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Last Updated : Dec 21, 2015 02:52 PM IST | Source: CNBC-TV18

Midcaps to shine; auto and pharma key themes: Dimensions

Ajay Srivastava of Dimensions Capital says the pharma sector will give good returns from a 3-5 year perspective.

While the current weakness in Information technology (IT) and pharmaceuticals is a big drag on the market, Ajay Srivastava of Dimensions Capital says one must add to their pharma portfolios no matter what happens.

He believes the sector will give good returns from a 3-5 year perspective. On Sun Pharma, that is currently in the news due to the USFDA warning on its Halol facility, Srivastava has a target of Rs 550-600 per share.

Furthermore, he says the market is in the right place as there is complacency that 7500 will hold. However, he says the upcoming year will see midcap stocks outperforming indices yet again.

Below is the transcript of Ajay Srivastava’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.

Sonia: The last two weeks of the year are left, so it is time to be jolly but cannot be so sanguine about the markets as well given the kind of turbulence. What is the kind of sense you are getting?

A: I would borrow the term, which the previous person was saying, ‘here and there’. So, we are all here and there at this point of time in the market. We do not know whether we are here or there. But, broadly speaking, we are in the right place that there is a sense of complacency that 7,500 index is there. We need to buy into 7,500 and hopefully go for a gain.

However, as January 15 comes, we should be more circumspect about the results when they start to come out because suddenly we are not feeling good about what we are seeing. We are seeing two of our biggest sectors, IT and pharmaceuticals under a threat of a kind which we did not visualise last year. Suddenly, we are seeing the infrastructure story not panning out and if you read an article in Indian express today on the power sector, it does not give you great comfort altogether.

So yes, there are trading bounces and today is one such day when you see it, because the foreign institutional investor (FII) selling has stopped, so there is comfort in buying today. However, these are the rallies -- possibly if things do not change dramatically but the results when they come out or something happens to the world economy or Indian economy -- would be sold down at least in the FII driven stocks. I am not quite sure as to how the rest of the market, the midcaps will perform, because there is a lot of faith in the system there. People are holding on, still buying and averaging whatever the high prices they have bought into.

So, there is a lot of faith and hope on the midcap story and the prices also look to be a lot of more stable, but I think the Sensex stocks will be a lot more volatile, because they have a lot more linkage to the global market, sentiments, futures and options, etc. So, that is a sector which is more at risk than perhaps 60 percent of the 'midcap market' which is a lot more stable today given the widely distributed ownership.

Latha: Where will you look for shelter or even appreciation for that matter in 2016?

A: You are right. You raise a very valid point that 2015 has become a place where if you can get away with not significant losses, you have done a good job with your portfolios.

2016 -- one segment stands out very clearly to me is the heavy commercial vehicles (HCV) and the light commercial vehicles (LCV) segment. That segment is going to get a lot of traction because if the law, what has changed in National Capital Region (NCR), changes everywhere in this country, the replacement demand is going to be huge. Ancillaries, which are doing the production of petrol engines, etc they are going to do very well.

So, I think the auto replacement market by and large, is going to be the big driver for 2016 and you can find significant comfort there. I am not sure two-wheeler qualifies for that but in the cars and LCV and HCV category, I think there is safe haven sitting there.

Sonia: So, for stocks like Ashok Leyland, Eicher Motors, etc despite the run-up we have seen this year, you would still be bullish in 2016?

A: I am not saying that we will get spectacular returns but Latha said that is there a safe haven? I think these are the safe havens. You may not see a big jump but at least you will not see a big cut of 30 percent odd in the share prices at the end of the year, So, to that extent, even if we eke out 15-20 percent return on a safe basis, I think you have done a good job in 2016 which looks to be challenging. At the start of it, I hope it is not as 2015 is.

Latha: We got fresh reverse or adverse news on Sun Pharma. Is this now a set of companies that you buy into this distress?

A: Unfortunately, I was born buying pharmaceuticals and I think I am going to die buying one. So, to that extent, I am always saying that – what surprised me is that the out-reach programme that we had with the US, I thought would give us exactly the reverse benefits. It has kind of hit back in a way which surprised us totally. So, we were a lot more bullish because this whole thing was supposed to resolve Food and Drug Administration (FDA) driven problems or at least bring them at par, but they have got them to a boil and not only pharmaceutical, IT -- look at the attack on IT -- H1B, etc coming in.

