Mkt needs liquidity triggers; stay away from ITC: Dimensions

Market, which has been sulking in last few days, needs liquidity triggers to move forward, says Ajay Srivastava, CEO of Dimensions Consulting. The market rally seen in last few months was largely due to global cues. Investors now need to figure pockets to invest in, he says. Bankruptcy Code that was passed by the Parliament on Thursday is a great positive for the banking sector, Srivastava says. However, to resolve the non-performing assets woes, not a code, but proper ecosystem is needed. Bankruptcy is ideally the last stage of cleansing process. Implementation and kick starting the process is the main issue, he adds. Srivastava advises looking at companies, which are reeling under stressed assets that can deliver some value and returns post restructuring, in a 4-5 years time. Demand pick-up, he says, will help the auto companies, which will have two-fold impact - volume growth and better utlisation of existing capacity. With more and more home loan companies cropping up, competition for HDFC Bank will intensify over the years. HDFC’s growth and margins will get impacted years to come, he says. Srivastava also recommends staying away from ITC as the company has not given great returns in last few years.Below is the verbatim transcript of Ajay Srivastava's interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.Sonia: I wanted to ask you about the bankruptcy code. You have been sceptical about these things in the past but at least now there is a ray of hope for lenders at least now there will be a good database in place for all the defaulters, how much of a long-term positive do you think this could have?A: One cannot be cynical about everything in life. It is a great positive to have a bankruptcy code.The issue is not the legislation, we have enough legislation, the issue is what is we doing with the institutions, are there enough justices there, are there enough dates been given, what happened to the banking system which goes and prosecutes this case? So it is not about putting another code in place, it is all about putting the right ecosystem, right intention.I will give you a little example, one of the big issues which has come up in this whole banking crisis has been loans to group company subsidiaries. We saw one big stock being hammered 20 percent down because large loans have been given to subsidiaries. Bankruptcy code is at the last stage of the process. The first stage is due diligence where the money is being used. So legislation is fine but the merit lines and the intention of the banking system, the lenders to enforce the basic discipline of a lender, that is one.Number two is will there be enough courts, infrastructure, processes enabled for a quick fire resolution, Debt Recovery Tribunal (DRT) was a good code, when we look back at legislation, it is still a very good legislation but what happens ultimately is implementation. So the bottomline is bankruptcy code is good, long-term it benefits. The question is how will we do it, how will we implement it. How will we start the processes much before the company reach bankruptcy.One very poor concept in bankruptcy code runs against every norms of start-up says that if you are a bankrupt, you cannot get new loans, you cannot become directors and so on so forth. The whole concept for start-up is, I build company, they may go bankrupt and I start to build again. That is how US got built. Trump would not have been there today if this bankruptcy code of India would have been in the US. So there are lots of negatives as well.You are putting a criminal stigma on to a promoter of a bankrupt company. That is where the code is wrong and needs to be corrected.Sonia: It looks like the situation is only getting tougher for a lot of these lenders and we are seeing it show up in their numbers as well, the likes of ICICI Bank etc, what do you do with some of these corporate lenders, do you stay away or do you look to find some opportunity in this adversity?A: There are two kind of companies. One is a company like ABG Shipyard, which is a basket case kind of company, second could be a company like Amtek Auto where for disclosure we have a stake.There the fundamentals are in order, the demand is in order, the factories are running well, it is overleveraged and can correct by sell off assets. So you have to distinguish between two kind of companies.So as an investor -- this is the most important thing -- you have to look at companies which can deliver value post restructuring, post sell of some assets and so on and they give very hefty returns over the three-five year period.So when you look at ABG Shipyard, you should look at what are the asset books? They have made an acquisition at much higher price which is all gone lost. They have an shipyard which has no value, it is valued at steel prices at the end of the day. That is more no value, they don’t have many contracts on books. So those are called defunct assets which you can buy as scrap.But there are companies under debt restructuring which can give you returns, provided you need to sift through very well and see will they survive this onslaught, has the promoter enough wherewithal? Are there any buyers for