Mkt pullback seen; buy IT, Bank Nifty: HDFC Securities

Below is the edited transcript of Dipen Sheth & Anu Jain’s interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.

Sonia: Difficult week for the market but perhaps this is the best buying opportunity for retail investors what advise are you giving your clients?

Sheth: The stall that is seen is one in a series of many more stalls to come but the big trend is obviously upwards. We are clearly in an Inidan economic structural change not just from a macro economic perspective but from a much broader perspective which is triggered by the arrival of the not so new government now. If you expect fireworks every quarterly earnings season then you are kind of stretching your imagination a bit too much.

Countries take time to reform and steer around. This was clearly a country which was in some kind of Sclerosis or the pessimists would call it cancer. So the chemotherapy is not going to be very enjoyable for a while. I don’t know whether this is chemotherapy or not but we will see a slow and steady upward grin which will be accentuated or punctuated by occasional hiccups. So if there is a hiccup it is going to be your chance to buy, yes you should buy.

Anuj: The old adage is sell in May and go away. This time around could it be other way buy in May and go away, are we there?

Sheth: People have been ahead of the curve and they have been selling in April not just in May. So in May they may sell but I don’t think they should. What is happening right now, there is a little bit of question mark around whether the good days or Achhe din are going to come as fast as they will.

As yet there is no evidence that they won’t, but the kind of incremental milestone kind of evidence that we were looking for is a little elusive so people who’s faith was little weaker seems to feel that their faith is shaken, so they have been selling. I am okay with that. It gives the long-term believers an opportunity to re-enter if they spent too much time in analyzing and missed out on the chance to buy.

I don’t think we should look, read too much into corporate earnings and look at how much percentage year-on-year (YoY) topline or bottomline has changed. So long as the thesis on a company doesn’t change, or a business doesn’t change, I don’t think you should get too bucked at what is happening.

Anuj: What is your sense; the Nifty spent the last 2 or 3 days trading below that 200 day moving average? Is that an important barometer or would you say that just another mark and the market would go back and trade above that. How do you sense Nifty’s move over the next say 2 or 3 weeks?

Jain: Given the fact that if you were staying below this 8,250-8,260 levels, you are actually opening the doors for about 7,960, close to 8,000 levels, just sub 8,000 levels. However, I am in no way saying that is coming like the way we have been seeing 50 down, 100 down on a daily basis. Markets are extremely oversold.

You can probably first have a pullback closer to 8,320-8,380 anywhere in that zone where market will reconsider whether it needs to stay over this 200 day moving average. So yes, it is classically a negative sign but being oversold you are overdue for a rally back to about 8,350.

Sonia: A lot of blue chip names sold off last week. ITC was down 7 percent, ONGC was down 4 percent and HDFC was down 5 percent. For a slightly medium-term trader or investor would you recommend buying into any of these names?

Jain: Do not buy ONGC and ITC because the chart patterns are pretty much eroded to an extent that ITC can test closer to even Rs 300 -95- if this trend were to extend. If market possibly goes back to below 8,000, then these two stocks- ONGC, ITC- will not withstand the pressure. HDFC can be a buy on lower level but there are much better stocks which would probably give you the opportunity, stocks which are corrected.

In the banking sector itself you will get probably opportunities better than HDFC. So probably a Kotak Mahindra Bank, if it was to correct to say about Rs 1,316 where it is kind of corrected earlier before. Also there has been some news factor for which it has been doing so. So, probably that looks good at those prices.

May be even ICICI is a buy if it corrects back to about Rs 310-311.

Within the whole sector banking is now looking to be slightly more resilient where as the others have broken the 200 days moving average. Despite a poor ICICI result and good Axis Bank result the indices is now closer to its 20 day moving average. So if I were to really look at levels than probably 100 point up where the 20 day moving average for the Bank nifty is there is some resistance.

If it gives a pullback that could probably be the strongest sector right now.

We have seen Axis move up consistently over the last two days, post the result, that could continue for other stocks as well. So, I would be a little more hopeful on the Bank Nifty at this stage technically.

Anuj: Let us talk about some stocks, I was going through your midcap portfolio and I want to discuss midcap IT because you have one of them in your portfolio, KPIT Technologies which had a crunching fall over the last two days. I know it is a brutal reminder to what can happen to some of these midcaps but are you keeping the faith in midcap IT story and some of these names like KPIT?

Sheth: Certainly KPIT’s numbers would seem to indicate that something has broken down. The question is to identify what has broken down and how seriously.

