Post the good news flown in from Reserve Bank of India (RBI) yesterday, markets are likely to remain rangebound with upward bias, says Amit Gupta of ICICI Direct . He says if Nifty reaches 7940, it may even reach levels of 8150. Some Foreign Institutional Investor (FII) cash selling will continue for the time being, Gupta tells CNBC-TV18. He has a buy call on Wipro. Meanwhile, Ganeshram Jayaraman of Spark Capital Advisors says the incremental earning from Seventh Pay Commission is unlikely to lift real estate sector. Instead it is going to boost auto. “So, it is going to be more of per month Rs 5,000-8,000 bracket which means two-wheelers, obvious four-wheelers, let us assume 2.5 crore people, one percent of them buy a car; that is 2.5 lakh cars and that is a significant delta in the current market for cars on a monthly basis today,” he adds.Jayaraman is also bullish on consumer durables and the discretionary consumption space. In addition, he also backs roads and Engineering, procurement and construction (EPC) projects for the quality of government spends.
Below is the transcript of Ganeshram Jayaraman’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: What are you advising your clients? Is it looking like the market is going to go lower? Are you asking them to put any money at all at current levels?
A: It is a positive. The rate action by the Reserve Bank of India (RBI) yesterday is in some form shot in the arm because we have been having an aggressive rate environment view between now and March. In terms of both rate cuts as well as one important trigger, which we see happening which is the liquidity is gradually turning from a deficit mode into a surplus mode, which means that the reverse repo rate is sooner or later going to be the operative rate in the monetary environment. That is 100 basis points (bps) lower.So, one is the reverse repo rate itself taking a leg down and second is the rate cut and we do see possibly a pause for now. However, before March, possibly one more rate cut as we see the data points moving in the direction, which is going to be conducive in line with how we see the RBI, in fact even better than what the RBI is expecting.
Latha: How would you play it in the form of stocks?
A: The yield curve is going to steepen up. So there are a bunch of banks, wholesale biased liabilities, non-banking financial companies (NBFC), who will be the bigger beneficiaries. So, clearly they are the best proxies to play the rate environment.
Latha: Anybody who borrows from the wholesale market would be your stock?
A: Clearly.
Sonia: You have written a very interesting note on how the 7th Pay Commission will impact a lot of these sectors like autos, etc. and you say that Rs 2.6 trillion of incremental flows will go to government employees and pensioners in FY17. How do you play this theme? Do you continue to stock with stocks like Maruti which have already hit new highs or are there other pockets that look attractive?
A: It is a big theme – 2.5 crore government employees plus pensioners. The total wage bill currently for this pack is about Rs 10 lakh crore. That is about Rs four lakh per employee or per pensioner. That is likely to go up about 25 percent. The distinction vis-à-vis last time when it happened was that there was significant lump sum arrears were paid because the pay commission was delayed whereas this time, no such delay is expected.It is going to be for a lot more people and but a lot less sum per individual vis-à-vis last time, which means the larger ticket size spend which happened last time in the form of real estate is unlikely. So, it is going to be more of per month Rs 5,000-8,000 bracket, which means two-wheelers, obvious four-wheelers. Let us assume 2.5 crore people, one percent of them buy a car. That is 2.5 lakh cars and that is a significant delta in the current market for cars on a monthly basis today.
Latha: So, which are the specific stocks? You like Maruti, you like Hero Motocorp, you like Bajaj Auto?
A: Clearly, automobile space. Cars, two-wheeler names are there, but more important are durables or derived plays on that. So, clearly, we are looking at consumer discretionary space.
Latha: So, would it be a Whirlpool kind of thing?
A: Yes, clearly, names in the consumer durables, financiers of the same as well as discretionary consumption plays. So, there are going to be significant beneficiaries of the whole theme.
Latha: Would you buy any of the real estate stocks? There is some sops given to affordable housing and a little more money can also mean a little more ability to buy a house?
A: No. Real estate is in some form going into a bit of a -- the cycle is coming to an end. It has been a super cycle in some form, 2002-2015. We are seeing pile up of unsold inventory. We are seeing challenges of housing demand in some form come down. The swing from physical savings to financial savings is also currently on and that is going to continue for a long time now. So, we are not fans of real estate or real estate proxies as well. So, clearly underweight on that space.
Sonia: So, apart from the themes you spoke about, the boost in demand for discretionary items or your consumer durables, autos, any other themes that you are recommending investors to put their money into?
A: Government spend. If you see the data which is coming out every month, the incremental government spend is substantially increasing in terms of numbers.
Latha: So, which stocks then?
A: Roads, toll operators, engineering, procurement and construction (EPC) contractors are possibly the best proxies to play the entire government spend theme and that is where we see a lot more action likely to continue. Not only is the increase in spend, but the quality of spend is shifting away from subsidies to capital spend.This has multiplier effect, a percolated multiplier effect in terms of liquidity, in terms of the whole ecosystem kind of benefitting. So, the multiplier effect tends to take time. It takes 9-12 months. But by the end of this financial year, we will see that. So, that is the quality of spend which we are likely to play.
Latha: The 7th Pay Commission triggers only next year and by the time the money reaches, it could be another quarter. So, in these six months, is there still reason to buy any of these stocks?
A: The report is likely to be out by January 1, which means the market will prepare itself for that in the January-March quarter. So, we are actually telling investors to get positioned for this substantial theme. Not only are we looking at government employees, the public sector undertaking (PSU) employees' pay-scales are in some form benchmarked as well. So, the employees of Bharat Heavy Electricals Ltd (BHEL) or Coal India or the oil marketing, oil producing companies.
So, it is a large employee base as well, so it is a very large theme. It is a two year theme in some form. In some form, we are telling investors to start preparing for that right away rather than wait for the exact event.
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