Valuations attractive now; like banking, infra: SBICap

In such a situation the momentum is for the downside so from a valuation perspective the market was attractive even at 8,200 levels because we were just at about 13 multiples forward earnings, FY17 earnings. We are today at perhaps 12 times FY17 earnings. So it has been a cheap market in this entire down fall that we have seen and the downfall is attributable to the huge FII outflow.

Thankfully the domestic mutual funds have been supporting the market but we really don’t know how long will that continue because if you have a rupee depreciation happening, you have weaker earnings and you have therefore weaker gross domestic product (GDP) probably the savings will not get drawn into the equities.

Ekta: Are you anticipating a worse September as oppose to what we saw in August? We have seen August FII flows at a record level since many months saw maybe a couple of years as well and not to mention we lost around 5-6 percent in the series itself. Will September be worse?

A: Let me answer this question in two parts – FII flow will that we worst than August probably not. We will still continue to see some amount of FII outflow but hopefully we will not see and this is purely based on hope because if August was a record of six years in terms of monthly outflows then probably September may not be another record month.

Second part of the question was about whether we will see Nifty levels going down from here on. So probably a 200-250 point cut seems visible in this FII outflow kind of momentum. So, that is what we are anticipating but like I said from valuation perspective the market is attractive this is a time to go out and if you have the money to put in value kind of stocks.

Latha: If there is incremental cash, where will you deploy them and for those invested - what would you churn out off, what would you churn into?

A: We are advocating that you have to be in - what we call as India-centric stories. India is a great economy, it is growing probably the faster that is the point of debate in terms of whether China is faster than us but I am just saying that from a momentum perspective India GDP growth will be the fastest in the world among large economy. So, if that is the case we have to look at picks within what we call as India-centric businesses and businesses which appear attractive in terms of valuation.

There may be weak earnings growth in the interim period for these companies. However, if the valuations are cheap why not look at such India-centric kind of businesses. So, whenever we say India-centric business, two sectors really crop up. One is infrastructure and one is the banking space. It goes without saying that these are go to kind of sectors and probably depending on the valuation that you take you might look at the some of the names are attractive._PAGEBREAK_

Latha: We spoke with the management of Marico and as well as Motherson Sumi Systems. Motherson Sumi was extremely confident of the sales in Europe that is 85 percent of their market and Marico did 6 percent volumes in Q1, they were confident of 8 percent and were even looking at 8 to 10 percent. So are these areas that you will look at - auto ancillaries, suppliers to Europe where troughing out has happened? 

A: The two companies that you named are aberrations, they do not necessarily tell you what the underlying trend is. In fact most of the auto ancillaries exposed to the European market either supplying from onshore plant there in Europe or offshore plant in India are in troubles because the euro as a currency collapsed this year. So, unlike the normal behaviour of currency which tells that rupee will depreciate against dollar and if you are an export company, you will get better profits. The companies exporting to Europe didn't see that build up in at least the first six months of this year. We don't know what is likely to happen in the next six months so from that perspective the currency play to us is quite weak. So, wouldn't pick companies who are exposed to the European economy just because the volumes are shaping up well, the currency play is going to be negative.

As far as Marico is concerned, we are talking about rural consumption, semi-urban consumption growth. However, on the contrary the indications that you can see look at the two-wheeler numbers reported this month. Hero Motocorp is minus 14 percent, TVS Motor Company is minus 2.50 percent in the domestic market. Therefore, that tells you that the rural economy is not shaping up well enough and the GDP numbers we saw were quite weak; monsoons are 12 percent below the long period average. So what I am trying to tell you is from a rural standpoint of view or a semi-urban standpoint of view some companies maybe exception in terms of seeing their particular basket of products really doing well vis-à-vis the general market behaviour which is very cautious. 

These are defensive plays. However, one has to again come back to valuations. So what we are trying to see is let us look at what were the valuation of some of these companies in the last five- seven years, what is it now, what is the departure from that long period average? If the departure is significantly on the downside, probably this is a value pick; you may have an interim period of slow earnings growth for the company. However, you can surely get into this stock with a 12-24 months kind of horizon.

Ekta: We had a cabinet approval which is unofficial right now, it is source based information at this point that private companies can possibly participate in smaller oilfields possibly in terms of bidding. Would you have a view on that, any companies that are interested in the oil and gas space?

A: Not really because when it comes to oil exploration for example, offshore is extremely expensive, onshore is probably simpler but there the challenges are about land acquisitions, challenges are about environmental clearances etc. I don’t think this policy is going to move the needle by much.