More than technicals or fundamentals, behavioral science indicators suggest the market could be close to bottoming out, Dipen Sheth of HDFC Securities tells CNBC-TV18.He says signs of that were evident in Friday's sudden plunge as it seemed that some investors were blindly selling without much thought."We had bad news running for so long now--Greece,US,China,domestic economy--and it is all adding up now," says Sheth."There will be another strong purge and after that the market may bottom out," he says, adding that midcaps and small caps could slide further.A big worry for the market is that inflows into mutual funds declined in December, and January could be much worse in terms of flows.He is bullish on stocks like Pidilite and Asian Paints as these companies will benefit from lower input costs because of falling crude prices. He is also bullish on IndusInd Bank as he feels the bank's asset quality is much better compared to peers. Below is the verbatim transcript of Dipen Sheth’s interview with Latha Venkatesh and Sonia Shenoy.
Sonia: It has been troublesome times for our markets, almost Rs 8,000 crore sold by foreign institutional investors (FII) in the last ten trading sessions. Would you expect to see more?
A: I suppose, rather than analyse earnings, rather analyse news flows, over the last few days I have been looking at behavioural signs and they tell me that we are approaching some kind of a bottom. However, it is important to look at these behavioural signs once in a while because that is when market extremes are indicated, whether it is on the top side or on the bottom side. So, here are some behavioural signs.
You saw a crazy sell-off on Friday afternoon, very sharp and quick sell-off, so was that some kind of fire sale of sorts? So, sell and then worry about the price. Then again, over the last three or four days, I have been getting gloom and doom notes from all kinds of experts globally about why the world is going to end up in flames, as it were. There were rumours and news of leveraged investors and brokers in so and so city and so and so town going bust.
However, retail flows into mutual funds have tapered off in December and I suspect January could be a worst month and best of all, there is disillusionment, the world is on fire and the Modi Sarkar is facing its first post honeymoon hangover or disillusionment or call it whatever you will, for a while now. So, there have been electoral reversals in Delhi and Bihar, there have been legislative stumbles in parliament. There is no more chess thumping by NRIs, no big-bang reforms of the kind that you guys can get TRPs on. So, I suspect it is all coming together and, so the darkest before dawn thing looks valid.
I cannot give you a spread-sheeted and rational reason for why we might be close to a bottom, but I suspect this is about it, give or take 5 percent. It could be 7 percent, it could be 2 percent, I am not making any claim on a specific number, but when hope runs out, that is when a bottom is formed and to my mind, given the structural strength that India has in a global context, versus China, versus other emerging markets, versus the commodity intensive importers and exporters, I think this is a good place to fish around and increase asset allocation to equities.
Latha: I hope you are right, but at the moment, mutual funds flows are still coming in positive from the small investor. And, all the technical experts today, said that they expect a bit of a bounce and a support at current levels for Bank Nifty and Nifty. You are also making positive noises, so it does not look like everyone is calling for a washout just yet. That is when usually the selling stops. That is just the other side.
A: It is just this morning’s attitude and another 2-3 percent down on the index and I would love to know what the technical analysts say, with all due respect to them. Also, if they are asking you for a bounce back now, they are looking at a 2-5 percent pullback. I am looking at a 50 percent pullback over the next two years or three maybe.
Latha: How much more of a loss? Do you think the markets will hold 7,200?
A: That is what I said. I do not know if it is going to stop at another 2 percent from here or another 5 percent or even 7 percent. But, I suspect that 5 percent kind of range and 5 percent plus, minus and another 2-3. So, I do not know, we could be 10 percent down from here for all I know. But, we have had bad news for so long now – last six months running at least. So, whether it is the US, whether it was Greece, whether it was China, whether it is the Middle East, whether it is other large emerging markets like Brazil and Russia. So, I think it is all kind of adding up now and there will be one final purge.
So, that Friday afternoon thing was when I was actually thumping the table and saying this is super. Somebody is selling without thinking about the consequences and, another one or two rounds like that and I think we will be close to a bottom.
Sonia: That is about the market set-up, but, you have identified some very interesting stocks for us, mostly companies that are insulated from the global slowdown and insulated from all this China talk. One of them is IndusInd Bank. Retail banks have been the top favourite now, but what makes you so confident that that story will continue?
