Q4 nos may not be good; pharma stocks costly now: Expert

A: We are in a long-term bull market and so, in between you will have ups and downs in the market. There has been a rally based on the amount of growth recovery, faith in the new government and policies but you yet to see the numbers come through, be in terms of corporate earning or macro and there is struggle that keeps happening and from time to time we get corrections.

There could be triggers but broadly that is the story which is that we have come this far, now there needs to be delivery on certain fronts and till the time it doesn’t happen, you will have back and forth in the market.

Q: One peculiar trend this week was that lot of non-performers started to participate whether it was Reliance Industries which went up 9 percent or Coal India, some of the metal names like Tata Steel, Sesa Sterlite rallied. In the next leg of this upmove when we do resume it, where do you think the leadership will come from?

A: The basic challenge you have in the market is earnings growth and to that extent this year March quarter is going to end with not very exciting numbers, which will come out and FY16 right now you are 17-19 percent consensus earning growth which has come down from 20 percent.

Therefore, when you are talking about leadership in the market essentially so far what the market has done in the last couple of quarters is wherever there are earnings, they are more visible those stocks have rallied, so a lot of defensive, consumers, pharmaceuticals have rallied. Those stocks are already expensive and in the consumption side you have the additional variable of rural consumption slowing down.

In that situation the market will look at value opportunities where valuations are evident and also where growth is better relative to the overall market because 16-18 percent consensus earnings growth for FY16 is potentially at risk or at least the market thinks so. If that is at risk then market will look at other areas that might have fallen too much where the value is more emerging or there could be other triggers.

Q: Where do you see value emerging now?

A: There is still value in the economy cyclical – that is where a lot of value hunting will go on because those sectors have not performed. If the overall belief is right which is what I have that ultimately you will get numbers coming through, you will have economic recovery coming through, it may take one or two years and you will have earnings coming through, it may take couple of quarters. On that hope and on that basis the market will look to find value in economy cyclical be it industrials, infrastructure or construction or even bank every time there is a dip.

Q: Some of these stocks have run up quite a bit especially in the construction space, in the infrastructure space and the market is now playing a balance sheet repair story or interest rate story but the Governor’s statement tells us that maybe we will have one more rate cut at best for this calendar year or this financial year. Do you think some of these stocks may have run up a bit too much?

A: Not really. If you do get the investment cycle recovery, ultimately which will happen, it is taking time, it is taking more time than the market may like but turning around an investment cycle always takes time, there are lot of variables, lots of factors that come into play.

If that eventually happens over the next one or two years then the operating leverage that these companies have in their profit and loss (P&L) as and when the business cycle is better is substantial.

The valuation will not be much of an issue there, more pertinent question is when and how much does the investment cycle turn. If the investment cycle is indeed turning then I wouldn’t be worried about the valuation aspect of it. I will buy the right story.

Q: Apart from that, this has been a bottoms-up market now for last three months or so? Last year was easy in terms of getting the sector calls right, any particular theme that looks interesting to you where you think investors can make a lot of money?

A: One theme on the negative side to watch out for is the rural consumption slowdown. You have had a segment of the market especially consumer sector, which has performed especially in an environment where market was struggling to find good numbers or good earnings growth and so, that is one area where we should be cautious and avoid.

On the positive side, the thematic play I would still have is that the government is doing a lot of things, there are lots of policies.

As of now, they are not reflected on the numbers but will eventually, whether it takes two quarters or four quarters. So from an investor’s point of view, economy cyclicals, economy sensitive sectors regardless of how much rate cut is there because whether there is another 50 bps rate cut or another 75 bps rate cut for the rest of the calendar year, I don’t think that will be a determining factor on investment cycle.

Other things will determine the investment cycle and if that turns then economy sensitive infrastructure, construction, it will remain a good thing and related to that good banks. Every time you have an economy which is going into a better phase, the banking sector always performs well.

Q: What would you do with something like pharmaceuticals? That has been the big pocket of strength in the last many weeks, would you increase allocation or recommend increasing allocation there?

A: That is being somewhat of a favourite place to hide for the market, little scarcity value premium which the market is giving. At this point, I find most pharmaceutical companies quite expensive and it would be tough to increase allocation there.

Q: Any pockets of value in the midcap space because midcaps have been outperforming now for the last many days and there are sunrise sectors that people are investing into whether it is defence, some people continue to be bullish on auto ancillaries, any specific pockets that you like now?

A: No, I think in midcaps it is hard to pin down a theme. Each midcap would have to be a particular story and one goes company by company. Historically, we found themes working in largecaps, bigger sector thematics but in midcaps, once in a while you can catch a particular theme where everything runs.

When you have the technology boom or when you had other phases of boom but otherwise in this kind of a market where you have a bit of rangebound activity for another one-two quarters before it breaks out to the next phase, during this phase as far as midcap space is concerned, one has to go company by company, what is the story and there are some excellent stories always there in midcaps and that is why you see them run.

Especially, the acceptability and the interest in the Indian market from all classes of investors be it the domestic investors or the foreign investors is very strong. You have flows coming in, so ultimately those flows will try to go one step or two steps lower in the marketcap index and look at midcaps.