Moneycontrol
Last Updated : Aug 13, 2016 04:13 PM IST | Source: Moneycontrol.com

Make a focus list of stocks and buy them in panic: Quantum Sec

Fund flows, more than anything else, is driving the market higher says Sanjay Dutt, Director at Quantum Securities. As long as flows continue, the uptrend can sustain despite stretched valuations and weak fundamentals, he says.

Fund flows, more than anything else, is driving the market higher says Sanjay Dutt, Director at Quantum Securities. As long as flows continue, the uptrend can sustain despite stretched valuations and weak fundamentals, he says.

Speaking to CNBC-TV18, Dutt says global factors are the only risk to the rally, adding, he does not see "any risk really from within India as such from policy or otherwise or politics."   

He advises against overanalysing global situations also, though. "Markets will correct and have to correct," he says, adding that investors should focus on a handful of stocks and buy them when there is panic.

Jai Bala of Cashthechaos.com believes the market is losing steam and that a breather now will help. While there is room for further upside, a Nifty correction to somewhere around 8,500 or even slightly below 8,400 will be a welcome correction, he tells CNBC-TV18.  

Both Dutt and Bala also shared their views on sectoral and stock picks.  
 
Dutt believes despite the recent run-up, public sector banks are still at a relatively deep discount over non-banking finance companies (NBFCs) or private banks. "I think still there are a large number of (PSU) banks which look very attractive that can still give 50-60 percent return even from the current levels in the next year or so," he says.

Among frontliners, Bala is bullish on auto. 

Below is the transcript of Sanjay Dutt and Jai Bala's interview to CNBC-TV18's Sonia Shenoy and Anuj Singhal.

Sonia: Finally the bulls are a bit relieved because the uptrend has resumed itself. Do you expect to see more on the upside?

Dutt: I think given what one sees on the screen and the flows, I think more than anything else it is the flows that are clearly indicating that there is more upside and every dip is being bought into.

In pockets, in fact in large pockets, valuation maybe stretched and maybe on the upper end of the range and fundamentals may not be looking that good or may not have caught up but it is the flows that are driving us both domestic as well as overseas. So, as long as the flows remain, the trend will continue.

Anuj: My mind keeps going back to the discussion we had in February about PSU banks and how that sector had bottomed out and you and I were in agreement on that. Do you get a sense that after a 60 percent rally in the index itself, these stocks are good for more, the PSU banks?

Dutt: I really can’t game what is going to happen in the next fortnight or a month or two but if I have to really look at a crystal ball and hazard a guess because you can’t really game market prices ahead, I think there is a doubt about the fact that the PSU banks will outperform the markets in the next year or two. Worst is behind them, things are starting to look better for the economy so therefore obviously lending would pickup and lending would begin. I think interest rate cycle is not really a drag for the banks.

So, on balance, I think PSU banks are very well positioned even though they have gone up 60 percent. I think still there are a large number of banks which look very attractive that can still give 50-60 percent return even from the current levels in the next year or so. So, I think the rally in the PSU banks has probably just begun so there is more potential ahead, no doubt. On a relative basis, if you look at them versus the NBFCs and the private banks, they are at a deep discount.

Anuj: First let us talk about the index itself, it is of course liquidity driven, all markets have done well but on the index do you see new all time highs pretty soon?

Bala: That has been our view since February. We have been saying that the market is headed for record highs and we have a price projection of 9,660 on the Nifty; that has been the case and we are setting price objective and time objective. We expect the market to achieve those levels before May 2017. We had said in March that we have a 45-60 week time window and the market is going on within that time span; it is heading where it is meant to head.

However, the market is looking a bit stretched in the extreme short-term, this doesn’t mean that it doesn’t have room to go to the upside but what is ideal at this point of time, if the market were to give up a little bit of these gains and come somewhere close to 8,500 or slightly below that; that will be a welcome correction. Even 8,400, slightly below 8,400 will also be a welcome correction.

When the market keeps on going one way, it gets tired. We need little bit of respite, little bit of time to catch the breath. Once the market can do that, I think the market is in store for much higher levels and the sector rotations will start to happen. Currently as I have been projecting, the banks and FMCG and autos have been leading the way; that is a good sign and they are the leader, they are meant to lead so far. Soon once the market gives up little bit of these gains, the sector rotation will start coming in.

