Mkt may fall once more, worry about capex: Dimensions

Even if the Fed rate hike happens this week, Indian market is not going to see a major shake up as the worst bout of volatility is behind us, says Ajay Srivastava, CEO at Dimensions Consulting. However, there is not much enthusiasm among retail investors who are supporting the market this time round, he says.He points out that the retail investors are far more circumspect and if this rally gets sold into, it will be very difficult to get them back. He strongly believes there is one more leg of downsizing due during which market will test fresh lows. Srivastava is worried by the lack of visibility in capex cycle. The distress is far more glaring in rural India. Below is the transcript of Ajay Srivastava’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: We have a big event coming up: the Fed event. Do you worry that this can mean a lot of volatility? How are you looking at the post-September 17 period at all? A: First thing is I think the volatility that we could have expected with the rate increase or even a stall on the rates possibly has already been through thanks to the Chinese. I think that period is over. By and large, the market is now willing to, if we can take the Chinese yuan depreciation, all the volatility, a quarter percent up and down in the fed rate can be easily absorbed in the system. And let us look at Indian market, by and large we have become in a market which is insular that the foreign investment has kind of tapered off, it is the domestic flows driving the market. And domestic flows are really driven by desperation for returns as the year ends because they are sitting on losses and we need to find some way to make our money which is reflected in the volatility. The single news in a stock takes it up 20 percent. Now, that shows you that the volume of liquidity is surging in domestic market. Time to find a way to make money. So, my view is that even if the rate increase goes through, nothing much is going to happen to Indian market, because the worst possibly is behind us. Latha: That is positive. Actually, all the fund managers we speak to are exuding hope or exuding enthusiasm for the first time in several years, they have noticed that their kitty is rising by about Rs 9,000 crore every month. So, retail money is there. What is the sense you are getting? You also have your finger on the pulse of retail money. Do you think that continues, that has seen the worst period of volatility and remained loyal to the markets, retained their recent loyalty at least? You think we can relax on that issue, that we are going to see domestic participation continue? A: No, what we are seeing now is in the first bout of the last recovery, what we saw was unbridled enthusiasm to go into the market. This time the retail investor is far more circumspect. It is looking at even debt option and saying listen, why am I moving in, should I keep it in debt and so on. And if this rally gets sold into for whatever reason and we believe that it will get sold into and we can go into that later, then the retail investor is not going to come back easily. So, this time, it is not exuberant, it is averaging the losses and more circumspect investment that okay, I think the bottom is reached, let us try one more time. If this attempt fails and block retail investors, I think we will have trouble in the first quarter because this liquidity is going to move to debt and not equity. So, a lot rides on the fact that this rally has to sustain itself for a couple of months and give some returns to customers. If it does not, if it fizzles out, then the problem starts. There is no enthusiasm. It like saying, “Chalo dal dete hai.” Sonia: That is about the rally. But, what about the bottom for this market? Do you think that we formed sort of a double bottom at that 7,600 level or do you think that there could be one more leg of a downside that this market has to brave? A: Whatever we are seeing from the market at this point of time on a pure consumer demand, we have one more leg of the downswing still left to go in this market. And I say that with great amount of discomfort that whatever we see in the papers, the growth rate, etc. is not translating to two fundamental factors: consumer buying and employment. Those two places, we are seeing major weaknesses. I have not travelled to the rural areas particularly to give you a comment on that, but I guess the distress is far more visible there than in the urban areas. But clearly, there is a very great sign of a great retail slowdown emerging in the market and in spite of the onset of festive season, there is no festive cheer. And that is the worrying part if that keeps going on, then we have trouble in our hands very soon. And that is why I say, the market lows maybe tested because what is happening on the ground, if it gets translated into the corporate results and gets translated on to the expectation in the market in the next quarter or two, three quarters, you could see a fair bottom coming lower than 7,500. Sonia: But, we have not seen that get translated yet into some of these retail dominated pockets like fast-moving consumer goods (FMCG), for example. Every time the market recovers, you see all of these FMCG stocks come back into action, whether it is Britannia, Godrej Consumers, Bata, what do you do with this pocket now? A: You are right absolutely and that is what I said; this market is driven by liquidity seeking returns. So, the moment there is a correction, the moment there is a slight uptick, they go back to the favourite stories. Nothing wrong in the favourite stories of the Marutis, the Godrejs, and the FMCG stocks, nothing wrong in the story. The problem is that the fundamental of these companies are not changing or are possibly going worse. So yes, liquidity can chase the stocks forever and ever, saying it was 30 percent down from the top. That is not changing the fundamental dynamic and that is when I say the interplay of fundamental and valuation starts to happen, maybe around November, when the results will be more apparent for this quarter, that is the time when you could possibly have a big market shake down saying expectations are still not working through. And the biggest one is going to be capital expenditure (Capex). I am telling you next three quarters, we will see such a slowdown in Capex companies, it is going to be incredibly, it will be brutal in fact. What has gone through one year is nothing. The new pipeline is zero. So, whatever we are seeing is old. Look at the coal companies auction happened. Do you know anything happening to any other auctions? Nothing, zilch, zero. You look at the Ultra Mega Power Plants (UMPP), anything happened? Zilch, zero. So, these are the orders which takes three years to come to get into a supply mode. So, if these orders are not coming, look at what is going to happen in 2016 and 2017. So, visibility of Capex oriented companies is going down by the day, literally.