies got the best benefit of the 5:25 rule or restructuring rules or construction in progress rules and therefore you see Reliance Infrastructure, you see GMR, you see Rattan Power, all these guys, they made the returns, not the marquee names. I think that is distinguishing feature perhaps of 2015.Latha: Any nuggets that you are noticing in the midcap space in terms of performance. A lot of auto ancillaries have done very well, a lot of home building material, home improvement stocks or at least some of them are doing well. Which is the best way to squirrel your money away?A: The best way the theme still runs is high leveraged companies including power companies, including infrastructure companies who are all going to get the benefit in the next one month. Buy those stocks, they have run up quite a bit but still I am saying is if you want a 50-75percent return that is the place to go. I don’t think you got a regular company who will get you 50-75 percent return but these stories are going to give you 50 percent return. I am not a holder but look at a GMR Infrastructure, if he gets a big largesse on debt moratorium, that company is viable and the share may even go from Rs 18 to maybe Rs 30-40. So, I still believe that with the new stance of RBI, I think you need to recalibrate your view on high leveraged companies and see the fact that they are not really going to suffer from the RBIs issues or bank issues of paying the loan down. They will get restructuring done for 5-10 years and therefore equity holders will get tremendous value out of it. Sonia: The share going from Rs 18 to Rs 40 is one possibility. The other possibility is the share going from Rs 18 to Rs 9 or Rs 5 as well. For people who can take that kind of a hit it is fine but for the average retail investor on the street who can’t, don’t you think it is too risky to take these bets? A: Tell me something, the same investor put money in the month of March in mutual fund has a 40 percent cut back on the price. So, the risk is inherent in equity. The point I am saying is that today we have a situation where if the share tries to travel from Rs 19 to Rs 8, lets us take an example, let us take this company’s example, it is not business fundamental which is changing too much. The aviation sector is growing.. The earlier hesitation of government would give user development fee (UDF) liberally has gone. Now, UDF is available to them very liberally. The overhang of commercial uses of property has gone; government is very liberal about it. So, with airlines going up and if airline stocks have to perform what they have performed today, these companies will have to perform automatically. If there is a pressure on the system, the banks will step in and say what is 5:25, now let us do another one called 50:250; being fictitious but the banks are willing to now take the haircut in place of equity holders. Latha: There are also other stocks that have gone up, if you look at the well traded stocks, Ashok Leyland is up 80 percent, Dish TV is up 57 percent, I mean year-on-year (Y-o-Y) terms, Aurobindo Pharmaceutical is up 45 percent, BPCL is up 45 percent. There are other stocks as well which rise, don’t they?     A: If you look at the universe of bigger names, compared to the number of performers that is a miniscule percentage. So, by law of averages if you are picking up 10 stocks to invest in, if you are in the marquee names, you could have maybe hit bull’s eye with maybe one or two. However, here if you had invested in 10, you could have bull’s eye of 80 percent. That is hindsight, hindsight always looks 20-20 and nice and so on. However, I am saying we must recognize the new stance of the RBI and the government policy and address our investment towards that. Let us be very clear, the investment parameters have to go with the government policy. Government policy is let us not disturb the promoters, let us support the power guys, let us support the infrastructure guys, let us give them more money, let us give them extended tenure. The ECB norm which just got liberalized yesterday which says remove the end use of fund, now those all are going in favour of these leveraged company and therefore you got to calibrate your stance. Marquee names, leave it aside, but they will always be there. However, chances of you hitting a bull’s eye in these companies percentage wise is much more than perhaps to pick up one pharmaceutical or one commercial vehicle like Ashok Leyland for instance.