Sonia: What do you recommend both long term and short term investors buy into now?

Bala: Your viewers would have heard first on CNBC-TV18 about Phillips Carbon Black, Tata Metaliks when they were much lower. Tata Metaliks was Rs 90, it has come to Rs 500.

Phillips Carbon Black was Rs 90 and it has come up to Rs 210. Identifying such kind of picks at this point of time is going to be a bit more difficult and risk are going to be a bit more elevated. However still there is opportunity in this market but your risk management should be a bit more measured and you should be able to manage whatever we are talking about, in that sense risks are a bit elevated at this point of time.

From the frontline space we are still bullish on the auto space. We are still very bullish on Maruti and we are expecting it to head to somewhere close to Rs 5800 plus.

If you look at auto ancillaries, we spoke about Bharat Forge the last time, the stock has shot up from last time we spoke and it is starting to breakout. This has very good chance of being a doubler from current levels.

There is a new stock here, it is GM Breweries. The stock had a stellar run in 2015 and right now it has retraced two thirds of this move and poised to take off in its next leg.

If you are a conservative trader wait for the stock to take out the 50 day moving average or you can pyramid from the current levels and expect the stock to be a three bagger to four bagger from current levels. It is looking very attractive. Downside for this stock is something like 10-15 percent maximum but upside is something like 300-400 percent.

Sonia: Apart from banks you also had a lot of other spaces in focus, top of mind was the restructuring by Aditya Birla Group, AB Nuvo fell quite a bit but Grasim had the most interesting reaction, it fell first and then it rose later. What would your advise be to Grasim shareholders and also how are you positioned in the cements space now

Dutt: Grasim restructuring is a no-brainer in my opinion. It is clearly in favour of the Grasim shareholders. We may not like what we have seen, what the group has gone and done. However that is a management's prerogative. They know what strategy they are adopting for the business ahead.

If I was a Grasim shareholder I wouldn’t be really worried with this restructuring. Even the AB Nuvo shareholders would eventually make money and be rewarded. As far as the Grasim shareholders is concerned I don't see any reason for concern. Structures pan out, management do these decisions, there are different views that arise out of it as to why make a mess of it when you have distinct businesses, when you have 60 percent odd of the cement exposure here, why do you make a mess of what you did. However I think there are various reasons because the group ultimately has to leverage balance sheets, has to look at other businesses. To give you a simple example it may need money for Idea tomorrow because you have spectrum auctions coming. now you just can't suddenly have Idea packing up because standalone Idea may not be able to raise money.

I am not saying they did this because they probably want to raise money for Idea but you have no option as a group but to create a structure where you need to balance it in the medium to long term for all the businesses that you have with your group. Some shareholders do get the rough end of it but they have tried to balance that by giving them shares of the Financial Services company standalone. So, to cut the long story short I think Grasim shareholders don't need to worry about it.

The second part of your question, continue to be optimistic on the cement space, I think long way to go, every pullback, every dip, any kind of panic reaction the market goes through should be bought into.

Anuj: The other stock in focus has been Tata Motors, that has also been a remarkably strong stock, keeps making new 52-week highs. The Jaguar Land Rover sales have been remarkably strong as well, is that a stock that you will back at current levels as well given that valuations are not too demanding?

Dutt: An important issue we all need to understand and that kind of engulfs the market and that is the most important thing that we have to keep in mind when we are looking at the markets today and that is the fact that market is primarily driven by liquidity and is not driven by fundamentals as we see them coming out of the closet quarter on quarter. Therefore, if I am a fund manager who is sitting across in New York or London or Hong Kong and I need to take a emerging market exposure of which India is an obvious best bet, I have no option but to have a reasonably well diversified portfolio comprising of banks, auto, oil, FMCG etc. So, therefore if I have to make a call on auto, my obvious choice turns out to be a Maruti or Tata Motors. Tata Motors like you said Jaguar sales are doing well, it is looked at as an international company, international brand, they have done reasonably well in handling this whole Jaguar thing over the last few years and therefore buying comes in. I cannot justify it fundamentally at this point of time, they looked very stretched but the underlying reason today for most of the market action is liquidity and not necessarily fundamentals because fundamentals are very iffy if you look at the results but it is liquidity that is driving the markets. As long as the flows carry on I think everything is in good shape.

