There is a huge amount of surging liquidity in the system that is waiting to get into equities and to that extent even a visit to 7500 has not dented the spirit of the Indian market, says Ajay Srivastava, CEO of Dimensions Consulting. However, questions are being raised and quite rightly so that the fact that the markets are going up is not backed by fundamentals, he says.
"The quality of the rally is a little worrying as beaten down names such as Jaiprakash and Lanco Infra are the stars of this rally," he told CNBC-TV18. Also, he says global and domestic factors are such that if the Reserve Bank's rate cut or future cuts if there are any don't work, then the Nifty may once again test 7500 levels as there aren't any cues that will help sustain or push the market from current levels.
Global markets too recovered because the US Federal Reserve may now raise interest rates only next year. However, global liquidity remains the biggest issue at this point, he says.
He says a bigger issue is global liquidity and once the Fed moves beyond a 25 basis points rate hike, which mostly will not impact the Indian markets, what will be the liquidity scenario like.
Coming back to India and the upcoming Bihar elections and its impact on the market, Srivastava says if the BJP does not manage to win, there will be tremendous impact on the markets. "There are talks on whether the delivery mechanism of the new government is working," he says.
According to him Tata companies — barring TCS — and Vedanta companies are both good trading bets, but not investor friendly. He is bullish on Nalco and Transport Corp.
Below is the transcript of Ajay Srivastava’s interview with Latha Venkatesh and Sonia Shenoy.
Latha: This is quite a rally that the market has seen from that 7,500 scare we got last month. Do you think this rally has legs now or will the earnings season or some such cloud put a break to the rally?
A: Three things, one is very clear that there is a huge amount of surging liquidity in the system still which persists in India, which is waiting to get into equities. That is one thing clearly coming out that the appetite has not got shaken by the 7,500 touchdown. So, to that extent, there is a great positive that there are enough people willing to buy shares when the market goes down gives a lot of support to the market.
However, the bigger issue has been the global liquidity that people have now become more comfortable that the so-called international liquidity issue with the rate increase is going to postponed at least for three to six months or maybe three months, maybe December, so to that extent all the global markets have recovered to some extent, maybe India has recovered a little bit more than the others. That is true.
The third unfortunate is that does this rally have a fundamental leg, I would guess that is a verdict which is not there because fundamentally the results would be out very soon and you can take a call on that that fundamentally. I think there is an issue in the market, liquidity wise, we have a surging liquidity and the pointer to that is that if you look at the climb back from 7,500, who are the stars of this climb back. Companies like Jaiprakash Associates, 45 percent. Companies like GMR Infrastructure, Lanco Infratech, all these companies which are by and large fully bankrupt companies, were the star leaders in this run up to this thing. It tells you what the quality of this rally is going to be.
Not saying the rally is not for real, but that is the quality of the rally we are looking at.
Sonia: Do you think we could get back to those lows because it does not seem like the worst is over?
A: As I said, we do fight the trend, so we say yes, there is enough liquidity in this country at this point of time and that has been tested in the last one-and-half month which can take the place of a large scale foreign outflows, that is one good thing which has emerged in 2015. Having said that the precept of the market is that there is a big recovery, economic recovery happening and that is the one which is, if it becomes fallacious or becomes a mirage or becomes too extended, you could see 7,500 or below. And I say that with a reason that on one side we are already seeing the international agreements keeping India out of it. It is not that Trans-Pacific Partnership (TPP), India has been out of TPP, we were not even called to the table to discuss. So, for all the international bonhomie that we generate, we were not part of the biggest trade agreement which took place in the last decade or so, that is one.
Number two is domestic demand. The oil price benefit is already in the system. Now, oil prices are on the way up. If not on the way, at least it will. So, there is no major benefit coming from now onward which will be of such a large magnitude for India to re-do its economy. So, that tells you the story that if this rate cuts do not work, then we could be testing easily 7,500 or even below, because fundamentally, as I had said, there is serious demand issue in the system, consumer sentiment is down at this point of time, there is a lot of over capacity, so the revival symptoms which were there are just not there.
Latha: I have a lot of stock questions for you, but just on a point of detail, it is a little unfair, Trans-Pacific Partnership, it was Pacific related countries. I mean what were the countries? Chile, New Zealand, Australia.
A: Vietnam is there.
Latha: Vietnam is bordering the pacific. It borders the Pacific much more than we do. It is closer to the Pacific. All I am saying is it was Pacific related countries; countries which have a border with the Pacific Ocean. So, let us not be so harsh on us. I take your point, that we should not consider ourselves international masters.
A: Why I am harsh is we walked away from the European Union (EU) treaty for a company specific issue, we gave up negotiations. The world is signing up trade agreements. We walked away.
Latha: That is a separate point. We do not border the Pacific Ocean, so we have to take that interpretation as well. Coming back to stocks, would you play the solar theme? Suzlon Energy has a lot of positives going for it as a stock with good onus coming in, it got a rating upgrade yesterday, but is that a theme to play at all?
A: Solar as a theme, I do not know it is a good enough theme, because it depends on the government to give us subsidy for the solar. The solar rates are much higher than today’s normal rates of power available in the country today. And we have surplus power in the country. So, whoever plays the solar game depends solely on budgetary allocations to subsidise the power rates. There is no state electricity board which can buy solar power and pass on the rate because there is abundant availability of power on the thermal side today at much cheaper rates. So, I am not sure what is this solar game because who is going to pay for this power? People are not going to pay for power based upon the fact that it is double the price of thermal power. So, it looks nice on paper but fundamentally, economically it is a flawed concept in a country like India where we are trying to bring our costs down and there is surplus thermal power availability in the country._PAGEBREAK_
Sonia: For now the market is not really bordered about what the outcome of the Bihar election will be, but if indeed the BJP does fallback in this one and you get a lead by the grand alliance, then what is the sense you are getting? Will the market be heavily disappointed or the market will not take this as a referendum on the Modi government?
