MNC stocks a great play; Leverage isn't a bad word: Dimensions

On a 2-3 year horizon, pharma looks promising, he said.Below is the verbatim transcript of Ajay Srivastava’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.Latha: Will 2017 be happy, at least the first quarter for the markets if you are a bull? A: I think it will be happier in the first quarter if we can expect some kind of I would say little bit of calming of the situation in the market is concerned because ultimately what is going to revive this market is consumption story. Consumption story comes from a stable policy environment, a non-obtrusive or non-intrusive kind of a government which allows people to spend money and enjoy the money. I think the mood of the people needs to get in sync to start to spend money. The trick in this market is consumption has to get back which I believe that on the demand side equities, I think there is enough money flowing in; there is no issue. On the other side, the consumption story has to come back to the table and that for needs some level confidence that has got shaken in the market, people are worried, concerned, etc. If those get kind of stable, you could see a positive environment.However, I believe that it will be positive nonetheless because people in search of yields are going to pour in money and will come to grief in the latter part of the year. Anuj: Last year the market bottomed out on Budget day, it almost looked like it factored in all the negatives and moved on. Is there a possibility of a déjà vu here that the market again, after the pedestrian last five or six months, moves on post Budget? A: I would love to share your view because I think that would be ideal for this market in search of returns because if you look at the returns, they have been anemic in the last couple of years. Therefore, yes, that could perhaps be on scenario building out. However, what I foresee, is a little difficult scenario to foresee because last year’s Budget session ended in a situation where oil was at its lowest, world interest rate were at its lowest, commodity prices were at its lowest and India was the shining star, etc. Look at this Budget scenario, the commodity prices are much higher, oil yesterday reached 18 month old high and you got local interest rates in complete disarray. You never ever see a scenario in any country where interest rates fall by 50-90 basis points overnight. When that happens, it is the precursor of an economic volatility which is underlying playing out in the interest rate. Will you see interest rates coming down by quarter yields and, Latha is a specialist on this, will tell you that, it doesn’t fall -- when it falls by 1 percent and we have been trying to see precedence’s where interest rates have fallen by 15-20 percent overnight, not many exist in the world at this point of time. Therefore, I would say that this Budget is different than the last Budget is because macro economically we are much worse off than we were last time; that is one. Number two, we are highly over invested.  The big chunk of the mutual fund money came in the next year; we are very over invested in the market. Perhaps the dynamics are different today to play out for a déjà vu to happen again. Sonia: Aren’t these unmistakable signs of an upcoming bear market perhaps, foreign institutional investors (FII) selling, bulls in hiding, low interest, ugly charts, do you think that there is a big sell-off coming mid-year? A: You could be right but the problem in the market is that people are saying if not to put here then where to put, that is the kind of a scenario. There are no choices left to people so there is a natural tendency to keep buying whether direct equities, PMS, mutual fund, or life insurance or whatever you want. However, the necessity is the fact that the entire savings is moving towards financial assets which is either bank deposits or it is just financial assets. So, demand and supply is trading in a scenario where the economics and fundamentals don’t matter anymore because where do you invest. Supposing I pull the money out from the market today, let us assume I pull it out, what do I do with it tomorrow morning? At best I go lend it to a housing finance company at 8-9 percent; that is all I can do at this point of time.  So, just the sheer absence of an investing opportunity in the economy tells you the story of the chase for financial assets which also tells you on the reverse side that if there is no other opportunity to invest in this economy, then that doesn’t forbear good things for the equity market as well. So, to that extent, I would say a bear market is kind of – bottoms are very high at this point of time because demand supply just comes and people pick up the stock. Latha: What pockets would you choose to hide in, in the equity markets at all? I mean this fall has also brought down well run companies lower, Yes Bank for instance, Rs 1,100, it was trying to do its follow on public offer at Rs 1,400 if you remember and there are similar such stocks, even NBFCs that are now available at lower rates. So, are these places to do bargain hunting at all? A: I think one place where we definitely like to be long always is the MNC stocks. There is a plethora of MNC stocks available at reasonable prices today whether you talk of liquor companies, you are talking of cropscience, you are talking of all kind of companies, leave aside FMCG for the time being; that group of companies, you got engineering companies, were two reasons -- one is these are better managed companies with greater amount of access to international markets and two of course there is always a possibility of a takeout which will eventually happen. In the next five years, you would not see a single MNC company listed in this country, they all will be bought out and become 100 percent subsidies if government policy allows in most sectors. So, I think one place you must be whether it is mutual fund or direct, is the MNC stocks, that is the one place you have to be. The second place, there is no point hiding this, a market rally, even if you look at the last three to five years, the market let us say last three years, index went up by 7 percent. However, what happened in the banking industry? That went up by 25 percent. So, it is hard to believe that banking will not move and the index will move; that will not move. I think the sectors to be in, if you ask me personally is back to banking in every correction because that doesn’t move, nothing will move. MNC