Positive on market, IT stocks look reasonable: Expert

Even though April auto sales numbers look encouraging, he thinks it would be a bit early to call if urban demand has improved.

He sees a temporary slowdown in FMCG but feels structural slowdown is unlikely.

Below is the transcript of Dhiraj Agarwal’s interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy

Latha: The market is confused, should it continue to worry that there isn’t too much for this rally? What would your bets be?A: Confused market is the right way of putting. There are three forces working at this point. One is the near-term worry that the economy is not developing any traction despite whatever the government is doing is paramount. After every earnings season, we see earnings getting cut for the year. So we started FY15 at mid double digit, mid teens. Now analysts are already talking about five to seven percent range. So it has been very sharp cuts, but the counter force on the positive side is liquidity.Even in April Foreign Institutional Investors (FIIs) pumped in USD 1.5 billion, in domestics another USD 1.25 -1.5 billion. So, it is a world awash with liquidity which is why even if there is a small spark of something which sounds like positive money starts coming in like that and which prevents market correction from going deeper which otherwise would have given the current near-term economic fundamentals.The third thing which people are grappling with structurally and longer term whatever the government is doing at in this point of time sounds positive. So there is a positive long-term view, there is stress in the economic environment short term which is counter-balanced by liquidity, which is why we are just chopping around in a broad thousand-point range.

Sonia: This month the Modi government will complete one year in office. What has your own assessment been of how the government has performed so far and is some amount of frustration with respect to policy reform kicking in yet?

A: This whole policy reform is an overstated thing and something which financial markets give a lot more importance to than what it is actually worth for and we always undermine the importance of execution. A lot of the problems in this country can be solved by sheer execution and putting systems and processes in place for getting things done which is what the government is focussing on.Unfortunately, what happens is the policy noise gets heard, discounted, talked about, shouted about immediately and execution takes time. So, the government is doing the right thing but these things take time.

Latha: Let me come to micros. IT space, would you worry in these dips? Is that something you would rush to buy or advice people to brush and buy or do you think you will hold back, after all the performances... 

A: I don’t see much downside in IT from here frankly speaking and as Cognizant results yesterday sort of indicated that it is not that much of a macro problem. There was probably some slow down in some pockets, that was some client issue specific, but in general, the IT growth will continue. It is tough to say whether we will see another 2-5 percent down or not but by and large IT stocks look reasonable in these prices.Sonia: But what about some of the more cyclical economy related stocks. People have been waiting for the capital expenditure (capex) cycle to pick up for the last six to eight months but we have not seen any signs of that. what do you do with infrastructure, capital goods, road companies now?A: Again what I started the discussion with, it is a challenge, the whole struggle between the long term view and what is happenings short term. So, do you buy for the long term and keep some short term pain, take some knocks on your chin if required, will the market continue to ignore the short-term earnings numbers keeping the long term in mind. Those questions there are not very clear answers because USD 2.5 to 3 billion a month if the money keeps on coming back to the market. What happens is barring the 5-15 day move when the results and the bad news actually come out they just go back to being normal.

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Latha: The April auto sales numbers that came out seem to be indicating green shoots according to the expert Sonia. For four months we saw Bajaj Auto giving us actually year-on-year (YoY) negative numbers December, January, February, March but April numbers actually showed a fairly decent uptick and then of course we have been seeing an uptick in Maruti numbers. Tata Motors passenger vehicles showed that uptick. So, yesterday we had this constant word being bandied around, has urban demand returned. What is your assessment? If it has then what should one start buying?A: It is a bit early to call one-month numbers as the return of demand. These numbers are certainly encouraging, there is no doubt that. So, there are two wheelers turning the corner, Maruti numbers looking good, even Leyland’s numbers were decent. So these are definitely encouraging signs which cannot be ignored but it is too early to call for a full-fledged demand turnaround.

Latha: But would you advise the investors to nibble therefore at the urban demand-oriented stocks?A: I would say it is more stock specific again. This bull market is very different from whatever we have seen in the past. So we have seen hugely divergent moves, not just across sectors, but within sectors. So something is at life-high, something is at a life-lows. I mean you can see in the capital goods, infrastructure space. So, Larsen is not that far from its life high level and you have enough stocks which are scraping the barrel at this point of time which never used to happen in the previous bull markets. I mean 2003-2007, everything went up. So, there the struggle to find was what will go up more than what you own. At this point of time, there are stocks which are going down as well, so it is very company specific, it is very business specific, the painting the market with macro brush is just not working. Sonia: What do you do with some of the fast-moving consumer goods (FMCG) stocks now because yesterday someone was telling us that people are now looking at FMCG as a structural slow down story; the bigger guys like ITC, HUL, just for the medium-term? Would you also be concerned about the slow down there?A: As a whole basket, again, keeping the individual stocks aside, as a whole basket, structural slow down is something which I do not agree with. Temporary slow down at this point of time is definitely there with rural income also looking under pressure at this point. With unseasonal rainfalls and possible risks in terms of monsoons, the short-term pressure is definitely there. But, structurally I have a very different take on FMCG. Structurally, I think that whole up-trading cycle which we used to talk about in ‘90s has now finally started and this is a 20-30 year trend. It is not going away in a span of a few quarters.Latha: So, those who ride it properly still have a chance?A: Yes, FMCG as a basket will make double-digit returns for the next 20 years per annum. Now, some years it may be flat or may be slightly negative. But it will keep on catching up because that whole up-trading thing has started now. This is an irreversible cycle.Latha: Would you dare to give us some names or is it all SEBI rules again?A: I would say as a general basket, so there will be winners and losers within that.