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Last Updated : Mar 03, 2017 11:50 AM IST | Source: CNBC-TV18

Liquidity will drive mkt even as economy weak: Ajay Srivastava

Ajay Srivastava of Dimensions expects major consolidation in the non-banking financial companies (NBFC) space in the medium-term. Smaller NBFCs in the industry can gain on these potential M&A opportunities, he added.


Liquidity will continue to drive the market higher going ahead as the rally in the global markets continues, said Ajay Srivastava, CEO at Dimensions Corporate Finance Services. He said investors need not bother with market fundamentals as long as liquidity flows into the market.

However, sagging Indian economy is a concern, which may impact the rally, he said.

He expects major consolidation in the non-banking financial companies (NBFC) space in the medium-term. Smaller NBFCs in the industry can gain on these potential M&A opportunities, he added.

He is wary about the over-dependence on retail credit in the banking sector.

He is positive on the commercial vehicles space in the auto sector and likes Tata Global Beverages.

Below is the verbatim transcript of Ajay Srivastava's interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.

Latha: As we are at the fresh 52-week highs, what are your thoughts?

A: There are two things. One is -- we are in a middle of a phenomenon global rally. It is not India alone, it is the global markets, you saw Europe and US yesterday, so there is a general feel good factor in terms of the equity market by and large. So you are in a comfortable zone.

The second issue is the Indian market. I do not think we are seeing slacking away of liquidity. I think we don't need to track the fundamentals, track the liquidity. That maybe odd thing to say but that is what is driving the market.

So you have to cautious of fact that till the liquidity comes in, you are in the safe ground. If the liquidity starts to dry up or we see a lot of profit booking which was not evident as of now by and large, that could be a cost for worry.

Having said that, one of the key points you will look at is even when you are talking about mutual funds now, you look across mutual fund, look at the diversity of performance, some could be as much as 25-30 percent of the top gainers. So you need to pick and choose correctly.

Today the flavour of the day is going to be metals for some time now -- what the development is taking place globally, so you can safely buy into metals. This oil marketing companies (OMCs) will come back in the order again because the rupee is strengthening, they have got a little more leeway with the oil prices. So you need to keep looking at the pockets of the market and seeing where is the undervalued stock relatively speaking if there are at all and then try to push them.

Number two is you don’t need to reinvent anything at this point of time in the market. The proven winners are coming out better and the stories of commodities is playing out in full stretch. So two clear sectors. There is no need to be experimental with pharma or IT or anything, I think two-three sectors, the public sector undertaking (PSU), the commodities, the banking space have laid themselves out very clearly in that market. So you don't have to go out and experiment to get returns.

Anuj: Any thoughts on Jubilant Foodworks whether the risk reward is favourable here or any of the other consumption stocks?

A: People have started to compare and say where is the stock relative to the 52-week high and how much is the gap. So this is what happens in the later stages of the rally that you start to look for undervalued stocks, not relative to fundamental but relative to where they were at 52-week highs. So you will see the story playing out in a whole number of stocks now coming through -- compared to 52-week high, they have got 30-40 percent margin, let us go invest.

Nothing has changed on the ground for this company by and large and I don’t think their results would be anything spectacular compared to the last quarter. So you are buying on the hopes that the gap between 52-week high and these stocks would tend to breach looking at other stocks which are close to 52-week highs. So that is the story in some of these stocks. I don’t think the fundamentally driven revival of this whole thing is causing this rally in stocks like Jubilant Foods.

Latha: That is also an important caution if people have started arguing that simply because of the distance from 52-week high, a stock becomes buyable that is also reason to be cautious perhaps, what would you be wary of, what will you warn investors against or even traders?

A: One of the things we need to worry about very clearly is the slipping fixed capital formation of the economy because eventually it is a matter of time when the economy will hit a cliff. Last ten years of capex cycle is now coming to the end. So when you are looking at capital goods stocks, you have to be wary about them.

Two is, the whole baking sector now is dependent on the retail market. That is the only mantra there, people are taking a share from nationalised banks, building up retail portfolios. If underlying the economy if the unemployment situation continues and what we see in IT, employment prospects dimming and companies is reducing their manpower force, if some day you are going to catch up with the fact with US caught up many times twice in my history of financial investing history, they caught up on the retail side and then what do you do with the retail loan. So what you are seeing is the first or maybe the second stage of the build up of the frothy like the real estate prime mortgage, what you are seeing is on the retail loan side, there is a frenzy out there to lend retail in absence of any other.

So two clear things, fixed capital formation clip, the capital goods clip which is approaching the economy and number two is the total reliance on retail credit to run the entire financial system, I think are the two principles we need to be wary about.

Anuj: History has also taught us that the last leg of this cycle is where you make most money. If you are not the last in the musical chair game. So in that sense, is this a market where liquidity can make real mockery of valuations, we have already seen signs of that?

A: It always happens in the last when you see the rally coming to the thing that the left out people start to pump in more and more money into the market. Having said that, what has fundamentally changed at least in domestic market is that very singular lack of opportunity to invest. Real estate is little bit moving but I don’t think it has moved anywhere by and large. Even if you look at the gold now, the gold bond scheme which has come out with 2.2 percent interest will capture quite a bit of people who used to buy gold as well because the good hedge in the market. Nobody wants to put money in working capital, companies are not investing money, you cannot believe the number of people who run companies and industries who want to get or are already in the market then you are asking the question as to why not expanding capacities, they say this is easier to make money here then who wants to worry about setting up the factories.

