See 50-100 bps rate cut soon; high on banks, pharma: IL&FS

Banks look better than most sectors, says Kapoor and although incremental margins for PSBs may be lower, he does not expect profits to fall sharply.

He advises staying away from IT on back of a lot of uncertainty surrounding it but thinks pharma can be looked at because rupee depreciation could be positive for them.

He is also wary of NBFC space because valuations are already high – so better avoid.Below is the verbatim transcript of Vibhav Kapoor’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18. Latha: First really the medium term view, are you looking at these dips as mouthwatering levels to enter or is it going to get more mouthwatering before it gets rewarding? A: The medium term view is definitely positive; there is no doubt about that. I think this whole demonetisation, etc will have positive impact in the medium to long term. The issue is how much the market can go down in the short term or in the next few weeks for you to really get them to buy. So, I think there is no single answer to that and therefore at such times you need to buy in small quantities, not chase the market and every time you see a further dip, buy a bit more and be selective. Look at only good quality companies for the time being and probably only the largecaps. In any case the midcaps were pretty overpriced and over a period of time you collect your shares. Anuj: I remember our chat for Taking Stocks three or four months and you had said that post US elections expect a significant correction. Now, the reasons could be different but we have seen that correction play out and I think it has entered a zone that you were talking about at that point and maybe even gone below that. What stocks are screaming buys right now at current prices? A: It is actually a little unfortunate that in addition to the domestic factors, the global situation for emerging markets has also become a little bit negative after Donald Trump’s victory. We are seeing the dollar go up sharply, we are seeing interest rates go up in the US and therefore some outflows from emerging markets are happening and could continue. So, that combined with the domestic situation obviously means that market can probably go a bit lower than what we had thought earlier and the downtrend can last even longer. We were anticipating a downtrend. So, in the given situation the sectors which one would look at, I think the banks look probably better than any other sector at this point of time and of course FMCG. The good quality stocks which are getting much cheaper than you would have anticipated would be the favourites. Even autos maybe 5 percent below today’s level, would also be good priced.Latha: There is a debate on public sector banking stocks; we have spoken to a bunch of bankers and their worry is that initially there is going to be a margin crunch because they are getting a lot of deposits and not too many takers, so, it is about a 1-1.5 percent spread if they put that money in G-Sec which is lower than their normal margins. However, there is an argument going that they could get better captalised if the government took a large dividend from the Reserve Bank of India (RBI); that is legally and monetary policy wise in grey area. We don’t know if the dividend will come, so, how do you approach public sector banks? A: I think overall while the incremental margins may be lower but still I don’t think there will be a really sharp fall in the profitability of banks because of this particular thing. Latha: Would you expect the non-performing assets (NPA) issue to be worsened? A: Yes, so, maybe the risk there is that the SMEs, etc you can have in that sector bigger NPAs coming. So, I think the RBI should look at maybe some forbearance temporarily in that place. The other thing which I would have expected already to have happened but should happen when the next RBI policy, is a steep cut in the policy rate. It is very obvious that at such times you need lower rates and there is a lot of money in the markets, demand is low. So, I don’t see why the RBI is not cutting rates immediately. I would have expected at least a 50-100 basis point cut. Anuj: What about portfolio position, this market has been bipolar, you have made a lot of money if you have been in banks and consumption and you have destroyed wealth if you have been in IT and pharmaceutical. In the near term do you think it is time to reverse that stance, get into more defensives and maybe get away from discretionary consumption? A: Unfortunately, IT as I said, because of the US situation while is something which in the medium term still doesn’t look good, there is a lot of uncertainty even on the visa situation what will happen in the US. Yes, the fall in the rupee could help them a little bit but on a medium term basis I don’t think it is still a good buy. Pharmaceutical could be slightly different. I think pharmaceutical stocks have fallen fairly quite a lot in the last few months and with the rupee also going down I think pharmaceutical is one sector one can look at as a defensive. Latha: The NBFCs, they were the vanguards of the rally in 2016. Now, because of loans against property and probably exposure to SMEs and MSMEs, the NBFCs have taken a pasting. Even today Magma Fincorp and Mahindra & Mahindra Financial Services Limited (MMFSL) are all among the leading losers. What would your take be on NBFCs, how does one sift the grain and the chaff? A: One is, you have to be very careful and unfortunately some of the NBFC stocks were trading so high, 5-10 times book value, so those are the first ones to avoid or to even sell off. Then you have to go sector-by-sector; there are other NBFCs which are more lending to for example transport sector, again you have to be careful there. Even housing finance companies, because real estate is going to have probably a much longer negative impact. So, on the whole I think NBFC sector was really in a sort of -- the valuations were anyway very high so I think one needs to avoid this sector for some more time.