Nifty stocks well-owned; like pharma, paint cos: Barclays

As far as pharma companies go, Singh feels the USFDA issues are transitory and these companies will do well over the next five years.

However, Singh says FY16 earnings will see double digit growth.Below is the verbatim transcript of Bhuvnesh Singh’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Going by the title of your conference, Emerging Leaders, are you of the view that the next 12 months like in the past 12 months will also find action outside the big indices, the action is going to be outside Nifty stocks? A: Definitely yes. If you look at Nifty stocks, they are very well owned, most of the foreign investors own it, and the exchange-traded fund (ETF) owns it. We think that if we have to look at next outside gains, it would not come from the front leaders today. It will come more in midcaps and it is where we have to do a significant value search, we have to sift through 500 stocks to get 50 growth leaders over there or maybe 20 growth leaders. India is already a USD 1 trillion market. To take it to next trillion, I think it will not come from the existing names but a lot of new names would come in, in Indian market over the next decade to take it to USD 2 trillion market. Sonia: I was just going through all the companies that are participating in your emerging growth leaders conference and there is a very interesting mix of the home improvement companies like Century Plyboards, the logistic companies like Blue Dart, some of the other companies like Just Dial, etc so interesting mix over there. So, amongst all of these segments that I spoke of where do you see the highest amount of potential for the long-term investor? A: If you look at the longer term investors, internet is a very interesting space. However, most of the internet companies today in India are unlisted and hence not easily available to investors. Home improvement is another place where we think that given what the Reserve Bank of India (RBI) is doing for reducing the risk weight for the small loans, the mortgage costs are coming down and actually Indian home owners are not that leveraged. So, real estate market is something which we are very interested in. Also, we think that playing it directly through real estate might be difficult. So, we have got a very few companies out there but home improvement, mortgage financials, these could be the two names where we can do very well going forward.Latha: What about the urban consumer theme, run its course? A: Not necessarily. In urban consumer we have to go beyond the regular names, regular consumer staples or consumer discretionary names. We have to go out and look at the next small companies which might be just USD 200 million company now but can it become a USD 5 billion company in next five years? It has not run its course but it is one theme which is well understood now. In 2013, when we started talking about urbanisation, it was not that understood. However, today, at end of 2015, urban consumption has become a consensus.Latha: Like what, would it be air conditioner makers, would it be tile makers, sanitaryware makers, how would you drill it down? A: In terms of home improvement for example, as you take a lot of names there in home improvement, we wrote a very interesting note recently and where our call is that we do not buy only names which are leveraged to new house building. We also buy a number of names which would be everyday, in home repair they would be required for example. Paint companies, very great business, high return on equity (RoE), companies over there have got high corporate governance, that is one thing to buy. You have got ceramic companies, you have got tile companies which are a bit more leveraged towards new house building but still are doing very well. Cement companies, not only a play on house building but also a strong play on Indian infrastructure boom. So, all of these particular sub-sectors within the home building would have their time. Right now I think the paint companies look best but when the new house building starts picking up, we will shift very quickly to sanitaryware or cement; that would become very strong at that time. Sonia: In your strategy note, one of your top recommendations or the top stocks in your India strategy note is some of these auto names like Maruti Suzuki and Tata Motors? However, this month we have seen a slowdown in the growth rates of the sales of many of these companies. Would that worry you or would you continue to bet on names like Tata Motors and Maruti? A: In case of four wheelers domestic consumption, we shifted from four wheelers to two wheelers in our strategy note about a month back. The call there was not that four wheeler growth is slowing, that was a risk which we were looking at. We were saying that cyclically high margins, cyclically high valuations does not leave much risk adjusted gains for us. Two wheelers on the other hand gave us better risk adjusted gains.Sonia: In the two wheeler space we have seen a slowdown this time as well, maybe it is for reasons that are very localized, because of the Chennai rains TVS Motors has been impacted, etc but there is a slowdown nevertheless. Would that not worry you? A: That does but the valuations are not as expensive as the leading four wheeler names. Secondly, with the pay commission coming out, government accepting pay commission recommendation sometime next year that would lead to much stronger growth in entire auto space, in the home building space and consumer discretionary space. Latha: Is the darkest hour over for rural consumption? We just had the Mahindra and Mahindra (M&M) management and they have done very well with tractors, they don’t have the courage still to extrapolate it for the second half entirely, would you have that courage? A: Not yet. In rural India, the government policy on minimum support prices is there to reduce inflation but it also impacts the rural income. We have also seen two consecutive monsoons which were weak. Should we start expecting a strong resurgence in rural India right now? I think it would be rather early. Latha: What about the capital goods capex driven space, you just spoke a little bit about public driven businesses for say sectors like cement. Would you say that at least because capex has not happened for so long it is time that for replenishment, for repair, capital goods will start looking up, any argument at all for the non-consumer space? A: In case of industrials, our call is very clear. The private sector capex is not going to pick up quickly. If you look at various ratios like asset turnover ratio for the private sector corporates, it is close to a 10-year low ratio. Why will private sector start spending again if they are not utilising current assets? So, private sector capex is not a theme which we believe in at least over the next couple of years. Government capex on the other hand, yes, and government capex has significantly benefitted the road companies in the current year. The government hopefully over the next one to two years will start spending much more on railways, would start spending much more on defence and would start spending much more on the complicated infrastructure projects, more bridges, airports, metros and then from the road builders we might just go up to more complicated construction companies or to some other companies which could benefit from there.