these assets? For instance Amtek, auto ancillaries are a big market around the world. If tomorrow company gets sold, somebody will buy it. So at market cap of Rs 300-500 crore, you are easy to double your money if you invest there. That is what our logic has been and that is what our disclosure is.However, if you buy an ABG Shipyard and arbitrage on that, there are no assets behind the company worthwhile to be in cash and certainly in a short order, you have to distinguish them and before you take positions.Reema: What about ITC? That is a stock which is in the portfolios of many long-term investors but there has always been an overhang about taxation now, about the pictorial warnings, what is the longer-term advice on ITC now?A: I have always been a believer that ITC stock should not be bought by anybody. It is a company which has huge shareholders money for all kind of personal hobbies of the senior management. It is the highest paid senior management which has invested 80 percent of cash flows and assets which have given no returns.So if you look back at the balance sheet of ITC and look at the segmentwise results, you will find 80 percent of incremental money invested in the last four years has given no returns at all to shareholders which is the consumer business, the paper packaging business, the agro-chemical business etc.So why should you want to put the money in the company? It has nothing to do with the tobacco. Tobacco is a good industry, it gives cash.Sonia: What are your thoughts on some of these stories in the auto space or auto ancillary space rather? You spoke about Amtek but do you see more growth in some of the other pockets purely because demand is improving?A: I think so, yes. Not only demand is improving, they don’t need to add capacities. So you will not see the balancesheet moving up, you will see utilisation moving up and you are not seeing new capacities coming up.So over the period, if the automobile sector grows, these people utilisation will grow which gives them better margins to play with and if the steel prices etc remain as benign as they are, you would see decent margins. So there is a good window for these companies on the two basis, the volume expansion and no capacity expansion required, which gives you all the increases and sales are going to come to the bottomline. So it is a good portfolio mix along with the autos to be in the ancillary segment because it is going to give you decent quality returns, may not be spectacular but decent steady returns coming from the segment.Reema: What are your thoughts on HDFC after 6-7 percent upmove that we have seen, the stock has derated in the last one year, do you believe the worst is over and it is time now to buy in HDFC Ltd?A: There are two schools of thoughts, one is on a pure home loan format, they are into a very comparative market down the line, nothing wrong in HDFC as a model but I think there are so many new players coming into the market that at last count, our analysis told us that they are about 20 companies now competing effectively in this housing segment market which is bound to impact the margins and the business growth. So on a standalone basis, the business growth is going to be tepid and HDFC is a very nice organisation, they are not cut-throat the way others are perhaps so they might lose out in the interim. So my worry is on the volume side, they might struggle with the volumes as more and more people jump into this housing loan game.On the other hand, if your play is a little longer-term then the merger might take place eventually HDFC Bank is a very nice play to be in but in terms of returns, my guess is it is going to underperform the market in the next couple of years, definitely by large margin.So, as an institutional investors, you can buy it but if you are a personal investor, smaller investor, I don’t think it is the right stock to buy because nothing tells me it is going to outperform even the index. So you might as well buy the index instead of buying HDFC as a stock.Sonia: What about the market as a whole? You have been a bit sceptical about this market but to be fair the market has proved all the naysayers wrong and seen a big rally since the Budget day, what is your expectation hereon?A: The market needs liquidity triggers, that is where the problem is coming up, there are no buying effectively in the market. We have seen foreign institutional investors (FII) numbers, domestic institutional investors (DII) numbers, retail investor participation, everything has become tepid at this point of time.End of the day we all know where this rally came from. This rally came from global funds being unleashed. We must understand that we are liquidity driven rally, needs liquidity consistently bouts of it. So last seven-ten days, it is very mediocre kind of purchasing happening in the market which is lending such a stuff. We don’t know whether to sell or buy. So if there is lack of liquidity over the next 15-20 days, you will see a deeper correction coming up. If a big buying comes in perhaps no, but you need to position yourself correctly for either the correction or the increase and you need to figure out which pockets you want to be in whichever way the market plays.