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Last Updated : Oct 27, 2015 10:22 PM IST | Source: CNBC-TV18

Q2 topline growth subdued, but margin expansion good: Ambit

Andrew Holland of Ambit Investment Advisors is bullish on the banking sector, especially private sector banks, as he believes there is still room for the Reserve Bank governor Raghuram Rajan to go in for more rate cuts. However, he is not too keen on the NBFC space and prefers banks over it

What global markets want at this point is some fiscal stimulus from China, says Andrew Holland of Ambit Investment Advisors. "If China can somehow stabilise, that is all the uplift that the markets will need," he told CNBC-TV18. He says the market did not take China lowering rates positively.

As far as the earnings season in India is concerned, Holland is fairly encouraged by it. He says though the topline growth in the second quarter has been subdued, margin expansion has been encouraging. He sees this helping companies in the following year as well.

He is bullish on the banking sector, especially private sector banks, as he believes there is still room for the Reserve Bank governor Raghuram Rajan to go in for more rate cuts. However, he is not too keen on the NBFC space and prefers banks over it.


As far as other sectors are concerned, he believes IT stocks will continue to be under pressure in the coming days and signs of pressure are rather visible in the telecom space as well. He also feels there are far too many regulatory issues facing pharma companies and since valuations are demanding, any negative news gets reflected in stock prices rather quickly.

Below is the verbatim transcript of Andrew Holland’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: In the last couple of months, the market has had a decent performance. We have risen from that 7,500 level and now at 8,200 plus. What is the sense you are getting about the traction from now until the end of the year?

A: This week is an important week because of Fed and Bank of Japan (BoJ). So, let us see what comes out of that. Also, we have got this five-year plan being etched out in China. So, again we could see something from there. I think the markets are still climbing the ball of worry on China.

Despite interest rates coming down, it is not seeing this a positive and I think what the market still wants from China is some kind of fiscal stimulus to make us all feel that the economy is being looked after and there are incentives there for the economy to at least stabilise if not grow from where we are.

Until we get that, where markets are going to be continues to be a little bit volatile because the numbers coming out of China that still no one is believing and that is bad enough. However, if China can just stabilise what we are thinking about the economy and that would be the uplift we need not just for our market but for global markets as well. So, that is what we are looking for. I think that is the key to us, is what China does next.

Latha: How has the earnings scene looked so far for you, more disappointments or on expected lines?

A: I am very encouraged because what you are seeing for the first time is whilst we have a topline growth which is not so great, the operational gearing, it is starting to have an positive impact on margins and also the impact of lower commodity prices is also helping margins.

So, I am very encouraged that the net profit on the profitability of companies is starting to improve mainly at the operating level and next year that will continue to help the earnings momentum going forward. So, I am actually more encouraged this time; I think I have seen more upgrades than downgrades so far.

Sonia: You have long positions in names like Asian Paints and this time the consumption story has actually seen slower growth than what we have seen in the last couple of quarters whether paint companies, whether it is white goods companies. Would that worry you or do you think it is just a patchy phase?

A: The operating margins for the likes of these companies have improved significantly because of the lower input cost so therefore there is only so much benefit you can get from that. However, in other industries now, you are starting to see the impact of lower commodity prices; that is the point I am trying to make. It is not necessarily the industries we know and have benefitted from that in the past year in a bit. It is newer industries which are starting to benefit from it.


Latha: Did you pour over the HDFC numbers? I know you are long on HDFC Bank as per your September 15 data. How do you stand on HDFC and what did you make of the numbers?

A: The numbers were okay. They are inline with our estimates; a bit of a slower quarter than usual but nothing that we can see which changes our view on HDFC going forward. The recent fund raising will help that kind of cost to capital and that will keep margins or spreads in play. When you set the bar high, the expectations also remain but slow quarter is okay for us.

Sonia: Since you did say you started off by saying that you are happy to see the way earnings have shaped up in this quarter, what are the sectors that you are bullish on where you expect to see more value and that could give you higher returns in the next couple of months?

A: We remain very positive on the banking sector. We still think there is room for the Reserve Bank of India (RBI) Governor to do more rate cuts, 50 basis points; only actually takes us 50 basis points lower than where we were in 2013 when the currency crisis happened. So there is a lot more room for the RBI Governor to do more. I think he will, I think his statement was so dovish, I was actually very surprised. So, I think there is more room for rate cut. I think the banking sector is where I want to play not just for short-term but the medium-term as well.

