Midcaps to stay attractive; positive on cyclicals: Expert

Below is the transcript of Ratnesh Kumar’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Crucial days for the market, what is the sense you are getting? How much lower can we plum?A: You have to look at this phase of the market as one of the phases of a bull market which we are still in whatever it might feel like. In the first phase you have a lot of hope and expectation which drives the market which is what we have seen over the last 8-10 months. Then you get into a phase where that rise, that hope and expectation, the market begins to look for actual numbers to support whether economic numbers or earnings numbers. Currently we are in that phase and that verification is not happening. So, as a result of that you have consolidation, you have corrections at times. Till such time as that verification doesn’t happen and in the mean time you also have other emerging markets actually performing. So those markets which are not performed earlier are attracting funds and so that is the reason that you are in this phase. However, eventually we will get out of this phase in a quarter or two when that verification stamp is there and then we move to the next phase of the market.

Sonia: What is the sense you are getting, have the markets bottomed out now or could it get worse from here?A: Bottoming out meaning you can always play around with 5-10 percent here and there. There are additional factors, fund flow factors, global factors, interest rates and you have the additional factor of the minimum alternate tax (MAT) issue for the foreign institutional investors (FIIs). So you can say the downside is not more than 5-10 percent is probably how I would look at it. However, I would also look at this phase as an interim phase whereby eventually we will get to a situation in a couple of quarters where there will be numbers support and then at that point the stocks will begin to be too expensive. So, this is actually the phase to be constructive in the market, still believing the India growth story, moving forward and taking it as an opportunity.

Latha: Are you seeing any green shoots? Couple of quarters, we have heard that before, it is not happening, the earnings are not coming. So, is it that we should be able to hear in the October-December quarter, some kind of improvement? Where would you place the inflexion point for earnings?A: In reality it is hard to place, it always is. If I would have known then I would have been a much richer man. However, at the same time what you are seeing is that indeed the rates will fall further in India. By what time, we will have to see. The green shoots, the way I look at it is that you have the problems which were there, have stopped to get worse. What the market is unable to find today are the up trend signs or the data points and that will come in the next couple of quarters whether it is October-December quarter or somewhat before that. It depends on a lot of other variables. Eventually the investment cycle, the credit cycle all of those things have to turnaround for the market to get the confidence that actually the growth on the basis of which we have had the market run has arrived. However, it will come, it will eventually come and at that point of the time then the market will be talking a different tune. So, from the investors point of view this is the right time to actually be constructive and be cognizant that till this phase of the market is there, there would be range bound markets, corrections, etc and not to be unduly worried about that.Sonia: What would you be constructive on now? A: In the past couple of quarters you have had a phase where due to lack of growth, data points and lot of different segments of the market, the performance and money flow have focused on areas where those things were visible be it pharmaceuticals or consumers or different areas where that performance was visible; even IT services sector. I think if I was a 12-month plus type of an outlook investor then I would look at more deep cyclical, more economy cyclical sectors like banks or even infrastructure and those areas because they will take time to turnaround but that is where the value is. On a one year basis I think those segments could actually deliver good returns.

Latha: When you say infrastructure or deep cyclicals can you be a little more specific, I mean would it be capital goods, would it be metal stocks, which specific infrastructure stocks would you point because many of them have beleaguered balance sheets in the infrastructure space? A: To elaborate on deep cyclicals, not commodity cyclicals so that leaves metals out. What I meant were areas like capital goods, construction, industrial, banks, cement. These are the sectors where I would focus on and certain sectors which continue to deliver decent growth and you get value opportunities be it in software or other such areas. I think they will continue to remain at the core of the portfolio. However, you may not find deep value there whereas in the economy cyclical space, is where you can potentially find deep value situations and with a bit of patience there is returns to be had out there. Sonia: What do you do with the midcaps now because it seems like there is a lot of profit taking that we are seeing especially from the larger midcap names and people are struggling to find value in that space. How would you approach the midcap index now? A: Midcaps I would not categorise them as one whole category like a sector. Typically they tend to be individual stories. However, as a segment what also happens is that clearly when the market sentiment is better, they are a leveraged play so to speak on the market sentiment. So, right now when the market sentiment is somewhat iffy, you are seeing some correction, some profit taking but that will remain an attractive space in a recovering economy, in a recovering market on a 6-12 month basis. I think midcap as a space would remain relevant and it would eventually come down to stock specific stories and stock picking there and I wouldn’t just run away from there just because you have had some correction.

Latha: Symphony is down 10 percent, Hitachi is down 6 percent, Voltas – at least a part of it is consumer durable, is down 5 percent, Whirlpool is down 2 percent; consumer durables? 

A: Consumer durables I would not categorise them as the economy cyclicals. I am not sure what is happening in that space, the stocks that you mentioned. Midcaps have had a good run. If you have had market x percent return, generally midcaps have had 1.5-2x percent returns. So, there would profit taking and the profit taking in the mdicaps would be more violent in terms of extent of correction; that is natural. I would just stay very constructive on the midcaps, I would stay with individual stock specific stories and where the belief is there that that is a good story these corrections would be excellent buying opportunity.Sonia: I wanted to discuss one space with you that has gotten hit very hard this year which is the two wheeler space. So, Hero MotoCorp is down 25 percent this year, Bajaj Auto is down 20 percent – do you expect more downside or is this a good time to be buying these stocks? A: Two wheelers I would at this point stay away or underweight or whatever the reference point might be simply because I think you have had a consumption slowdown and probably there is more to come from the rural side. Two wheeler space specifically has the demand which is spread all across the country and any such large trend of rural income slowdown or consumption slowdown, generally you have seen these businesses take sometime to come back. Latha: What is the correct or good valuation for companies like Hero Honda, Bajaj and TVS Motors? A: Good valuation I would say is not a company specific concept. It is generally for every stock where you take into account growth – how much is the growth, how much is the return on equity, what is the cost of equity and correlate with all of that. Whether that comes to 12 times or 15 times it depends on each company to company. I wouldn’t say that there is a right valuation. Latha: I was just wondering if in the two wheelers now there is a valuation compulsion to buy? A: Valuation compulsion, sometimes you can have overshoot of the valuation and undershoot of the valuation. So, one has to look at the trigger points and the trigger point for these companies is when the demand begins to bottom out or turnaround. I think at that point will be the right time to start looking for value opportunities.