Worst over in financials; like pharma, infra: Prabhudas

R Sreesankar, Head - Institutional Equities at Prabhudas Lilladher believes that worst is over in financial sector as far as stressed assets are concerned. In an interview with CNBC-TV18, Sreesankar says that banking and financial sector will be one of the first to benefit from economic growth. Sreesankar is underweight on global commodities and sectors connected to it. Contrary, he is overweight on financial sector and says stressed assets will improve hereon. He is positive on companies that are not cash strapped. He recommends HDFC is the financial sector.In the infrastructure space, Sreesankar recommends L&T, adding that inflow of orders in the sector is not an issue. However, capital availability for project completion remains a concern, he says. Sreesankar is positive on pharmaceutical sector. He recommends Jubilant, Glenmark and Aurobindo Pharma from this space. He also recommends Sadbhav Engineering.Below is the transcript of R Sreesankar’s interview with Latha Venkatesh & Ekta Batra on CNBC-TV18.Latha: What is the sense you are getting, is the market putting a reasonable bottom at 7,500 or are the flanks still opened for further attacks? A: My best estimate is - markets to a great extent have discounted the rate hike should it be there in the US and probably the market participants too would have, to a great extent reduced their commitments or open positions or whichever way you want to call it and must be looking forward to see what is going to happen over the next few days. Ekta: So in your opinion if incase the rate hike does come about tomorrow we won’t have as much of a volatile day on Friday?A: My view is or rather if I want to stick my neck out my answer is to a great extent no. The reason is to a great extent market will first try to find out how is going to be the affect of these things going to happen in global flows. If you tend to believe that after the initial reaction that there is not much affect going to be on the flows then the markets should take new normal course that is what I would think the market should happen. That is immediate. Second is again what is it going to do to the currencies across and what is it going to do to US dollar per se. One of the biggest issues I think emerging markets across with a strengthening dollar and weakening emerging markets currencies; that is the biggest issue. You really don’t know which direction the Japanese Central Bank is going to continue to take but which is quite contrary to the view that probably even the US rate hikes are happening or whether what you are going to see it in Europe where both these economies Europe and Japan will continue to have a easy policy where as in US it is going to be tight policy kind of. You have to give sometime for market to digest that rate hike, should it happen and then we will see the direction in the market.Latha: Sectorally, how would you position yourself? At this point in time are you sufficiently confident to buy economy exposed stocks?A: If you look at our top picks and our recommendations, we have got recommendations across the sector and we like it. The only sector which we keep away is global commodities especially the metals and metal pack. We do not have a recommendation of any buy from that particular sector.Again in our top picks, one interesting omission is on consumers or rather fast-moving consumer goods (FMCG) stocks. Not that we do not like the FMCG stocks, but the valuations are pretty steep when compared to the many of the other stocks. That is the reason why we don’t like. So, across the sectors we continue to believe that there are interesting buys which is there. Financials is one sector which we still continue to be overweight with HDFC Bank being the top pick over there. We believe that economic recovery will link towards better growth in the financials and as well as the worst in terms of nonperforming assets (NPA) creation or the stressed asset creation is behind us. I am not saying that it is out of the window so worst is behind us and things should look to be much better. We are overweight on financials and underweight global commodities that are metals and remain neutral on other sectors.Ekta: What have you read of Sadbhav Engineering as well as Sadbhav Infra the new listing?A: We like Sadbhav Engineering it is part of a top pick and the way we see the entire space is there are some engineering companies in that space which will have the benefit of raising money. They will have capital, they will have enough cash to fund their build, operate, and transfer (BOT) projects which are already in the pipeline. Let me put it as Sadbhav Infra the company which has got listed which is an asset owner so being an asset owner the large capital requirement that they have those companies are at better advantageous position so they will continue to do well. I see this as longer-term story not immediate big gainers, a sharp appreciation that you will continue to see in this stocks. This will be over a longer period of time.Latha: What else would be economy facing stocks? We understand that the cabinet is currently meeting and may make some further announcements on implementing the Delhi-Mumbai Industrial Corridor. If these are themes that are going to play out would you bet on these kinds of themes?A: In the infra space, we have Larsen & Toubro (L&T) as one of the top picks. So, Larsen obviously is going to be the number one choice in the infra space for all the economy stories. We have large number of companies within the infra space. We continue to like it for the simple reason - both asset owners as well as engineering, procurement, construction (EPC) contractors and where we are only making a slight differentiation is that we like companies which are not cash trapped.I, who have raised money, who have got new projects coming up, who have raised money through qualified institutional placement (QIP) plus companies like Sadbhav Infra who has been able to do their IPO who has been able to get their funding for their BOT projects etc. So, what we think is the significant differentiation from now with the companies will  be large number of orders coming from the infrastructure space be it a Delhi-Mumbai infrastructure corridor etc. will be continue.I don’t think orders are going to be a constraint. What will be a constraint for lot of companies is availability of capital to execute these orders because many of these companies have gone into corporate debt restructuring (CDR). With the stringent conditions of CDR, implementation and the money getting released post CDR some of the companies in the engineering space will find it difficult and that will be advantageous to some of the others. That is where we think you need to look at those companies which are in advantageous positions.Ekta: A lot of companies that do have a lot of cash on the pharmaceutical stocks so there was an acquisition that took place by Sun Pharmaceutical today. Can you tell us if you look at that and how you have read it as well as how lot of pharma companies are now looking at their new chemical entity portfolio. We heard from Glenmark Pharmaceuticals last afternoon as well?A: I do not want to go to the specifically point of Sun Pharma per se but in our universe of converge every stock that we have from Lupin to Cipla to Sum to Dr Reddys Laboratories to Glenmark to Aurobindo Pharma to Jubilant Life Sciences etc and Indoco Remedies if I look at entire portfolio, has performed from a 1-3-6 and 12 months perspective has beaten the benchmark. Except in one or two cases for a month or three month period, they would have underperformed. So, we continue to believe that pharma is a space where you will see strong performance coming in. However, again it all depends upon the valuation play for some of these companies. At some point of time we had Sun in top pick, we had Lupin in top picks, we had Cipla in top picks which we have removed from top picks because other stocks have done well. Probably stocks like Aurbnondo, Glenmark and Jubilant. These three stocks are a part of our top pick, which I think offer the better value, a better capital appreciation in the medium-term and that is the reason why we have these stocks. We continue to like that sector.