A: Look at what IndusInd Bank’s book is like. It is skewed towards commercial vehicle (CV) lending, much more than any of the other banks that I know of. So, for me, it is a very strong proxy for high quality CV lending. It is not going out and lending to the blokes that Mahindra & Mahindra Financial Services or Cholamandalam Investment and Finance Company are lending to. My own bank has a slice, but not as big as IndusInd Bank. In any case, I do not have an official view on my bank, but be that as it may, I think this is one part that makes IndusInd Bank very interesting. But, if you look at the last five years of bank stocks’ performance, then the one thing which has kept the winners from the losers has been the difference in asset quality. And there IndusInd Bank comes out absolutely on top.
So there is a reasonable tilt at least, towards corporate, mid-corporate and so on but they have a very large retail book and a very large part or a significantly large part of the retail book is skewed towards CVs and what a fabulous fee income stream, something that even we are jealous of.
So, I do not see, if you weather the storm so magnificently, in terms of asset quality, and if your book is the best leaning book in terms of exposure to the CV cycle and this consensus that that cycle is turning around, I would go out and buy them on a limb. This is like at 2.8x, it might look costly, but I think this is a bank that has delivered, one of the few banks that have delivered absolutely positive returns over the last trailing year and I do not see this changing very soon._PAGEBREAK_
Latha: On a day like this, you have also chosen to give us some midcap picks. Let me start with the safer one. Pidilite Industries, you point out it is a beneficiary of lower crude prices. So would be the paint stocks. But, do you prefer only Pidilite?
A: No, we like Asian Paints as well. Asian Paints is a dominant player and 50 percent odd market share and 20 percent profit CAGR for more than a decade now. So, with no disrespect towards Asian Paints, by the way, Pidilite is a largecap for me, it is not a midcap anymore. So, one, it is a direct beneficiary of falling crude and it owns a dominant brand, but outside of that dominant brand it has made wonderful forays into a variety of other product categories all connected with home-building. So, if you look at epoxy sealants, if you look at waterproofing, if you look at adhesives outside of home building, they have made remarkable progress in product development and even in the auto maintenance space. So, for me this is a small 3M – product innovation and branding are so strong and they are so far ahead of the competition that there is years and years of growth here and 31x looks very costly, I agree for FY17, but again, these earnings are calculated on USD 40-60 per barrel crude. So, I think there will be some drift from there. And two, they have very strong pricing power, so I do not think all of that is going to get passed through.
Sonia: I noticed you have picked up Cipla as one of your top stocks as well. This is one of the fewer pharmaceutical companies that do not have as many regulatory problems, and now, they have appointed Umang Vohra as well which is one of the more credible hires. Is that couple of reasons why you are buying this stock?
A: Yes and no because Cipla has probably the most underexploited and high potential and high delta US pipelines that we know of at this point of time. So, we have been there, done that with a Lupin, Dr Reddys Laboratories and Sun Pharmaceutical Industries of course, but with Cipla, the US part of the business was on slow gear for a while, for quite a while in its corporate history and that part is changing and, this is going to be driven by the respiratory portfolio. However, I am not looking at this year’s or next year’s earnings, but the next two or three years, how they might play out. We are looking at something like a 25 percent profit compounded annual growth rate (CAGR) over FY15 to FY18.
Therefore, you are absolutely right they do not seem to be on the wrong side of the law so far with the regulatory authorities. So, to my mind, at 20x again, this is on FY17 numbers and even they will probably be beaten handsomely in FY18, at 20x the bargain on the table is very interesting. If you will allow me, one more comment, a broader comment, not on Cipla, it is wrong in this market to just make broad generalisations on sectors and say, is the story over in pharma or is the story over in midcaps. But, the larger point on midcaps is of course that earnings growth has not happened in tandem with the kind of appreciation that we have seen. So, I suspect the last point, and I want to make this with some emphasis, is that I think the largecaps are due for a significant delta hereon and if you are seeing signs of midcap topping out, midcaps topping out and corrections coming in, the broader sense on midcap certainly is negative here on.
Latha: You are not buying any of the big banks other than IndusInd of course?
A: Again, IndusInd, I cannot call it a big bank versus an ICICI Bank or a State Bank of India or Axis Bank. On the larger banks, especially the ones with large corporate exposure, I will look for some stern measures on non-performing assets (NPA) recoveries. Before that, they are going to be under a little bit of a storm.
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