Wait for corrections in NBFCs before you buy them, says Jaipuria

He also recommends tea sector.Below is the verbatim transcript of Jyotivardhan Jaipuria’s interview to Ekta Batra & Anuj Singhal.

Anuj: The sector of the last few days has been pharmaceutical sector. Do you get a sense that not only the worst is over but these stocks can now give good returns from here on considering that compared to the historical valuations maybe these stocks are lower than that and finally there is some good news for the sector?

A: Yes, pharma is like a story which will continue to play out over the next few years. We will keep having earnings growth coming through. What has helped over the last few days has been probably the valuations have become more expensive and that has corrected.

Second, we have seen some positive news flow coming. As we get into the earning season you will see some of the big pharma names show strong earnings growth in the near basis. So, couple of these factors are helping the pharma sector.

For me of course the big theme still remains domestic India rather than pharma. Pharma is a good secular story but I would still prefer domestic India rather than any of the exports plays.

Ekta: Your thoughts on the IT stocks? Would you be cautious now with regards to what is happening on the pound and possibly across currency headwinds?

A: The problem with the currency is not yet over. We will continue to see it play out because growth is still a scarce commodity and we are going to see to lot of political turmoil, in fact so far what is happening in Italy is worrying me a bit and that is something where we could see a stress point coming through.

In IT more than the currency my call is it a sector which to some extent has become like a mature sector. It is something which will continue to grow but it will grow much lower than it used to in the past and to that extent these are good nice companies which trade at some valuations but there is nothing exciting about them.

So, if we see a turnaround in the economy I would prefer the domestic guys. At the moment my view is IT is something which probably over the next two to three years will underperform. However, when we get market corrections and stuff like pharma and IT which probably will relatively outperform the market._PAGEBREAK_Anuj: One of the sectors which have done remarkably well is the non banking financial companies (NBFCs) sector and of course we have had some new listings that have done phenomenally well. Have you looked at this space and is there any winner at current levels for you?

A: If we look at and I guess we are talking about the NBFCs which are getting into banks, so my view is these are things which will play out but given the way some of these stocks have run up I think at the moment one should not really buy these stocks. Wait for corrections in them because over the next 12-18 months they will transform into small banks there will be a lot of reserves requirements they will have to take so there will be like a short-term, mid-term profits.

So, you will have a few quarters where things are not good so you will get time to buy them, buy them on corrections. Don’t buy them at these valuations. However, these are things which over the next five years I will like. So, these are like long-term growth stories you want to buy, it is just that probably not at this price.

Ekta: We are getting the first of banks numbers soon enough. We have IndusInd Bank which is one the 11th and South Indian Bank which is releasing numbers today. What is your expectation in terms of earnings from banks? Do you think maybe asset quality could improve on a sequential basis and there could be further upside especially in public sector undertaking (PSU) banks?

A: I think the March quarter saw those very high provisions. We will still have those provisions coming over the next two quarters. However, I don’t think it is going to be higher than what we saw in the March quarter. So, to that extent you probably will start entering a phase where you are looking at, okay have we provided enough in these banks and should be start nibbling at them at this stage.

It is still the private sector banks which will do better in terms of asset quality. However, I think at some stage as we move into the end of the year and we feel a little more comfortable that we have improvement in the Indian environment and improvement in the economy, I think we will get more comfortable on the PSU banks also in terms of assets quality.Anuj: I am looking at some more of your research and you believe it's a good time to park money in domestic and rural consumption stocks, but that is a really large gamut. Can you zero it down to three or four stocks which look good at current levels or broader themes?

A: We can’t really get down to stock specific unfortunately but if we just look at the rural plays probably what I like is one is the tractor story and second is the agrochemical story. So, these are the two areas which will be good in rural India. Rural was struggling for the last two years. We didn’t like the rural India story till the early part of this year. So, rural will see probably a bigger turnaround than the domestic.

The domestic theme is going to more consumers discretionary; right from cars to white goods to whatever people will buy when income levels are going up because of the pay commission coming through.

Ekta: Similarly it has been a lot about ancillary sectors this year, the sugars of the world, the coffee stocks and even the milk stocks, the newer listings, anything from these niche ideas that you like? It could even be say from the diagnostic space from the healthcare space?

A: There are not many things that attract very well in the niche sectors, but there are some stocks in the dairy industry that I like. I think they are good and they will probably continue to do well over the next few years so it is something which has not been as popular as sugar.

Sugar, of course is a commodity which you got it right. The other thing is probably tea where the focus has been a little less though those stocks also have also moved up. So, I think tea is the other area which probably will do well among these small sectors.