A: Of course it will. If we walk down the street, I talk all the industry, of course this is a big issue, and I think the comfort is that it will run through or scrape through or something will happen which will allow BJP to come in. If it does not and it loses and depends upon the majority, if another Delhi happen, let us say, god forsaken Delhi happens, is going to have a tremendous impact, because the question is coming up really again and again is that is the delivery model of the new government working and the first big test was Delhi, the second big test is Bihar. If the test shows that it is not working, there will be tremendous back on the government. So, it will definitely, I do not think anybody is comfortable with the fact that the stock market at least to that extent, that there will be a loss of the national ruling party in the centre but market will remain sanguine, I do not think so. It will impact the market, definitely if the elections go the other way around.
Sonia: What could the downside for this market be if some of these cues work adversely?
A: I think the biggest issue today is not even local but the global liquidity. The moment that tap looks to be under threat, the moment the Fed decides to raise the interest rates and we have to go through the repercussions, maybe 0.25 percent will not impact so much as we are all fearing it to be, maybe we adjusted it. I think the biggest fear in the market is what will be the global stance and the reason I say that is because even in the last turmoil, if you analyse the last 45 days of the performance, not a very large selling which took place, USD 3.5 billion from a USD 200-250 billion portfolio, which is not very large but when USD 10-20 billion starts to move out, that is the time to worry. So, to me the catalyst is going to be global liquidities coming in or staying put in India compared to any local factor. Local factor can impact for a weak 10-15 days and go back but if global liquidity impacts then that will be a much longer term impact.
Latha: Where will you hide?
A: Even in a country like India, there are very good companies and there are very bad companies and that is the way I say that there are investment plays and there is arbitrage plays. There are good quality companies who are doing well, who even in this scenario are holding their head above the water so to say. So you have already seen for instance corporate action like Transport Corporation of India Ltd (TCI), it is a logistics company, good quality company at the end of the day. There are lots of debt free companies which are doing well including some public sector undertaking (PSUs), you have Container Corporation of India (CONCOR), you have National Aluminium Company (NALCO) of the world and we have holdings in both of them, so that is what disclosure purpose is. They are doing reasonably well, in a good market share and a good stable platform.
There are some software companies, you saw the result of a midcap come out yesterday, done extremely well. So, there are nuggets which are everywhere and I keep saying it is ad nauseam that the best place to hide if you ever have a doubt in this country is to hide in pharmaceuticals because one thing which is given for a sure is that 1.3 billion people will fall ill over a period of time and will buy medicine in this country and these medicines cannot be imported, by and large 90 percent are domestically sold. So it is a fantastic industry to be in and you must be an investor in this company whether mutual fund, direct stocks whatever it is, your portfolio always must have 25 percent pharmaceuticals at any point of time.
Sonia: But what do you do with some of these beaten down names, the ones like Tata Motors etc that have now made some attempts to rebound?
A: That is what I said there are investment opportunities and there are arbitrage and trading opportunities. I had said Tata Motors was an ideal candidate last week for a beautiful trading buy and it gave fantastic returns for the simple reason that US had the highest growth rate in car sales ever in the history of United States of America in the month of September. Number two Volkswagen is out of the system globally not only in India, so two big things happening is good for any car company in the US at this point of time. So it is good for Tata Motors in my sense. Long term, they do not give great value because at the end of the day, which Tata company has given great value as a specific example and that is what I say about people like Jaiprakash and all these GMR’s etc, these are not share holder friendly companies, these are promoter friendly companies. They give you trading gains; they do not give you investment returns.
Latha: What about TCS (Tata Consultancy Services)? It has rewarded a lot of share holders.
A: TCS did reward but the last three years it has not given the cost of capital. If you look at the last three years returns, it is a good company no doubt about it, fantastic company, absolutely excellent. But that is what I said, that this is a company which is unique in Tata’s. The rest of the pack, if you look at Tata Global Beverage, you now look at Titan Company, struggling all the way. For a disclosure we are having stock position and debt stock as well these are companies that are struggling. Tata Global with Starbuck’s - where has it gone? - that is not consumer space, they know how to manage. So I think Tata as a group very good for TCS but rest of the pack, do not invest. Similarly for other companies I keep saying like Vedanta, good trading buy always, but that promoter has a history of taking his interest first. You do not want to be an investor in those companies; you want to be traders in those stocks.
Sonia: You cannot paint the same brush across all of the stocks; I mean Titan has been a great wealth creator.
A: You are right but look what happened to it eventually when the old Managing Director (MD) Xerxes Desai left, what has happened to the company after that. This is Rs 440-450 stock, it is struggling at Rs 340, touched Rs 300 if I am not wrong just now. It is struggling for traction, it is struggling for presence, it is struggling for competition. They changed the business model this month which will reduce their margins permanently. They have gone to a franchise model, which will reduce their margins permanently. They always had company owned stores. And look at the competition and look at the jeweller companies which have come into place, they are not in the online space. So one guy made a fantastic company but then what did they do with it in the last one-and-a-half years since he left the company is going downhill steadily.
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