Right time to look at PSU banks, metals, cement: N Jayakumar

N Jayakumar, President, Prime Securities was one of the few experts to believe that market would witness a huge rally post Budget. He says Nifty is likely to trade in the range of 7500-8400 till September 2016.“Any move towards the top-end will be followed by selling and any move towards the lower-end will be met with buying,” says Jayakumar, adding that it won’t be the low-hanging fruit that the market was in the past but that there would be a great deal of churn in stock preferences. He is very upbeat on public sector banks and expects 2 or 3 of the banks to gain dramatically going forward. According to him, experts, too, will now talk more about recoveries in these banks.His theme for the year is 'reversion to mean' – be it oil prices, commodity prices etc. According to him, market now needs hard evidence to validate the reversion to mean.Cement as a sector too is likely to surprise in the near-term, believes Jaykumar because of the fair bit of recovery that is already underway in sectors related to cement, ports and roads.It is now time to look at second-order derivative stocks, says Jaykumar. However, he is not keen on investing in primary markets. His advice is to look at stocks/sectors that are not in focus now like cement, metals and even PSU banks.Below is the verbatim transcript of N Jayakumar’s interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal.Sonia: You can say that I told you so?A: There is enough that humility tells you that don't need to say things like that.Sonia: Yes, you win some and you lose some?A: Yes, of course. You hope on balance you win few more than you lose or the ones that you lose are affordable etc. But having said that one of the things which actually made one say, it was the kind of screen based pessimism there was and literally there was everyone screaming for 6500 next week and people were screaming from the rooftops.So, actually if you look back and you say, you have sort of moved away from the crowd to an extent you could see this coming but it had to climax in an event which has been the most built up event in the Indian markets for the last 30 years. And you have had a rally probably 27 out of 30 years, for the last 30 years. So, if you see that event actually had a sell off pre that. It almost became a no-brainer that there would be a rally post that regardless of anything else that has happened in the world.It is important also to know that there has been a huge number of things that have actually bottomed out much like the way the markets have. Nifty was only one of the various things in the world. Oil at USD 26/barrel or mid 20s. When people was screaming for USD 20/barrel and double digits and 10s and stuff like that. Or for instance the thing about non-performing assets (NPAs) will eat up Indian banks and phoenix like rises the Reserve Bank of India (RBI) and sort of tells you to go out there are bare all as it were and guess what, the kind of efforts being made today have created a monster out of Vijay Mallya. We can discuss that as we go along.So, the point I am trying to say is whenever you have this kind of a clarion call for a system to breakdown and the breakdown of a public sector undertaking (PSU) bank was like the government defaulting. It is obviously never going to happen and clearly from that rose a resurgent effort for recoveries or for instance more recently commodities and the greatest textbook case which I am telling you in history will bear me out.I don't even remember, was it 10-15 years ago that with great fan fare for a few billion dollars and more Tata Steel rather than following what Schumacher said was small and beautiful went out and said we will buy Corus, the greatest big bang in the history as we are going out and seeking grand frontiers and 15 years later they sell it for a dime, you could call it a nickel, call it whatever. If that isn't bottoming out of the steel space then what is. They bought it at the absolute peak, they sold it to my mind at a historic bottom, because incidentally steel price have gone up from USD 260 to USD 485 in a matter of six weeks. And you have had a sell out of a steel company of Corus of that capacity. Clearly when big industrialists panic that is when bottom is coming.Anuj: What about the upside now? We have had a fair bit of rally. Let us put it that way and not all the problems are sorted and a lot of people would believe that this rally is backed by hot money and which could reverse. What next, do you see this market over the next one years or two years going to its previous highs or there is still a risk that there would be another wave of global risk off which could take the market, maybe if not to the recent lows, maybe track it back to 7200-7300 kind of levels?A: Here is a snapshot. My feel for the next six months is that the markets range between now and September between 7500 on the low and 8400. I feel any move towards the top end will be met with selling, any move towards descend will be met with buying. It will not be the same low hanging fruit like the past but there is going to be great deal of churn within the kind of stocks that people go for.If you see the performance of the HDFC twins for instance it tells you that the old order change is yielding place to new. There are new kids coming on the block all the time and I will be referring to stocks, so it is safe to assume to assume that I have an interest, so that disclaimer maybe made. So, for instance the new kids on the block, I keep saying what will keep markets up. So, the new entrants to the Nifty for instance. That is already pointing to two stocks.Sonia: Eicher Motors and Aurobindo Pharma?A: Well, Aurobindo Pharma and Tata Motors DVR, which actually could be to my mind Eicher Motors before that. They are clear indicators that the world and the money in terms of the Indian exchange traded fund (ETF) based buying will make