Investors are gravitating towards value picks in the economy-facing sectors as they are running out of options, Ajay Srivastava, CEO, Dimensions Consulting tells CNBC-TV18.Pharma and FMCG stocks now look risky--the latter because of rising competition--and IT stocks have been underperforming for a while. At the same time, sectors closely linked to the economy are available at attractive valuations, and can give good returns over the next couple of years, Srivastava says.He has short positions in PSU banks and is looking to increase those positions if prices rise further. But he cautions against going short on other sectors though fourth quarter numbers in most cases are expected to worse than the third quarter numbers. That is because there is too much liquidity in the system right now forcing share prices higher in the short term irrespective of fundamentals, he says.Srivastava is bullish on stocks like Vivimed, Venkys, Syngene and Cadila. Below is the verbatim transcript of Ajay Srivastava's interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.
Latha: 13 percent of Budget day lows. You will be wary of buying now?
A: We have not bought anything yesterday but barring few things. We have done open short position with the public sector undertaking (PSU) banks and we have a conviction that if it goes up further, we should increase our short positions on them.
Latha: One of those sister companies of PSU banks that is economy facing like all the metal companies or capital goods companies, all economy facing, they have got a lot of buy recommendations. Are economy facing stocks becoming flavours now?
A: I think one argument would be that they have been beaten down and brought down to the levels where intrinsic values were there in the stock perhaps some value is there. So, any kind of recovery which one foresees two-three quarters down the line should give a major equity fillip to the investor's portfolio. We have to look at the backdrop as to what is happening to Indian equity market. Pharmaceutical was a safe haven which has become riskier, fast moving consumer goods (FMCG) is becoming extremely risky with the new entrant in and competition, gross margin. So two big IT has underperformed, so three big segments of investment avenues for investors that kind of looking shaky at this point of time which use to take up lot of money, so necessarily the avenues of investment would gravitate towards value picks rather than regular picks where itself they become risky. Therefore, I would tend to believe that the investor has no choice but to narrow his picks from sectors which have been beaten down because that perhaps is where the value can come in a year-two years time.
If you look forward FMCG, what kind of return it will give in two years timeframe, looks very diffident with the new competition and government action for instance. If tomorrow government bans Fair & Lovely or Fair and Handsome, what happens to Emami's stock? So we are in a scenario where branded items could be a risk in the market in consumer space, so why to go there. Therefore, buy a steel sector and hope that something turns around there. Cement has already done little bit of trick on its own. So keeping that in momentum, it could be that 1) intrinsically they are good values 2) the choices of investors also shrinking as to where to put the money.
Reema: You spoke about initiating fresh short position in the PSU banks, any other sectors or stocks that you would recommend fresh shorts now?
A: Not really at this point of time because you do not argue with the kind of liquidity flow coming from the global markets. If they taper off, we could open up segments to do that. I would go into FMCG short easily and Hindustan Unilever (HUL) is one of the candidates which is always in prime list. ITC is second of them. However, you need to be wary of the fact that you cannot find global liquidity flows. You may be pessimistic about our economic scenario; our economy is struggling, the results of Q4 is going to be worse than Q3, by and large is most sectors but you do not find liquidity and start initiating short position even though you are not convinced about the valuation. So hold your fire, see if the liquidity tapers off and then we get back into the market, but otherwise unless you are reasonably sure like we are about PSU banks, you do not short and fight against liquidity and momentum.
Latha: Is there a tactical long in any stock or sector?
A: We are net long in a lot of companies and there are lot of niche players in those companies including healthcare sector; we are buyer at all corrections, investors feel jittery, we have got lots of smaller companies like Venkys and egg company, we like Syngene International as contract research and manufacturing services (CRAMS). So we have been building long position in these kinds of companies over time. We like Vivimed Labs as chemical company. So all and all if you look at our portfolio, it's sprinkled with all the elements of different sectors and long sectors and long on them but that is why we say it's a healthy mix of long and short, net-net we are always long. I do not think I have ever been net short in the market and that is where we all feel that we are in a stock market, we just feel optimistic about everything.
Reema: In the past we have seen that very strong liquidity inflows can surpass weak fundamentals and we have seen the indices reflect that and the stocks move up significantly. You don't believe that currently we are in the phase that yes, the fundamentals maybe weak, Q4 earnings could look bad but considering the strong liquidity market could still go up and therefore we should stay long?
A: Of course market can go up and that is why I said you do not fight liquidity kind of inflow but what you do sensibly is 1) get out of stocks that are weak and have done reprising 2) take some money off the table regularly from these flows because these do not come often 3) I hope this March is long. This is a third March in which you are seeing great amount of optimism; March 2014, March 2015 was a great high that we had and now we are in March 2016. So the cynical part of me says take the money out, at least 10-20 percent money out and wait for redeployment; it may not come but perhaps it will come sooner than you realise it but the trick in life is to calibrate yourself to international pros because these are rallies driven by central bank. These are not rallies driven by rerating of economic fundamental forces. So you do not need to get carried away by these. You need to ride away and when the wave goes back; you should be on the beach not in water.
Latha: Cadila Healthcare is a buy in distress?
A: I have a long position in that and I think it is a buy call at any distress point it falls down, good strong stable portfolio products, good facilities, very conservative management. I like that company. It's a nice company if you look at financials, consistent, not grown very much. It should have grown much more but it is a nice clean, consistent pharma company. It will have its own shares of Food and Drug Administration (FDA) etc issues but leave that aside. I think it's a good strong pick. If it any major correction happens, I would be a buyer in that and you want to be with this kind of company which have given 10-20 years of good consistent performance.
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