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Last Updated : Aug 13, 2015 08:27 AM IST | Source: CNBC-TV18

Yuan a worry; PSBs arbitrage play, load pharma: Dimensions

Ajay Srivastava, CEO of Dimensions Consulting said Capital Goods sector, bulk drug businesses, Consumer Durables, tyres and Indian exporters to Europe are likely to bear the brunt of yuan devaluation.

China using devaluation of currency as a constant policy tool is a big worry for India and a government response is needed to counter the impact on Capital Goods sector, bulk drug businesses, Consumer Durables, Tyres, and Indian exporters to Europe,  says Ajay Srivastava, CEO of Dimensions Consulting.

Alarmed over the situation, Srivastava said one must pare down expctations unless the government takes some steps.

Inspite of the downturn, investors in good quality stock will not get butchered. There are fundamental stocks that will perform and the advise is to "avoid speculation and return to fundamentals," Srivastava said.

Although the ever-popular IT is the "safest of safe sector," returns are not going to be huge.  In his view PSU Banks are great arbitrage opportunity. "Just Watch, all reported NPAs will disappear in a year," he said.

Srivastava is optimistic on domestic consumption story but picks pharma as No. one bet in the current scenario.

Below is the transcript of Ajay Srivastava’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: It has been slightly tricky times globally especially after that shock came in from the currency devaluation in China overnight. Do you think we should worry about that too much or is it a China specific issue?

A: I think we should worry about it, in fact quite a bit. I was surprised yesterday in the debates that you guys host because there was no mention of China; it was all about the magic pill called goods and service tax (GST). I think China is a big worry because it shows the trend of decision making of the Chinese authorities. The 1.8 percent devaluation itself is strong enough but the trend it shows is that they will support the market, they will incentivise the exports and the Indians as well as the rest of the world need to find a response to Chinese.

We don’t have a response at this point of time therefore you see little bit of mayhem, I would not say mayhem but little bit of cutbacks in the market. However, it is going to be a much bigger issue as you go forward if the Chinese continue the way they are doing. We have got high interest rate, high cost, government is not cutting down petrol prices, our cost structure is intrinsically high so either rupee devaluates significantly or we become uncompetitive. So, there are significant implications but I don’t think people have understood this so far.

Latha: It's over 24 hours and now it looks like more and more people are looking at China using devaluation as a constant policy tool to boosts its economy. In that case how would you look at Indian market? Do you think we should be prepared for even the 8,300-8,200 to breach before we start making investment picks?

A: I do not believe today the index is a right way to look for a stock market person. I think it is very stock cherry picking market where good stocks continue to do very well, in spite of the downturn today you will see the good stocks are still doing well, the cut back comes for a very short period. Yes, there is a market, there is indices level but there is also a level called fundamental stocks which are performing and continue to perform.

I still hold the theory that through all this volatility the man which is going to get butchered is the one who speculates in stocks. The investor in good quality stocks holding it is not going to be so badly affected and you have enough cases like pharmaceuticals, automobiles, IT, these stocks are rock solid today and I do not think you need to change your strategies. Your strategy should be to avoid speculation and get back to fundamentals.

Sonia: I just want to come back to that point you were making about how we should be worried about the yuan devaluation impact. We did see a lot of sectors like tyres get hit quite hard yesterday but if you had to guide investors what are the sectors to avoid now because of this news flow what would you worry about?

A: I think very simply if you ask me, the first sector to worry about is the capital goods sector because there the imports can come in at a much cheaper price. So any company which is into capital goods, even the intermediate capital goods sector, is going to get affected severely.

The next one is going to be people in the bulk drug business in the pharma side; they are going to get impacted.

Third is not the speciality chemicals but the generic chemicals, I think they will get affected seriously.

Fourth is anything which you can import – you said tyres and you talked of consumer durables, these kind of stocks will also get impacted very clearly. So, there is about a 40-50 percent of the market breadth which is going to get impacted by this Chinese inflow of goods. Tariff can give you protection up to a point but beyond a point it doesn’t make sense; that is one.

Two, companies who are exporting to Europe, they will face a much tougher challenge as the Chinese reduce the price in the market. Even if they don’t lose volume, they will lose margins. So, all the big exporters to Europe are in serious bit of trouble if this continues.

