Post-Budget slide seen; midcaps to take beating: Dimensions

He expects smallcaps, midcaps and infra stocks to take a beating after the Budget.

He is bullish on largecaps in the banking and pharma sectors.

Srivastava sees the BJP recalibrating its reforms agenda following the crushing defeat in the Delhi assembly polls. He does not see the amendment to the Land Acquisition Act happening in the current Budget session.

Below is the transcript of Ajay Srivastava’s interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.

Latha: How should a trader approach the Budget now? Is a pre-Budget rally to be sold into, is a post-Budget potential rally to be sold into? Just relate Budget and market to us this time around?

A: Two things are going to stand out, one is very clear that there will be some kind of run-up again pre-Budget not because of the reason that Budget is going to be euphoric.

However, the reason that we saw a steep correction is because market looks at every opportunity to kind of get into and that led to a correction in the last 48 hours with people trying or getting in again or averaging their prices. So it is more in a nature of a market rotation today then a Budget event.

By and large if there is a big rally post Budget we will see some kind of a sell-off. The reason I say that is if you look at the market the way it is set up you take away the Bank Nifty part of it, take away the top 20 or 40 companies out of it the market does not look as bullish from the foreign investors perspective.

It is only the domestic investor who is piled on into the turnaround story. I do not think the world has bought a turnaround story the world has brought a story of big caps, banking stocks and that is all about it.

When we see the Budget coming through we will definitely see some kind of sell-off in the “non-FII” stocks because that is where people are trading off on greater fool theory to say somebody will buy it off then.

So rest of the people who have invested in the turnaround story of the economy, they are the ones who will come to the grief. This is because in the last nine months no effective action has been taken on the ground, no turnaround happening on the ground and therefore, the so called turnaround story is going to be at least one year ahead compared to what people thought. That is where the sell-offs pressure will come and that is a very domestic pressure because there is no FII sitting there to buy those stocks out.

Latha: Would any of the auto ancillary companies be on your mind? Are you worried about the valuations of a Motherson Sumi or a Botsch?

A: The stocks that you have mentioned are really the top tier names of each and very category and these are the top quality names where you can have buyers, they are an FII buy. Just go slightly below these names and you will find a plethora of names with pure domestic buying. A lot of them have already seen two things happening, even FIIs are holding their selling-off, DIIs are selling-off.

If you look at lot of share holding pattern for December, they are changing with the DIIs selling off along with some promoters who sold off their shares and you see the increase in public participation. That bunch of shares which has seen an increase in public participation, lower FII, lower DII, lower promoter are the most vulnerable stocks because those have been sold out to small investors and those will not be amenable to the greater fool theory.

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Reema: Is the nervousness around the AAP victory priced into the market and how will it affect BJP’s reform agenda?

A: Two things are very clear that the reform agenda has to be now recalibrated. The whole environment was pushed around into a belief that Corporate India is the only constituency in the world right now. Once that is now been put to rest if you do not calibrate then you are not listening to the market. It is saying we want immediate steps, we want step for the common man and we want economic growth to come through on the ground immediately.

The reformist pitch is good but that will not be a sufficient condition for it. So you will find recalibration in the Budget even if BJP says they will not do it I think that will be pretty naive not to even take a lesson out of what happened in Delhi in the last two days.

Reema: If the Budget is recalibrated would it disappoint the investors and therefore, if there is a pre-Budget rally should it be used to sell into?

A: I had never said that something will disappoint the people because the reason I say that compared to the lofty ideas are only focused on FDI’s and only focused on for odd macro five years plans, Budget will have to give some impetus to what will happen in six months, nine months and a year down the line and that is where the economy is struggling today because there is no demand.

I am not clear that a recalibration should necessary be a negative for the market or negative for the investors. I think it will be great positive because we will get away from 4 years plan, 5 years FDI and 6 year growth and employment to something which will be tangible in the 12 months.

What we are battling is a pure inertia in the market for people to buy goods and services that a simple fact of life. That is where the economy is struggling and if that can be put right at least put in the right way you will see better benefits than a longer-term plans of a reform which will come.

Having said that, the land reform is certainly under doubt now as the spree for all purchases from everyone will come into question and to that extent it will again have to be recalibrated because the way it is right now the land acquisition will not go through.

Latha: What would you tank up now? Where do you see valuation gaps?

A: We had a discussion and we said that the banks stocks and joining BJP is the same as both did not turn out that way with both crumbling at the same time. Having said that, what we are positioned for very clearly is largecaps, we are in the largecaps banks, and we are in the largecaps pharma space.

It is very clear that pharma will remain. We have one or two challenges in IT, it is not a sector which I am fond of in the current year but only one particular player we are fond of in the current year.

We have got a reasonable amount of investments in essentially largecap stocks. I do not think we are no where 5 percent of the portfolio allocations or may be 10 percent in the lower and the midcap story.

We have focused ourselves to the top quality names and secondly, we have focused our self on domestic stories more than international stories. We are not buying into restructuring stories and have sold off everything. We are not buying into turnaround; we are not buying into infrastructure at this point of time.

Reema: Even largecap infra?

A: Even largecap infra, the largest of largecap infra we are out of it completely. Luckily because we saw the result that came out disastrous results so it was a sensible decision.

The recovery we were expecting in infra has now shifted by at least one year. As a prudent investor you would rather wait than kind of jump in today and say things will start happening in next 3 to 5 months.