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Last Updated : Jun 29, 2017 05:16 PM IST | Source: CNBC-TV18

See Nifty base around 9400; like select PSU banks, pharma cos: Quantum Securities

Sanjay Dutt of Quantum Securities believes that the focus should be more on individual stocks, says it is the best time to be in the market now

Following the sluggish movements that the Street witnessed in the past few sessions, benchmark indices on Thursday opened on a strong note on June F&O expiry day. The 30-share BSE Sensex was up 146.19 points at 30,980.51 and the 50-share NSE Nifty rose 44.90 points to 9,536.15.

The development also raises the question as to whether the market has bottomed out or is there more pain left.

Quantum Securities believes that the Street is more or less at a good base of 9400 and is confident of the market holding on to that.

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“However, the Nifty levels are not so relevant. Focus on individual stories and companies which will perform better…it is more about the stocks than the Nifty,” Sanjay Dutt, Director, Quantum Securities told CNBC-TV18 in an interview. There are companies that could benefit from the Goods and Services Tax (GST) as well, he added.

Elaborating on the impact of GST, Dutt said that the country was going through an ‘unconventional and unprecedented’ period. Calling it historic, he said that these are moments that will redefine how business is done. Whether de-stocking happens or not in these times, he believes that there could not have been a better time to be in the market. “If you are in the market for long term, this is the time to remain invested,” he told the channel.

Additionally, resolution in the bad loans problem is another major step by the government and Reserve Bank of India, he added. “The process is excellent and cleansing is happening. It is time to look at select good quality PSU banks with good franchise,” he told the channel. Apart from these he also remains optimistic on a sector like steel; there are 4-5 steel firms in this list of 12 accounts. They could have some equity value left in them and one has to wait for the right day to buy them.

Meanwhile, on aviation, Dutt believes that the overall trajectory is upward, but high crude prices were always a matter of concern. Airlines are managing to live with the balanced costing model such as SpiceJet or IndiGo, while the government is determined to expand air travel in smaller cities. Due to all of this, there is still some steam left for investors.

On pharmaceuticals space, he sees opportunities in select spaces such as Alembic Pharma or Divi’s Laboratories.

Below is the verbatim transcript of the interview.

Anuj: What is your gut feeling telling you? Last time, your gut feeling got it right. Do you think this market has made a bit of a bottom? The 200 point correction was it or do you get a sense that once GST rolls out, we could have some more correction?

A: We are more or less at a good base that is about 9,400 plus-minus. I am reasonably confident and a very high probability of 70-80 percent that that base will hold. In a worst case situation, 9,300-9,350, I do not see anything below that. But the Nifty levels are not relevant. What is relevant here is that what are the stocks you are holding and the holding period you are looking at. So that is what is more relevant because if you look right now at the market, there will be a large number of stocks which have corrected 20-30 percent from the highs whereas Nifty might have just corrected about 4 odd percent or maybe even lesser than that.

So, it is a market where it is clearly focused on individual stories, companies, companies who are going to turn around, sectors who are going to do better, sectors that will benefit phenomenally from goods and services tax (GST) rollout, etc. So, it has got to do m9ore with individual stocks that you are holding than the Nifty really. So, the Nifty is probably going to be sideways or may again go up. It does not really matter.

Surabhi: Coming back to that point on GST, that is what Anuj was asking. The market seems to be divided. There is one camp that says more disruption, so do not expect great corporate earnings, but we are hearing the other side of the story as well that destocking happened now, so there will be restocking. So maybe expect a very pleasant surprise perhaps in Q2. Which side of it would you be on?

A: I am in none of them. I do not want to game this quarter or the next quarter. I am at least clear in my mind with the events that have happened in the last 8-9 months or 12 months. We are seeing unprecedented, unconventional moments in our history, in our country's history which none of us have lived to see through, things like what we saw and demonetisation, fine, we all can quibble about the fact that we do not know what currency came in, what was the benefit, but it has had a very key impact on the unorganised sector on the under the table or so called black money economy.

The general sense amongst people has turned towards better hygiene in terms of tax compliance, accounting, etc. There is a sense of responsibility and fear. There is mix of both come in. coming to GST, exactly the same thing is going to happen with GST. These are several moments in history which are happening. They are going to redefine the way business is done, they are going to redefine the way the economy starts to function, the way tax compliance goes up.

Now whether we do stocking this quarter or next quarter, as someone who is a portfolio manager, someone who has got his money into the market for 2-5 years, this could not be a better time to be in the market if you are looking at the next 2-3 years ahead. But, what will happen, this quarter or next quarter, I cannot game it, because it is impossible to game which company is going to have what benefit, how to go down to the micro level to tune it, whether restocking or destocking, we can have unending debates on those.

But if you are into the markets for the long term, this is a time to just remain invested and cut out the noise of GST just like we cut out the noise of demonetisation. When the market collapsed, people were actually were very clear that this is a time to buy and not to worry about this quarter or the next quarter.

Reema: In the last one month, there has been a material change in the news flow surrounding banks and the resolution of bad assets. Does that change your assessment of PSU as well as private banks?

A: This is, in fact one more thing that I wanted to mention in my so called discourse on the seminal moment and unprecedented events that we are seeing. I think never have we seen in India so much of focus, sincerity in a government along with RBI actually deciding, given the politically backdrop and the corporate backdrop of taking such steps. We must understand we cannot actually adopt cold cut measures of resolving this NPA crisis which has been built up over so many years. We have had to get consensus from the industry, from politicians, from bankers, everyone.