Anuj: The other issue or the other topic that I wanted to discuss with you was NBFCs. You spoke about it in passing when we had the PSU bank debate or the PSU bank issue talk, but among NBFCs is there any one or two names that you would want to buy at current levels?

Dutt: Yes, the only one that looks very attractive to me has had some baggage issue, but those are getting out of the way and is grossly undervalued integrated play is Reliance Capital. If you compare it with all other NBFCs that kind of trading at extreme discount, I think is getting right for a big move. Of course, we always know historically that it has been a very high beta stock. It does unpredictable things, so therefore you need to fasten your seatbelts and do get your EKG check, but I think that getting set for a big move.

Even otherwise, there are a few mid tier and small tier NBFCs, but if I were to bet on something I think the best way today would be Reliance Capital amongst the entire pack. It has got mutual fund within there, it got insurance arm within there and it’s got the perfect ingredients for Indian Financial Services play.

Sonia: From non-index space where does your interest lie?

Dutt: I am glad you ask me because I actually want to qualify my earlier statement about iffy and spotty numbers and fundamentals. There are a good number of companies which are showing early signs of fundamental and numbers turning around, growth picking up top line as well as the bottom line. In quite a few company we have seen earnings before interest, tax, depreciation and amortization (EBITDA) margins also improve, so some of them that you mention just now fall into that category.

Escorts is one company is starting to see a lot of improvement in numbers right now. Maybe, it stretched for the short term or the immediate near term, but if you were to have a little longer perspective on it, if it corrects about 5-10 percent from here or maybe more even it would be a good level to buy into it and similarly there are lot of other names second tier companies, non-index companies, which are showing good numbers, which are showing confidence ahead, we have had reasonably good monsoon, cost of capital for companies is coming down.

Even though we may not see it in the prime lending rates etc of banks, but what I understand from when I speak to corporate, that they are able to borrow at reasonable rates today. If they are good quality corporate and have potential in their businesses, so lot of companies across sectors is not just necessarily where one could say its auto or its pharma or its some metals or otherwise, it really bottom up specific companies who are actually seeing improvement in margins as well as top line and that’s where I think the movement is there in the second tier companies and there is a good amount of research to do when buy into them.

Sonia: I wanted to ask you about some of the private sector banks because while we have been gushing over SBI and the move there, we have seen private sector banks like Axis and Yes Bank give great returns. In fact, in the week gone by they hit new highs, what are the key stocks that you like in that space?

Bala: We have been positive on Axis since November of last year and we have been expecting it to cross Rs 750 over the medium to long term and it is doing exactly that and we are quite happy the way price action at this point of time.

We have been also positive on Karur Vysya Bank, so we like these two names in the private banking space and I still think that they still have much more upside to come through, but in the short you can see back and forth choppy price action. Once that is done you can deploy additional capital. Until that you should need to be a little more patient if you are going to allocate fresh capital in these counters, but there is still upside yet to come through. The structure is still incomplete therefore the higher upsides to come through for these stocks and much more bigger targets are there for these two names.

Anuj: What’s the key risk to this market, so far of course we have seen liquidity driven rally and all markets have participated. Is that itself a risk or is there any other risk for markets?

Dutt: I think the risk to this market is primarily coming from outside India, global factors. If we see some kind of crisis hitting the global markets for whatever reason, whether they are geopolitical reasons or financial markets otherwise react to some currency adjustment or so some country issues.

Those are the only risk that we have to deal with and those also like we saw what happen at Brexit, those also would immediately be discounted and the market will move ahead, because we must be very clear if you see price action, if you see the set up right now, we are definitely in a bull market and it is a bull market which last for a reasonably long period of time.

You just need to be sure of what your holding right now, so therefore any if panic reaction, any pullbacks you get you should have your list ready and you are to going to buy. Don’t get to overanalysing the situation about Japanese Yen or about Brexit or about anything else, just patiently come in and buy the stocks which you identified.

Markets will correct, markets have to correct, panic does set in after all its human behaviour and financial markets, but that should not take you away from an investment strategy and just be focussed in the end. Domestic, I don’t see any risk really from within India as such from policy or otherwise or politics, not really I don’t see anything really. Whatever I see is for the positive from within India.
First Published on Aug 13, 2016 12:36 pm
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