So yes, there is a challenge out there but I am still a firm believer that if you are building a 3-5 year portfolio, pharmaceutical stocks is a great place to be in and if these are opportunities, so be it, you buy into them. Maybe, Sun Pharma could go to as low as Rs 600 or Rs 550, which was the old base of Sun Pharma. I am quite sure it will go to somewhere around that level. So, if you are already a buyer, perhaps you average out. If you are not a buyer, I think you need to add to pharmaceutical no matter what happens.

Not only pharmaceutical, all the healthcare stories including Contract Research And Manufacturing Services (CRAMS) companies like Syngene, which we are owners in the stockholding etc and pharmaceutical of course, the disclosure, we have stockholdings in most stocks, but this healthcare story, you need to buy into rather than sell into a problems. That is the underlying theme and over a three year perspective, you should be well-off in this.

Sonia: So, is that the same concept that you would apply to the private sector banks as well? Names like ICICI Bank that have lost 30 percent or would you stay away?

A: I do not want to name a bank, but particularly, the bank you named has a management issue. So, till you do not resolve management issues, the same people are going to run this bank then you do not want to buy into this stock. Banks is all about faith. I am an ex-banker - it is all about faith in the institution. I do not trust those balance sheets, I do not trust these banks whether it is Axis or ICICI, their balance sheet and their management. If there is a change, I am a buyer because the franchise is very good, but if the same management team continues, there is scarce case to buy. That is number one.

Number two is - look at the next two year horizon. 14 new banks coming into the play. Payment banks already happening in the market. Mobile wallet is already picking up. I think the environment is going to be much more challenging for them and if the governor delivers and Latha had a very good interview with the governor and I want to pass it on to him to say let the balance sheet show what the true situation is. How bad it is, let it show.

If they come clean on their balance sheet, there is a case to buy. Today, when can the next surprise come? You saw the Axis Bank surprise which came out of blue, absolutely. Blue chip accounts suddenly becoming non-performing assets (NPA). So, it is not about value, it has come to Rs 250 so, you buy ICICI, it is about will they change the way they report results. Will they have a change of management, will they have a change of strategy? If yes, these are fantastic buys. If no, then they will continue to dwindle downwards or at least face the pressure over time. They may have a few bounce ups and downs, but overall trajectory will be down for these stocks.

Latha: You were speaking about the US themes. How would you look at IT now?

A: IT is no-way, no-go, absolutely, no way are we going to touch IT. It is going to be far more challenging as time goes by and these companies are not really responding. You saw Infosys change of management, a lot of things are changing, but nothing has really changed on the ground level in terms of numbers. Maybe we were expecting miracles, perhaps it is too short a time period to evaluate the new management team. But I do not think there is a fundamental shift in the strategy which gives us comfort that returns is going to multiply. And the H-1B pressure, the next stage go on to the next level of pressure etc.

So, we are not very clear where these companies are going, so one would tend to avoid IT. As I said, if you want to buy US theme, I would still say pharmaceutical is a better theme than the IT stocks at all, at this stage.

Sonia: So, if you want to give us one ultimate Christmas gift to our viewers, what would that stock or sector be? You mentioned commercial vehicles, but that is the broader range. One stock that you would want to look at.

A: I am sorry, I wish I could do that but my legal guy is going to pin me down on the board whenever I reach the office.

Sonia: Then you can give us a sector, a broad theme.

A: Where we are positioning, our stocks at this point of time is that we are going very heavily into two kind of stocks and we are buying into them which are stocks like, which have zero leverage and one which I can disclose the stock, things like Venkys, things like Syngene, things which are very strong and they are in their range. Do not buy it because I am saying so but these are my holdings which I want to trust into.

However, if you really want to look at the Christmas buys, you really need to go to things like Amtek, etc which a restructuring is coming into place and these stocks will I think come back and gain value.


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First Published on Dec 21, 2015 10:41 am
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