So yes, liquidity will drive this market for some time but the flip side is that the economic activity -- I know you will ask me that yesterday's gross domestic product (GDP) number has been surprising and so on but let us not deal with that one right now but the fact is that the flip side here is that the real economy is not doing well, it is shrinking to my mind and therefore the proportion of financial assets to real economy assets growth at least is totally disproportionate. It needs to get some balance before we say we have a healthy market.

Having said that, let us savour the moment for today. We have done a good job in the last two years, also a good reminder to people that it has taken us two years to come back to where we were. So the treadmill has not been easy on us.

Latha: Would the auto stocks of two-wheelers and four-wheelers be in your list?

A: Maruti Suzuki as you said, there is no choice, there is only one stock in the market. Mahindra and Mahindra (M&M) I would put it in a diversified categories. So you have Maruti Suzuki and you live with Maruti. That is the only one stocks you have to take exposure to. The big chunk of money would perhaps be made if the revival happens. It will be in the commercial vehicles market. To that extent it is there.

Two-wheeler market is petering out. One is the competition is intense, we have already seen the numbers of Eicher Motors have been good but not so spectacular as it used to be. So we are already seeing a little bit of petering out two-wheeler market. So my gut would be that commercial vehicle market would be a better traction thanks to pollution norms coming in, thanks to at least some revival happening, replacement demand, government may come with the policy so I would place my money in those sectors rather than betting just purely on consumer sector or two-wheelers.

Latha: What about NBFCs, that has made a lot of money for people in 2016? As you point out retail is a crowded trade, so is that a place of caution or is it that they have seen cycles and therefore Bajaj Finances of the world are still worth a buy?

A: One thing is very clear that this sector is going to see consolidation. This sector is going to see lots of mergers and acquisitions (M&A) activity because it is not physically possible for all of these to reach a scale which is required like a Bajaj Finance or Bajaj FinServ.

Therefore in my view, your play is M&A play that which are the candidates which will be acquired in this deal because in next three years, you will see significant amount of M&A opportunity. So the play should be instead of just looking at organic growth and all and latching on to Bajaj Finance, the only play is look at candidates who are potential acquisition because they will pay the premium to be acquired for the assets, network and people and the loan book etc. So my gut says that NBFCs, which are of the middle and the smaller size would perhaps be a better bet in terms of return on capital than the large ones because these are the ones which will be acquired either by the large ones or by the banks. So it is a pure M&A play more than even organic on the medium size and small size NBFCs.

Anuj: We discussed that the year could belong to companies with broken balance sheets but still with decent businesses, we have seen that play out in Jaypee for example, GMR is also looking up, do you see more gains for some of these stocks or do you see this trade extending itself over the next three-six months?

A: There will be more gains. You missed the most spectacular one -- Jindal Steel and Power. It went all the way to Rs 60, now it is Rs 125-130. That is a strong fundamental company. So even within the space of the stressed companies, you had good pockets of it. GMR to an extent is so overleveraged that one doesn’t know the breakup value of this company will pay off its debt or no. So I cannot make it out but the fact is that the process, the way the whole thing is running, they will get substantial relief from the banking system. That is inevitable.

You have already seen SDR phenomenon, you have already seen that classification phenomenon, therefore the built up is that if your cash flows are remaining strong equal to your interest or thereabouts, these are very strong candidates for turnaround and getting relief from the banking system. So your banking and this story will continue for the next 12 months because there has to be a solution for the largecap companies and they will be the big gainers in the process because the Indian banking system cannot take a significant write-off, so they will get preference shares, they will get long-dated instruments, they will get ballooned up interest etc, so you will see disproportionate benefit to equity holders compared to debt holders. The game has changed, the debt holders have to part with significant benefits to the equity holders to keep their money intact. So this story is going to continue and there are a quite a bit of a candidates who are fairly strong on their asset side and cash flows. So it is not that all are junk.

Latha: Anything in terms of the consumer brands that you will buy, FMCG companies and other consumer companies also have had a very good time, you saw good moves even in Hindustan Unilever Ltd (HUL) in the last few days. Anything in that space that you like?

A: We just moved into holding about a month back, this is a disclosure -- Coffee Day because it is not only a consumer story, there is a real estate story, there is a transportation, logistical story there, so it is a pocket of a company which has bought both consumer as well as industrial. So those kind of companies will perhaps do well.

We could see things like -- for disclosure we have the holding -- like a resort companies to do well in this environment if the revival happens and you see demand coming up. So we have already seen some kind of rerating of Tata Global, which has been a dog for -- I don't even remember how poorly it has performed for so many years and I guess is that under the new chairmanship, that is one company which could see a revival. So yes, there are pockets, you have seen Godrej Consumer coming back in the pocket.

Having said that, if you look at over the last five years, the return on invested capital on consumer stocks has been very poor and I am not sure whether it will change in the next three years. So let us be cautious, they may increase and I think they will increase but the money that you make out of them on investment will be far in terms of percentage compared to leverage stocks, commodity stocks etc, they could give you a better bang for the buck.

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First Published on Mar 2, 2017 11:05 am
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