So this process that is happening, that is excellent, the cleansing is happening. Yes, there will be haircuts, there will be pain for PSU banks, mostly here in this case, but most of it or 90 percent of it is already in the prices. That is why you are seeing such low prices compared to private banks and the PSU banks, the valuations where they are. I think it has played out. Whatever is going to happen now on ahead, it is going to be for the better, so it is time now to actually look at select good quality PSU banks who have a good franchise, who will be able to solve these issues, who are in the process of solving these issues and will come back stronger.

Anuj: What about aviation? In the past, you have liked this space. This is a call which sometimes works out, sometimes does not. But, do you get a sense that this rally that we are seeing could continue?

A: It will be fits and starts in the sense that you will see a period of aggressive built up in positions and rises of 10-20 percent in stocks in about a month or two and then you will suddenly see a period lull or a correction. But the overall trajectory is upwards no doubt and going by past, the reason we have actually had a very rocky past, a very unpleasant taste with aviation stocks, if I put it that way is mainly on account of crude prices is what we never made money. If you look back last 10-12 years, crude has been at a very elevated level and that is why no one made money in the aviation stocks because every seat there just blows up aviation fuel whether it is empty or it is full. So there we have had problems.

But in India, we are going through a different situation now. Select airlines who managed to live with this balanced costing model, no frills along with some amount of frills, like a SpiceJet or IndiGo, etc. who are positioning themselves at various places. And then on top of that, governments are all to expand air travel across the country in tier-II, tier-III locations plus a new airport being planned in more or less every metro city. There is steam left for an investor to pick up select stocks.

But like I said, you will go through these pockets of frenzy and sudden lull and a kind of panic as to why did I buy this stock 30 percent higher.

Surabhi: But would you still buy aviation now at these prices because some of these stocks as you mentioned have already had a dream run. Still worth a fresh entry with all the divestment news surrounding them?

A: No, I would not buy them right now. In fact, I do not have exposure to aviation, let me be frank at this point of time. But overall, sector has potential, but I would not buy these stocks right now.

Reema: What about pharmaceuticals? Is it showing you signs of bottoming out and in that, how do you select the stocks to bet on because as we have been saying in pharmaceutical sector, there are land mines as well as gold mines. So how does one go around selecting the right pharma stock to pick?

A: Investors have dealt with most of the land mines. I do not know if the gold mines really lie ahead or not, but more or less land mines situation has been dealt with by most investors. That is where you have had a huge underperformance over the last 12-24 months. Purely on a technical basis, about a month or two back, probably on your channel only I thought that pharma stocks were oversold, so therefore, select stocks deserved investment or maybe a trade.

I feel the same right now because I think select opportunities are there in the likes of a Divis Laboratories or an Alembic Pharmaceuticals or something, some of these I own also as trading positions. So therefore there are opportunities. But like I said, most of the land mines have been dealt with.

Now whether there is a gold mine, whether there is a pot of gold lying at the end of the financial year, next financial year, it is a difficult to gauge, it is too early to gauge that because one needs a lot of work there particularly because of the fact that most of these companies are dependent on international businesses as well as US Food and Drug Administration (FDA) issues, etc. and the foreign regulators.

Anuj: Jaiprakash Associates, I know we have discussed this in the past as well, but it has doubled from the lows and this entire group actually. Do you see fresh value here or do you think, can you take a bit of an all or nothing call here?

A: One does that with about 5-10 percent of one's portfolio always whether you are depending on the risk profile, you are someone like me, might take a 20 percent bet on 2-3 of these stocks which have come out of the woods and would be half or three times and four times the next year or two head, it is worth it. But you must understand, you must look at the attendant risk in them when you are getting into them. So you correctly said all or nothing, but limit yourself in these stocks to exposure which you can handle, losses you can live with because there are a lot of ifs and buts and fits and starts that you will experience.

And also, in these 12 companies that have gone to the National Company Law Tribunal (NCLT) procedure as per the RBI mandate. So there are opportunities in them also but there again, you will have to live with these issues there. If you are an active participant in the market, I would not use the word necessarily a trader, but you are an active investor who is monitoring it closely, then it is worth a punt in these stocks. But if you are a stable passive investor who looks at his portfolio once a month or once in 2-3 months, then I do not think this is your cup of tea. No, do not dabble in these.

Surabhi: I am going to take my chance with this last question. Trying to look at it beyond just Russian Roulette, these 12 companies that have been identified, would you hazard a guess which are the ones where we see a good resolution, we might actually see buyers. Is it going to be the steel companies? Can the power companies pull through? We have some infrastructure names as well. What is your sense on these 12, they are the headline makers?

A: In my opinion, I have been quite optimistic on a sector and that is steel. Out of the 12, there are four or five steel companies, and some of them actually have hard assets on ground. If you closely get down to reading the last annual reports, a lot of research reports that are publically available and the fact that is accepted and more or less we all know that there would be haircuts on the loans, some of these steel companies might actually have some equity value left in them and one has to just, like you correctly said, the Russian Roulette here, one has to just get the right day to buy them on a down circuit or some negative news up in the headlines of the pink papers. That is time when you have to look at these steel companies.

So if I have to bet, I would bet on the steel pack amongst these 12 because the sector has phenomenal opportunity. If there are haircuts and the right capital structure that will definitely evolve out of this restructuring and the assets will be sold or whatever happens, there can be multibaggers coming out of one of these or two of these four, definitely. But you have got to get it right. Like you correctly said, it is a Russian Roulette.

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First Published on Jun 29, 2017 10:54 am
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