stocks definitely must have and we have always said this high capex stocks because high capex stocks give you a leverage that increase cash flow overtime. So, whether it is Power Grid, Petronet LNG, or the oil marketing companies, they all are intensively using capital expenditure to grow themselves. I think you want to be there. The last category which is the one which I call the New Year category is that highly leveraged good quality industrial companies I think should start to come into focus now because interest rates are going to fall 3-4 percent; that is going to be straight into the bottomline of most of these companies. So, we are ferreting it out, we are seeing where they are -- so leverage is no longer a bad word. I think for 2017 we think leverage is fine because that increases your return to equity. Anuj: Any thought on Bharat Financial Inclusion or any other NBFC that you would want to buy? You are bullish on banks clearly? Would you extend it to some of these NBFCs beaten down which are come down to maybe reasonable valuations?A: I will tell you, you go back to the same old guys whether it is a Bajaj Finance because that has got strong pedigrees. However, I think the key here is that we need to let it play out. The banks are sitting with an advantage which NBFCs don’t have at this point of time. My guess is that let it play out for next two to three months. There might be exuberance like say Bajaj Finance has come down from Rs 1,100 to maybe Rs 850-800 or thereabouts. So, there is a natural inclination to buy. However, we are not very clear and I will be honest to you that how will this whole impact play out when there is such a big churn of interest rate in the market how many customers are going to move as well.What you will see is forget new business, the churn is going to eat up lot of business and lot of capacities so the industry may not grow but some players may grow than the other because of price cutting. I would suggest investors to wait a while for these stocks because you haven’t seen the end of this one. Bharat has been the old favourites, it is one of the first stocks, micro lending stocks to get listed, it has been a stellar stock performer. It had a unreasonable promoter issue, but by and large people give much premium to it because they see it as a market leader which will consolidate other players into it more than this getting sold. So, that is a premium it enjoys in the market.Sonia: I also wanted to ask you your view on this CBDT clarification that came last week where foreign portfolio investors (FPI) will have to be doubled tax now if they hold more than 5 percent in India dedicated funds. It spooked a lot of people we have spoken too. Do you think this tax scare could pour cold water over the Budget?A: We are all waiting for the clarification to come in because these circulars come and clarification happens within next few weeks after that. I don’t think that was the intention because it is not bothering lot of people at this stage because they believe the clarification will come and soothe it out. I don’t think the intention of legislation was to do that. People are having a wait and watch at this point of time.If the government comes back after a month and say listen they will be no change in the policy then perhaps you will see some kind of reactions coming through. It is more than the tax alone I think it is a way that tax will be administered is also the key issue there. My guess is that this will be taken care of by a clarification.I don’t think it is an intention and that is where the market is taking it and maybe it is a wrong drafting of the circular which has created this confusion. It will get clarified. If it does not well you would have its own repercussions. Not that FIIs are great buyers any way today, so it is a few more sales is not going to hurt this system by and large. However, it is an avoidable calamity just like demonetisation perhaps. Latha: I just want to flush that point that you were talking about in terms of high leverage companies now getting a major breather. Where should we look for them, is it the Vedanta’s, Hindalco’s, JSW Steel’s otherwise making money but a big debt burden, is that we should be looking at?A: Of course yes because what is going to happen is, not only interest cost is going to go down, but I think banks will not want the money back; that is the best part of it. They will say I don’t want the repayment; you want more loans, take it, I got so much of money. So, you have a very peculiar situation, while the banking industry sensibly needs to get this money back, they may not want the money back at this stage.So, I think whether it is NPAs or whether it is industrial companies or whether it is commodity companies with loans, they have a golden period for the next 24 months where banks are going to say please don’t pay back the money to us, we have nowhere to go with the money. So, not only they will drive down interest rate cost, the supply to these companies has come back with a vengeance. So, you are absolutely correct, pin point them and I think they will earn a lot more than what the market is projecting purely on interest cost alone.Anuj: Anything on IT and pharmaceutical, any stock that may have come down to your radar, to valuations where you would want to buy some of these stocks?A: Don’t talk of nightmares; Divis costed me heavily. So, I think pharmaceutical is one such love affair which will never end. I love pharmaceutical stocks, no matter what has happened to the portfolio because of one stock. However, I think we have to be careful in what we are doing here in pharmaceutical because purely on the domestic market I think the trajectory is fairly strong. So no matter what the corrections are, we are a buyer in the stock and I think the top leaders in the industry are going to do well.I think you will see corrections coming and going but if you look at a two to three year trajectory for the pharmaceutical company, it is going to be a great story out there. As they correct, you need to add to the portfolio, not to get out because after all an aging population and India’s growing population, forget the US market for a minute, that is for argument sake, is itself going to be bigger than the US market in four to five years. We have not even touched Japan as a market; Indians don’t sell to Japan too much. So, I think it is a great story there, it has a temporary hiccup for last 12-18 months but in a long term positional play, it is a must pick.