Where will funding for recovery come from, asks Ajay Srivastava

Sonia: It has been extremely tiring for the bulls this market. Day after day we are seeing a sell off. How do you really wade through all this volatility?

A: Are they still alive, the bulls.

Sonia: There were a few. Trust me, we have spoken to a lot of them even today?

A: These are the tackling noises, things that take get India story. I heard them before. Haven't we heard them for the whole year long. Let us understand the reality and people have to understand that the results of the Public Sector Undertaking (PSU) banks reflects something much more dire. What reflects is that should there be a recovery what will be the process of funding this recovery going to be because these banks are coming out even perhaps to my worst imagination things look even worse than that and it is not all out. If you see a report today which says that Rs 7 lakh crore of restructured loans out of which Rs 4-5 lakh crore are shown as standard assets. So, it is not the end of the story. It is going to be much uglier now.

So, the question remains for the people who believe in the recovery story is okay, if there is a recovery who is going to fund this recovery. Working capital finance, capital goods finance, the industrial finance that is the typical old fashioned finance. Private banks don't do it. PSU banks can barely find capital to survive. So, if there is a so called recovery where is the money going to come from. That is also now going to start bothering people to say exactly where the financial system is, what the liquidity system is going to be, how the working capital is going to work in the system. So, lots of more issues have now come out in just pure disclosure.

Anuj: We might well have seen evidence of that over the last couple of days. Are you saying that we will now underperform as a market regardless of what happens globally. Today European markets are up two percent and still we are down quite a bit?

A: The local factors always play the role because the fact was that there was a local participation in the Indian equity market and even when the days when the global markets were down we were kind of stable. All Foreign Institutional Investors (FII) were selling heavily and the domestic buyer was buying in. That is the phase which possibly has come to the end. Maybe today or is about to come to an end where the Indian probably is going to lend support. The key here is going to be that is there earnings going to be that is there going to be the hand is going to withdraw from the market rather than fresh money in the market.

My guess is that this kind of a situation that we are seeing today and we have not seen an appropriate response to the market of banking crisis could possibly convince the local investor that enough is enough, I don't think things are going to mend around. So, there the decoupling might happen is because domestic investor finally is going to capitulate and say I was better off with gold, I was better off with fixed deposits (FD). This India story has not given me anything great to work with.Sonia: For banking I understand, you could see some of the signs coming but what about pharmaceuticals, so many curve balls getting thrown at you every day. Dr Reddy’s Laboratories has halved in the last six months, Aurobindo Pharma fresh issues over there. How do you deal with that space, a space that you have been bullish on?A: It is in an absolute surprise because if you look at it every single problem with the pharma industry has come from FDA, if you look at other historical parts. One would have expected that, I was expecting that with such a fantastic political overreach into the US political system, you would not have such amount of hostility coming out of FDA system. I all know that FDA is independent and so on and we all know how independent organistaions are. However, this level of hostility we have not seen in the level of five to seven years. As a pharmaceuticals observer for last 20 years I have not seen this cumulatively coming together. So, to that extent the great outreach hasn’t really worked, in fact has worked to the opposite because now we have timed it to the point – our research team has done the chart, every single major facility at this point of time in India in pharmaceuticals is under a watch.Anuj: What about something like a Tata Motors? It had a relief rally but it had equally sharp declined now, almost back to the previous lows?A: Tata Motors, I don’t want to comment but I thinkgenerally speaking I don’t believe that Tata group shares have given value at the best of times. Even if there is great rally in the market that could be a speculative rally I don’t think it is a great stock to be in because if you look at pure shareholder value even at the best time of the market it lagged the market. At the worst time of the market it was ahead in the lag period as well on the way down. So, some stocks and I am not going on the fundamental of Jaguar and how good they are and so on and so forth; some time there are some stocks just don’t give you the returns and I guess Tata Group stocks belong to that category including Tata Motors. Sonia: If this is a bear market, something that many people believe, in your assessment what phase of the bear market are we in right now? What is your best guess?A: My best guess says that I think we are seeing the midpoint or the starting point, somewhere between the midpoint and starting point of the bear market because even till now valuations of lot of very mediocre shares was pretty high. For the first time we have seen them falling. Let us take Britannia as an example. Somebody said the results were very good but if you look at quarter-to-quarter (QoQ) and typically the December quarter is the best quarter for them the results are flat quarter-to-quarter. So, yes they are 40-50 percent up over the previous year but QoQ is flat. When these prices start correcting one would say for sure that we have a bear market. Still there is some levels of optimism, pockets of optimism in the system which buys in shares whenever there is a little uptake in a market. I would say the real bear market has reached a maturity. When we see Rs 20,000-30,000 crore withdrawal from the mutual fund in equity that is a point you would say yes finally we are seeing an end of the bear market. Till the retail public is still there I think this will continue.  

Anuj: Everything is good at a price. What about say, something like an Indigo. At Rs 900 there was a talk that it looks good. The largest carrier, you have seen a big tailwind in terms of crude prices and now it is almost back at issue price. In fact intraday breached that. Any temptation to go for this?

A: I would have. The problem with me is I don't like promoters who are poor on disclosures. I really don't like them. Then I don't believe the company is worth investing because when you believe he throws the next as the curve ball at you with something which is hidden out from you. So, you would be very wary irrespective of the merits of the case that yes, they are cheap and yes, they should have a higher price, their valuation should go up. Possibly it would go up in my view, it should go up. But would you want to bet your money with a promoter who has been, to use a mild phrase, dishonest with investors in the market. That is a question people have to ask. If you are willing to live with a dishonest promoter then yes, it looks an attractive buy.

(Interview transcribed by Binu Panicker and Vrushali Sawant)