So the other stock for example that we have from midcap IT is in a completely different class of its own, which is e-Clerx, which has a very different business model from the normal midcap IT companies and a very high margin business, a very unique and niche positioning.

However, so far as KPIT is concerned, they have roughly two different parts of the business in terms of flavour. One is more of the business applications and traditional IT services, which houses three different divisions of the company, there is an SAP practice, there is an enterprise practice and there is an oracle practice. The other part of their business, which is about one-third of revenues or slightly less than that, is the tech services or the product engineering services that they provide to the auto industry.

This part of the business surprise is very resilient. In fact, the largest customer there which is Cummins, revenues from Cummins are flat but the rest of the business has grown some 30-40 percent over the year.

So that part of the business has absolutely no complaint. It is the bread and butter IT services business, which is what the worry is for even the larger IT companies which is causing the problem.

There is a very strong de-growth in one particular account in the last quarter which was accompanied by a ramp up of costs and investments in people so on and so forth, operating deleverage played out. I think at the current price, it is just about Rs 2,000 crore marektcap or thereabouts at Rs 105 or so. It looks very attractive in terms of trying to figure out what is happening and taking a long-term view on things.

You make big money in equities when the going looks very bad for good people. There is no doubt to my mind that KPIT is run by very competent bunch of people.

Sonia: The problem with KPIT was also that they guide last quarter -- they had said that their growth would be flat this quarter and there would only be cross currency headwinds but this time they de-grew. So there is a bit of a confidence crisis as well. So would that not worry you?

A: Yes, it worries me so we are going to dig deeper and I don’t think just the proceeds of the conference call are going to be enough for us to firm up our view. We will certainly take a much deeper look at this one.

I suspect that something has gone wrong and I am hoping that something which has gone wrong is curable and if it is then there is great value at this price. If it isn’t then we are in trouble.

Anuj: You spoke about the Bank Nifty’s resilience but IT index and IT stocks are showing breakdowns on chart, Infosys, Wipro, Tata Consultancy Services (TCS), we have seen double digit falls in a matter of a fortnight or so, what are the charts indicating there?

Jain: Bank Nifty is not contributing to the fall, it is basically CNX-IT, pharmaceutical and fast moving consumer goods (FMCG) which is contributing.

CNX-IT which is closer to about 11,000, it is below 200-day moving average (DMA), it is indicating for the trendline if it doesn’t take support at 10,900 odd you could probably see a little more fall coming out there.

Individually if you were to look at stocks out here, TCS is in Rs 2,400-2,600 zone, it is at about Rs 2,450 odd. So it is close to support but not broken it. Wipro at Rs 540 basically could drift down to Rs 520-510 that is the kind of weakness it is showing, results were also a disappointment like TCS. Infosys again Rs 1,947 is where it closed, it has got support levels at Rs 1,900 but if it were to break those Rs 1,900 levels then you are looking at Rs 1,820 levels.

So what I am trying to say is the crucial bigwigs of the IT sector are close to supports, the trendline has been breached, there is a good chance that there should be slight pullback. In that slight pullback, can that trendline sustain that level is important else you will have at least 3-4 percent cut on all of these stocks going up to 6-7 percent out of which I think Infosys is at the highest risk right now.

Sonia: Last week the private sector banks did very well, Axis Bank reported a good set of numbers and ICICI Bank also rallied, you have some of these banks like DCB Bank in your portfolio. Is this still a time to buy these good quality private sector banks or do you think the run up has been far too steep?

Sheth: The story of investing in the banks over the last few years has been a uniform story of staying invested and continuously invested despite occasional crisis of confidence in the private sector banks and avoiding the public sector banks. That sounds like a very unfair generalization but barring an State Bank of India (SBI) and perhaps a Bank of Baroda (BoB), there is very little that the public sector undertaking (PSU) pack has done to earn any confidence from investors.

I don’t think this has meaningfully changed even after the arrival of the new government. So whether you look at capital adequacy, whether you look at reported slippage numbers on a quarter-on-quarter (Q-o-Q) basis for the last two-three quarters, whether you look at any other freely elements to their income mix such as fee income and so on, I don’t think the public sector banks barring of course notable exceptions like SBI and BoB inspire any confidence.

At best, they look very interesting value plays, which are in distress right now and at worst they might become spirals of ever decreasing value. It sounds like a very harsh thing to say but if there is one part of genuine criticism that can be directed at the new government, it is in terms of the fact that they haven’t been able to provide a vision for reviving PSU banks. So to that extent, the faith has to be maintained in private banks.