Latha: We have been betting on the Motherson Sumi, the Bosch, the Bharat Forge, they would be in trouble you think?

A: As I said trouble comes in various forms and shapes. Trouble is in form of expectation not need to be lower, troubles are in forms their volumes may remain but they will have to cut the prices or EBITDA margins. Trouble in the form of that the extended credits given by Chinese companies could impact them in the manner speaking. So, expectations certainly need to be paired down compared to what they were may be a month and a half to two months back unless the Indian government also formulates a response. I am expecting that to happen that once you take away the magic bill of GST after the parliament session you will have some logical steps for the economy.

Latha: So your bets would now be on what domestic plays and where would IT figure that is a winner or advantaged sector because of rupee depreciation?

A: IT, yes, has a tactical advantage of a rupee devaluation. Having said that, the prices have not corrected so much to give you a good entry point that is one. Number two is there are enough opportunities out in other sectors to give you a relative outperformance compared to IT. IT is a safest of the safe bets. However, with a satisfy investor return I guess not. So, IT is there but I don’t thing demand matrix changes with this Chinese devaluation of global markets becoming into a bit of a problem. IT will struggle around for a while, gain a rupee here or two rupees for devaluation but that is all about it.

Sonia: What do you do with a sector like PSU banks? Before SBI came out with its numbers, a lot of people were still hopeful that perhaps the turnaround is somewhere close by. The government is doing a lot of things like recapitalisation etc, but now post SBI’s numbers, that confidence has been eroded a little bit. What do you do with that space?

A: First of all I must tell you actually I am long on one sole PSU bank, I can’t name it but I am long actually on one but by and large I will tell you something and not factitious about it. Just a year down the line these banks will report no Non Performing Assets (NPA), think about it. Either they will not report or you can’t find what the NPA level is.

They will look fantastically good, in my view it is a very strong arbitrage opportunity for people to get into the PSU banks. I am not talking of invest, I am talking of-now this is pure speculation and high risk game because the way the RBI guidelines are, NPAs are going to disappear from the books of these banks, at least reported NPAs. So, therefore they all look good for the taking. So, optically I am saying these are good strategic bets; you are going to make money out of them in a year’s time.

Latha: What would your other plays be at this juncture? You said you wouldn’t get into IT because there is better money to be made in other stocks. What would it be, would it be again the United Spirits, the domestic consumption stories?

A: Domestic consumption story yes and I am a strong believer that the pharma story is still unfolding in the Indian scenario. You must heavily weight your portfolio to pharma and the beauty of pharma is right from midcaps to small caps to large caps, it all makes sense. Unlike IT where small caps don’t make so much sense or automobiles where the small caps are losing traction, this is one sector where you can invest across the spectrum or the size of the company and make a very handsome return.

So, I would still bet today that in the domestic stories, pharma would be the number one story if I were to bet on it. Fast-moving consumer goods (FMCG)I will bet on the non-big brand companies because the big brand companies are going to lose market share heavily, they are going to have to go price discounting, the e-sales are going to hit them very badly, so if you go down the line of two-three years, the big brand companies are in for a little bit of pasting irrespective of Britannia’s result which continue to surprise me.

Sonia: I find it very hard to believe that despite no evidence of any improvement in earnings, you still believe that one year down the line things could improve. That was the hope that we had one year back as well but nothing has come through, so is there anything that you have spotted, any internals, any improvement which gives you the conviction on PSU banks?

A: Two-three things are happening, one is if you look at the trajectory of NPA reporting, that is going down actually speaking. The big news are already filtered in, may be the next three months later you will have most of the- three-six months later most of the bad news already in the books, that is one.

Number two is, hopefully if government can give Rs 7,000 crore to Air India, they can give Rs 20,000 or Rs 30,000 crore more to the banks.

Number three is that you will have lot of sale of portfolios happening down the line which is already in the pipeline in the banks that we know of, therefore you will have a sizeable amount of money coming back and the fourth is in spite of the portfolio, there are still one or two PSU banks which are doing fairly well relative to each other, so even in the PSU bank portfolio I can tell you at least three banks which will outperform the index, I can’t name them but there are three banks which will outperform and that is why we are carrying a long position.

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First Published on Aug 12, 2015 10:04 am
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