Looking to short PSU banks at every rise, bearish on large cap pharma: Sushil Kedia

Time for financials is done, time for PSU is done. Defence and all of these railway thematic stocks have made a long-term top.

Banks in general, and PSU banks in particular, will be punished by the market, said Sushil Kedia, founder, Kedianomics Research. Some of the older bets that were a no-brainer are now going to be a no-brainer on the short side, he said in an interaction with Moneycontrol.

He is bullish on FMCG and IT, and does not think valuations will come in the way of FMCGs outperforming in the short term.

Edited excerpts from the interview:

Q: Do you see Tuesday’s sell-off as a one-off or will the weakness persist?

Irrespective of the election outcome, there is too much froth in the banks, particularly the PSU Banks. After a 15 percent badgering on the PSU Bank index, any rebound will be a sell opportunity.

The bank index looks like it has placed a long-term top, but on Nifty, the trading range between 21,000 to 23,000 can keep oscillating for a while. We took safer bets into this election by getting into FMCGs and small ITs, and those have held the day well.

Q: Why FMCG and IT?

These are the safety sectors where earnings visibility will be easy. Funds cannot hold too much cash, so whatever rebalancing happens, these sectors will gain, and the market will move towards them. Time for financials, PSUs is done. Defence and all of these railway thematic stocks have made a long-term top.

Q: After these sharp sell-offs, usually, how does the market respond if you look out about a month?

In general, a very large single-day fall cleans out all the short-term weak-leveraged bulls. In 2004, when the NDA did not return to power, market sold off. But even after another coalition government came in, those (low) prices never came back.

Once we are done with the business of choosing governments, markets return to the core elements, which are the merit of the India story, corporate performance, and sectoral shifts.

Q: What is your strategy going to be?

There will be new sectors and new bets on the long side. Some of the older bets that were a no-brainer are now going to be a no-brainer on the short side. The charts of the banks, particularly the PSU banks, are one place where I'm going to have a thematic round of constantly shorting them on every rebound.

Even a telecom stock like Bharti, which was floating in the sky for no reason, I think will give me a 30% downside. So, any rebound in that I'll book profit.

Q: Last week, after the exit polls, you were quite bullish, but you were saying that sector rotation will be at play?

It was a no-brainer. If this government had got a strong mandate, everything would have gone up. So, even IT and FMCG would have gone up. And now with this fragile mandate, the place to hide is IT and FMCG.

With or without a strong government coming in, the charts were already telling that all the glamorous stocks were already done. And now that the glamorous stocks have had the floor taken out from under them, they are falling sharper than we had anticipated.

Q: You are saying stocks like HAL, PFC, REC, Bharat Dynamics, and Mazagon Dock have already peaked out?

PSUs, railway, and defence stocks had become fashionable to the point that even paanwalas had bought them. There is nobody left to buy them. Everybody who has bought them, even if a strong government had come, they would have fallen, maybe slowly.

Q: Where else are you spotting opportunities other than what you have already mentioned?

The pharma pack, the challenge is we don't see any signs that one needs to exit the mid-cap and the smaller pharma names. We like midcap pharma from a six-moth horizon. But large caps like Dr. Reddy's, Sun Pharma, Divi's Lab continue to remain very toppish. If they rally, we will short them more.

If a DLF starts going back and closing closer to the day's open today or maybe tomorrow, we will maybe look at it. Also, some other names in real estate and cement. So let this dust settle down. We are clear on one thing: banks will get punished, and fast.

Q: What about concerns that FMCG valuations are already expensive?

As far as the valuation story goes, once the momentum comes in, the valuation concerns will get abandoned. As RK Damani once said, “Peddar Road ka maal Peddar Road ke bhav lena padega aur Dharavi ka maal Dharavi ke bhaav lena padega. Dono ke valuation kabhi same nahi honge. What is rich will remain rich."

So, there are going to be good reasons now for even higher PE ratios to thrive in the market where safety is being sought. Titan is something we are looking to add to our long bets.

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