some of these as there are some extremely good additions and in the case of Tata Motors DVR better late than never as it were.So, the market is going to move. PSU banks which are being so ignored and so beaten down two or three will rise pretty dramatically in my opinion and every quarter going forward you will find people talking about recoveries rather than write offs and number two, the interest rate cycle is headed sharply lower because before interest rates bottom out there must be a sharp fall. There has so far been a graduated fall.There is going to be a sharp fall which may happen between June and September and that is when you will have bonds moving up dramatically, the bond portfolio gains coming through. So, there is good news in the wings for PSU banks.Anuj: Since you mentioned the HDFC twins what do you make of the kind of underperformance that we have seen from HDFC twins. You could say that new leaders are emerging but at the same time it is not supposed to be mutually exclusive. New leaders could come and others could also rally. What is preventing the rally in HDFC?A: Over ownership. Over ownership needs to be seen as a proxy for consensus trade. Any time money came in, moved into these and kept them, for instance, the banks at a much higher price to book than - there was a time when price to book of HDFC because the options were fewer, now the options are far more and number two as efficiency comes into the rest of the sector, I am not saying the gaps will for sure narrow and it is narrowing all the time but over ownership as a result of this will keep some of these valuations in check.So, the way I see this is that at 6800 index the market is supposed to react the way it did. That is in one fell swoop as it were it should just cover 10-15 percent, don't give a chance to anybody to come in. Now you are back to kind of - so my theme for the year is reversion to mean. You take oil prices, you take commodity prices, all of these are very important element in this. If commodity prices have rallied up the way they have at these levels all steel companies are making money. So, the question you ask is if steel companies are producing enough, selling enough and making money does it mean the economy has turned.So, as a proxy or as a derivative trader I would say the economy has actually turned. We will get to know about it six months later, which is why every trade now the markets will look for validation off the reversion to mean to say okay, there is sufficient pick up of oil at USD 45 per barrel to me to believe that the bottom is over. Otherwise the reversion to mean indicates that bankruptcy doesn't happen every day and therefore the market has come back to fair value in many sense. So, 8000 also if you look at it some kind of weighted average over the last two and half years or two years of the Modi government. Sonia: If we do trade in this range of 7,500-8,400, I am sure there are plenty of stories that will give you superlative returns. What have you made of themes like cement? We just saw really good numbers coming in from UltraTech Cements. Do you think that the story has played out or are we at the cusp of new bull market in cement itself?A: Cement could surprise and it takes out from where I feel. If steel has moved to these levels and if there is enough off-take, steel and cement are kind of almost Siamese twins kind of thing. So, they will move in tandem. So, steel and cement could be the industrial groups that could lead you forward. Roads and ports are a very major indicator of the kind of activity that Mr Gadkari has put together and that indicates that there is ground level work that is going on. So, if roads, ports, steel, cement, you are talking about not just green shoots, there is a fair amount of recovery underway. We are probably not able to see it, because the nominal growth which used to be real growth plus inflation – inflation is hardly.So in a sense, the nominal growth visually is looking much less than what it was earlier. So, because visually we are not seeing activity, it seems to us that most people come back and tell you that where is the growth. The reality is that there is growth. Otherwise, you cannot have local steel prices gong from Rs 23,000 to Rs 32,000 and off-take being as strong. And similarly for cement, etc. there will be pockets of protection that the government will bring about because they want to protect their banks, there will pockets of areas where the prices will be higher, but no taking away from the fact that, and notwithstanding any comments that anybody might have about specific sector.I am clearly of the view that the worst in terms of recoveries, the haemorrhaging of banks, the story of crony capitalism, that is very far behind us. But the next six months, the markets will now want that to be validated because the move has happened. The market has preceded this move in terms of taking valuations up to September-October levels and saying now, I want you to produce the growth that I am pricing in.Anuj: I remember, the last time you were here, you told us that Nifty may not go back to its all-time highs in a really long time, but that does not mean a lot of stocks will make you a lot of money. In terms of bottom up stock selection, you have already given a couple of sector names. In the broader market, what kind of stocks do you think stands out where we can still see good growth even from current levels? Do you think high-beta plays off from here, do you think it is about safe stocks?A: What has happened is that if we just take up the list of winners that there are many 52-week highs that are out there, small plays, big plays, I can mention a few. But the idea is not to mention, the idea is to figure out if you can identify a few more. So, the way I would look at it is now is the time not to look at the first order of derivative stocks but the second order which means for instance – I am not necessarily