Latha: Would you therefore also play the NBFCs?

A: The ones that we like are pretty richly valued so we probably would play the banking sector rather than the NBFCs at this point.

Latha: How did you look at the non-performing loans (NPL) performance, we don’t have much to go by, we had just some two smaller PSU banks, State Bank of Bikaner and Jaipur and State Bank of Mysore, both of which reported flat NPA performance. You don’t think that will be a big bomb to worry about?

A: I think we know all of this. I think we know the PSU banks are going through problems and each bank will probably come out with their own set of horrors for us. However, it is not the PSU banks I want to play; it is the private banks I want to play at the moment. I have said to you before that once the sector stats moving up then the PSU banks is not something that we might want to own but we may want to rent for a shorter period and that is the way we look at the PSU banks.

Sonia: You have a long position on Infosys, what did you make of this quarter’s earnings from the big four or rather from the top three and how do you expect things to shape up from here, in terms of the pecking order will that change for you?

A: Not really, the results were okay; nothing to write home about. I still think the whole sector is going to be under pressure. That decade of growth has gone away I am afraid so they all happen to try and reinvent themselves. I think the jury is still out on whether they can do that but the valuations are looking a little bit more attractive than they were a year ago. At some point I am hoping that these companies will give us some of the cash back in forms of dividends which they haven’t done yet. So, if you are not going to grow, give it back to the shareholders.

Sonia: The other space that you have liked is the pharmaceutical space and you are bullish on names like Glenmark Pharma. Today we have Lupin announcing their numbers and the problem with this space is now the valuations have become so expensive that there is no scope for disappointment. For a company like Lupin there is expectation of a lacklustre growth, what do you do at a time like this?

A: The pharma sector is a difficult one because there are so many regulatory  problems for the pharma companies, it makes me wonder whether US pharma companies are helping or nudging the regulatory authorities to look at India more closely. Every day there is some kind of regulatory problem for one of the pharma companies. So, maybe we just have to go through this phase. It is a sector where you should be able to sleep at night easily but it is not. So, the valuations as you say are quite demanding. Therefore if anything negative happens the share price takes a quick hit. It is not a sector I feel I want to be in, it is a place I want to hide in difficult markets along with IT.

Latha: Which other sectors or stocks will let you sleep at night? You spoke about the private banks, would it be autos, the big boy Maruti coming today?

A: Our view on that particular stock is that the Yen will drift towards the 1.30 level. I expect the Bank of Japan to do some more stimulus and that will weaken the currency going forward. So, Maruti is obviously a big beneficiary of that tailwind. It is a very competitive market, the margins for Maruti will continue to expand. So, I think it is one of the best within the auto pack. Again the way we have been playing the whole of India is, who supply's India and we think that is the theme that will continue to play out over the next 2-3 years. So, auto components  not necessarily the Bharat Forge or Motherson Sumi but some of the other companies within the sector are set to benefit from both operational gearing and financial gearing as well.

Latha: Which is that? If it is not Bharat Forge and Motherson Sumi, which ones would they be, tyre companies?

A: No not tyre companies. The auto components industry.

Sonia: How do you approach the telecom space now because there is so much competition there, numbers have been weak this time and then you have that big elephant in the room which is Reliance Jio that is coming very soon. Is this a space that you would stay away from or do you look for opportunities during these adverse times?

A:  I am not looking for opportunities. I think even without Reliance coming in there is pressure in the sector and that is coming out in the numbers. So, if anything it is going to get worse for these companies not better. Obviously I will see where the valuations take us but at this stage I think the share prices of the incumbent telecom companies are probably going to fall in the very short term ahead of Reliance launch. I think we are all worried about what that could mean, we have already seen what it means at the moment in terms of the numbers and they are just not going to improve. So, again it is a sector I don't need to be in. I don't find there is much value or anything exciting. The excitement is on the downside rather that the upside.

Latha: You spoke about private banks and autos but I don't think you have complete your reply on what are the other stocks that interest you?

A: I am still optimistic on the Reliance launch and I think that could be not quite a game changer but for years we have just been watching Reliance spend money into telecom and retail sector with no guidance on what that really means, I think that is going to start coming from the end of the year onwards. We haven’t valued any of these companies, I think the market will have a relook again going forward. I think that is the catalyst for the share price to move higher.

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First Published on Oct 27, 2015 09:53 am
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