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Last Updated : Aug 11, 2015 05:32 PM IST | Source: CNBC-TV18

Sell midcaps on rally, cherry-pick banks now: Elara

Domestic mutual fund inflows are triggering the ongoing midcap rally, but Harendra Kumar of Elara Capital warns that cracks are likely to emerge sooner than later and advises selling them on rally.


Domestic mutual fund inflows are triggering the ongoing midcap rally, but Harendra Kumar, MD, Elara Capital warns that cracks are likely to emerge sooner than later and advises selling them on rally.


Meanwhile, the Chinese government has allowed yuan to depreciate 2 percent against the greenback which will impact India's exports to China. Talking about it, Kumar said the move is not a one-off action and expects further devaluation in future. Grasim a largecap stock, besides a host of tyre stocks will come under pressure. ‘This period of volatility will not be easy to manage in the short term.”


In the domestic scene, recapitalisation of banks will initiate cherry picking in the sector and State Bank sits on the top of the public sector bank heap.

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Rural recovery, with monsoon gaining traction, will aid rural consumption theme. Kumar believes stocks like Hindustan Unilever (HUL) and two wheelers names like Hero MotoCorp will be beneficiaries of the consumption upsurge.


Furthermore, Siddharth Bhamre of Angel Broking believes the Indian market is unlikely to correct anytime soon and advises traders to not short the Nifty. On sectoral preferences, he is bullish on Bank Nifty as it has seen a 6 percent open interest and suggests buying a Bank Nifty put at 18700.


Below is the transcript of Harendra Kumar's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.


Sonia: It has been such a midcap and smallcap oriented market for the last couple of weeks, what are the stocks that have caught your attention either post numbers good numbers or ahead of earnings, we have so many more midcaps that are going to detail their earnings today?


A: If you look at it, the bigger trigger for midcap stocks is a flow into the domestic mutual funds. I think a large part of the run up is liquidity driven and some of the small and midcap stocks are overshot largecap valuations as well. So while the street is quite excited about midcap and smallcap, I would like to highlight or bring out a caveat here is that if you would have seen that, the circuit filters and the movement to trade to trade has begun, which is initially a sign to show that the regulators and exchanges are watching the unusual price movements.

So typically by the second or third list, the market tends to peak out. So my guess is on the midcap and smallcap stocks we are closer to the old valuation zone and sooner than later, you would see some amount of profit taking or cracks emerging there. So at this point of time, I don’t think I would be outlooking for fresh midcap ideas. In fact, I would be looking to sell them on rallies.


Latha: We just got news about an hour ago that China has devalued the yuan by two percentage points. It sounds like a one-off but would you worry more about tyre stocks which have been complaining of dumping and metal stocks which are anyway decimated?


A: Clearly this is not going to be a one-off, while we would like to believe that what the government has gone out and said is that this is one-off but typically we would not trust the Chinese, so they would be looking to devaluate it further, which means that we have seen a big rally in the textile stocks, some of the stocks that you mentioned in terms of tyre and other stocks would get impacted over the medium-term.


Also Grasim, one of the large cap stocks which has large headline revenue number out there as well. So the short-term currency volatility given the INR's overvaluation will come under pressure at this given point of time. So, select midcaps which were rallying on the back could also get impacted. So, I would say that this period of volatility where the regulators and Chinese government try to stabilize that, it is not going to be easy for India as well over the short-term. So, we need to watch out over this period for the markets.


Sonia: How do you approach a stock like State Bank of India (SBI) now because the management has indicated that this quarter there will be lower amount of stressed asset formation etc and going into the numbers, there has been some buying in that name, how are you positioned on SBI?


A: We would not want to trade the results per se but I think if you would have seen Latha Venkatesh's interview with Anand Radhakrishnan of Franklin Templeton with the basic premise now that is developing in the market that private banks are overbought and that was a consensus buy and clearly what measures the government is trying to do in terms of recapitalising new bank chairmen and of course a recovery which has always been illusive and people are believing that we will come up over the next two quarters.

The one public sector undertaking (PSU) bank stock that one would love to own is probably SBI and select recovery that is coming up in Punjab National Bank (PNB) and Bank of Baroda (BoB). So yes, the cherry picking on PSUs will begin but at a price point and with some conviction. So I would say SBI is up there in terms of PSU bank ranking and despite whatever results it posts today.


Latha: Since you referred to Anand Radhakrishnan, just point out to the other theme that he referred to that a rural growth theory would lead you to buy consumer staples and an urban consumption growth theory would lead you to build consumption discretionaries. That was a theme and now yesterday Society of Indian Automobile Manufacturers (SIAM) numbers also told us that passenger vehicles are rising by 17.5 percent distinct high in recent times, are you backing the urban discretionary theme and if yes, which are the stocks?


A: Absolutely, we have been backing it right from January and I have mentioned it multiple times and general news is that the biggest theme that we are pushing, while the urban recovery in terms of job growth has already started trickling in, you can see that number in data consumption in four-wheeler sales. I think the rural recovery along with the monsoon regained traction. So the two sectors that are leading the market or supporting the markets are four-wheelers and you have consumption stocks which are doing extremely well now if you look at the fast moving consumer goods (FMCG) index.

So what we are seeing is that the urban recovery is getting priced in, the rural recovery start to get price it. So the mispricing out there is on Hero Motocorp from auto pack. So I think valuations are extremely comfortable, they have gone out and reported good margins, if you have a volume number that is meeting the street expectation, the stock could rerate significantly out there.

I think the other rural consumption theme very largely would be Hindustan Unilever despite all issues on valuation, that is one company that is going to monetize its huge big consumption book. So that is also currently very under-owned at this point of time and I think as they report the next quarter numbers, the stock will tend to rerate from hereon.
 
Sonia: You were talking about a couple of pockets that you like in terms of earnings etc, one space that has done quite well is the entire FMCG space. You were referring to rural consumption themes names like Hero Motocorp etc but some of these names like Emami, Britannia, Marico continue to do exceptionally well. Anything from that space that you like?


A: We like the entire basket. I think we relooked at Emami's valuation at current level but per se Britannia, Godrej Consumer and Marico are our accumulates. Among the largecaps clearly you have very little choice between Hindustan Unilever Ltd (HUL), ITC and Nestle. Nestle and ITC are clearly struggling with their own issues so one outlier in HUL at this given point of time. So largecap which is under-owned could see buying progressively from hereon. So I think pretty much the pack looks okay at this given point of time.



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First Published on Aug 11, 2015 09:10 am
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