saying it is a Crompton, but like a Crompton – it has restructured, it shed a few things, they have a brought in a few things. Now is the time to actually analyse that far better to see if the restructuring actually now will bring about the gains that they have been shooting for or has debt reduction been their only objective.So, anywhere there is a play, where there is a bit of simplicity in the balance sheet, where they have multiple businesses, conglomerates spreading up, markets tend to give you disproportionate returns where the businesses are simply understood as opposed to when it is complex. So, there are a number of plays right now which are in the restructuring mode and that is the first place to start looking for. And that is where we are finding a lot of value in this where simplicity is the new avatar of complexity in the past. And restructuring plays which involve infrastructure, which involve, I will give you, Dredging for instance. Dredging is a big play because it is linked to ports, not too many companies so it is easy for you to do the first order research to come out with names. And these are the kind of names that we look for. Even rogue companies. A lot of them will come through.I am really amazed. The few steel companies that have survived will probably be here for better days. And while this is happening, we cannot take away the fact that the RBI has had a huge role to play in pushing banks to make promoters make up their mind. And I was actually keen to – we keep talking about this Mallya incident – which at one level while being fantastic to say that PSU banks, what you and I are paying for, in terms of the capitalisation that happens to banks finally comes to the pockets of you and me through taxes paid. So, at one level, you feel good. But at the other end you actually have a question to ask that is this entire concept of group investing something that the RBI has put into play which means that, are all industrialists being viewed as groups? Which means that they should be given a clarity that okay, if there is an exposure loss in one, we will set it off against the other, because I think it is not very clear to me that this limited liability concepts actually being kept the way it is, but if there is diversion which means that people have taken it from one company and gone to the other, then clearly, the companies themselves invoke the group concept so you can reach out and recovery from the others. Just because every industrialist has four or five companies.And I think the RBI today, has made a very clear point that through its latest special drawing rights (SDR) guideline, have told banks that unless you have a restructuring in place, unless you put out benchmarks that have failed, unless you put out critical conditions, you cannot walk away and say or force a promoter to sell his company.Anuj: So, PSU banking is not necessarily the kind of space, it is hated a lot but it is actually giving good value right now?A: It is giving huge value. And for actions not necessarily generated by PSU bankers themselves, but because of the environment around.Sonia: That is quite a gutsy call because we have not seen that turnaround come. Of course the stocks have moved up tactically, but we have not really seen the turnaround in earnings.A: The first sign will be when they start trading close to book.Sonia: Let me also squeeze in one last question. There is so much activity in the primary markets. We have had some great listing with Equitas, Dr Lals, etc. we have a couple more coming in. There is Thyrocare, Ujjivan, anything that interest you?A: I think these are very richly valued, most of them and my own assessment is that actually listing is a great leveller. Take the case of IndiGo for instance. You know the run it has had. Runs they all will have and then one question about why was it that all money was taken out came back to haunt them four months after listing. Actually it was a negative net worth company, actually they pulled out dividends well and truly before, they said they would pay out dividends but they have already taken out. So, these kind of questions became corporate governance issue. So, voices like ours became a voice in the wilderness. So, people said do not bother, Rs 700 has become Rs 1,100, that is the bottomline or Rs 1,300. But not to forget, Rs 1,300 became Rs 700 virtually in a two week period.So, the listing, what it does is it gives you that measure of accountability. So, I would like to wait for many of these companies to list. They are probably great businesses, but they are richly valued. None of them is going a-begging. And then the Indian consumer, the investor is a sucker for fixed price investments. So, you put out a sticker saying this is a sticker price at which you are getting, the applications will come in. So, these do not necessarily suck me in because there is too much of attention. I would like to look at stocks which are not being focused on, the not so pretty girl out in the.Sonia: So who is the not so pretty girl apart for cement, metals, that you spoke about?A: PSU banks is a thing. They are the ones shunned and they are the ones ignored and this is not, this is a hugely sexist comment almost coming from me, about this part of it, so I might get pulled up by organisations for this.Sonia: You could say not so pretty guy, it is fine.A: The girl, guy is actually pretty much unisex in that sense. The point I was making actually is the ignored, the almost outcast pariah spaces in the market are also stocks where people can find a lot of value. So, my assessment on this is I would rather focus on what is not being focused on by people where there is enough amount of work to be done and you have 3-4 months, because I do not know of too many times in life, you just pick up a dart, throw it, pick up an initial public offer (IPO) company and make lots of money and everybody goes home happy. Somebody has to lose.