Anuj: You have two midcap auto stocks or auto ancillary related stocks, SML Isuzu and Balkrishna Industries. We have all heard about Balkrishna, what are the numbers indicating there and what is your call on SML, what is your story here?

Sheth: There are two different reasons why we prefer these stocks. Balkrishna is a tyre manufacturer with almost all its production being exported out of the country and with a very strong footprint in Europe and the US in off-the-road tyres whether for agricultural implements or for heavy earth moving equipments. This is one company which has assiduously grown volumes in its business for a decade in the mid-teens or late-teens and just compounded year-after-year.

To us, this looks like a classic compounder and right now they have gone from 160 to about 3 lakh tonnes capacity, they are just coming off a huge capex cycle and they are about 55 percent capacity utilization. They are gaining market share in all the markets they are selling into and one large market they are selling into, Europe is facing currency headwinds.

So they will report lower earnings in FY17 versus FY16; for FY16 they are very intelligently hedged.

So, again for people who want to look at FY17 numbers and buy them no, so we have taken the trouble of looking at FY18 numbers for these guys, in terms of what might play out with higher volumes and even the lower euro and to us there is a compelling case of buying into this stock.

On the other hand in SML Isuzu, this is more of a concept investment right now because they have a very interesting franchise in school buses and their truck business has borne the brunt of the downturn in the commercial vehicles. So this used to be the old Swaraj Mazda and now it is part owned by Sumitomo and Isuzu has a stake in this company.

What we are betting on is that Isuzu will notice that this is a great franchise to build out their business in India and will sooner or later pick up a stake and there could be tremendous upsides if that were to work out.

Sonia: Technically if you had to give us, a couple of stocks to trade into next week at the start of the May series either from the frontliners or from the broader markets what would they be?

Jain: Idea Cellular in the frontliner, given the fact that technically it took support at Rs 172 went almost upto the Rs 194 levels. Dips can be used to buy. The stop loss will be closer to Rs 166-167. It is poised to move back closer to the Rs 200 levels out there. So would look at a dips to buy Idea.

If one were looking at midcap stocks then we have a couple of ideas which are technically looking decent. Gati, which has kind of made that Rs 200 low where it is trading, Rs 194 should be the stop loss one can look at bounce back to about Rs 220 out there. For even long-term holders this looks to be a decent price to get into the stock.

The other stock which looks good from the medium-term now these two would probably be for investors rather than for traders would be National Buildings Construction Corporation (NBCC) which is at about Rs 784. It has taken horizontal trend line supports about Rs 710-720 and any dips if you get over the next week about Rs 760-750 should be used to get in. Medium-term targets are about Rs 850 -880.

Similarly for Force Motors, dips should be used for accumulation. I am not giving any level because if were to say Rs 1,480 that is far off but dip should be used for a move upto about Rs 1,900 in the mid terms. I would look at these four stocks in the midcaps to accumulate on dips.

Sonia: Talking about midcaps one stock that you have in your portfolio is Bata and it is a larger midcap. It is a scary situation to be in because fast-moving consumer goods (FMCG) as a whole is seeing some slowdown. The valuations are extremely steep but would you still stay invested?

Sheth: There is a reason why we like Bata and that is they have just stumbled. Where have they stumbled? They have stumbled on an enterprise resource planning (ERP) implementation. It is not a business failure of course it is a failure, it is a stumble.

I don’t think there is any breakdown of the basic thesis. The basic thesis is that here is a company which has got market leadership and a brand name that every child has grown up on.

It is also a brand name which is assiduously being premiumise over the last few years. Average realization per pair of footwear sold is increasing year-on-year (YoY). There is volume growth, there is value growth, there are margin levers, and they have revamped and then reinvented their entire retail and sales distribution function.

Now they have stumbled on an ERP implementation which led to disruption of supplies and loss of sales opportunities even at a time when they were adding fixed cost and ramping up the business.

So, they suffered on account of one part of the business not firing in tandem with the others and sure they will get it right if not in one quarter than may in two or three quarters.

It is the best known footwear brand in the country. It is a brand which is unlikely to lose its luster and if there is urban revival, if there is macro economic revival this is one company where there are so many margin levers and growth levers in place.

So even now they are not cheap after the crack of about 30 percent from the top. They are trading at something like 25-26 x on FY17 numbers I think they should trade at 40x.

You know what happens when multiples go through the roof for some of these companies where there is a scarcity premium and where visibility of earnings comes back with the vengeance. There is just one respectable and listed player in this space of this size.