See capital shifting from IT, pharma & FMCG: Pramerica MF

Below is the verbatim transcript of BP Singh's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18

Sonia: Your thoughts on the news which is just coming in where another IT company expressing concerns on revenues and on margins going forward? What is your own estimate of how IT stocks will perform now in the next say 6-12 months?

A: We have been consistently speaking on your programme and explaining that IT stocks in our opinion are something which is slightly towards the overvaluation side. We are saying that IT, FMCG and pharma are the ones from where the capital should be shifted to other sectors. The simple reason for IT is that if you compare the Indian rupee vis-à-vis other currencies - as far as dollar is concerned, it is not appearing to have appreciated so much but if you compare that with the rest of the world currencies, rupee has appreciated a lot.

IT industry on an average has closed to about 25-30 percent of the revenue in non-dollar currencies and so that is going to have an impact.

Along with that if you see in this particular month because the full-year Budget is to be presented by IT companies and there you have a little bit of a moderate view, the guidance are never going to be aggressive. So keeping both these aspects in mind the stocks are likely to remain under pressure.

Latha: More importantly for the broader markets do you think this correction can get a bit too deep?

A: This correction is entirely because of the fear which has come that US is going to increase the interest rates. Now there are many factors and it is very difficult to come to one particular view. It would be a surprise that the entire industry is not talking about the word patient which is going to come from the Fed Governor. If you look into last 12 days numbers US dollar has appreciated close to about 6.2 percent whereas Indian rupee has depreciated against dollar only 1.2 percent.

This clearly means that rupee has sharply appreciated vis-à-vis rest of the world currencies. Now if I look to US dollar the dollar appreciation is not going to help the corporate.

USA is not got in to that growth phase where it needs to start controlling its growth and start controlling inflation. The word commodities are coming down and so therefore the inflation is rather being discussed in terms of the deflation. So whether USA will rush into increasing the interest rates we are not in that particular camp. Having said that even if it does that the short-term, the carry trades are getting reversed and which is going to have an impact in any economy including India.

However, the moment the stability comes because after the sharp fluctuations the currencies do stabilise and the moment they stabilise the Indian rupee and India as an economy appears very attractive to the global investors and you will notice that huge amount of inflow will follow once this stability comes. So probably till Wednesday we can expect some amount of correction in this particular market but post Wednesday we think that the stability will come back and gradually the investors will start coming back.

Latha: A pocket that got hit hard last week was the private sector banks so names like Axis Bank, ICICI Bank and Kotak Bank were all down 5 to 8 percent. Do you think this is a good opportunity to enter in to these banks or do you think that through the course of the next couple of months we could get better levels?

A: We think now the time has come to enter these banks. One important point which probably the market is missing at this point in time is that due to the decline in the commodity prices it has dual effect. Number one the margins are obviously expanding for the corporate which is going to have significantly positive impact on the non performing assets (NPAs) of the banks. The second which is big news is that due to the commodity price decline the working capital requirement for the corporate are going to come down.

So, we are going to witness, post March a substantial liquidity in the system and many of the corporate who are facing cash crunch are going to be in a slightly comfortable situation which is positive news for the banks. So therefore we are looking to accumulate stocks at these levels because we think that from here onwards the positive news will start flowing in.

Latha: For the next few weeks and months we will probably be under this cloud of what the Federal Open Market Committee (FOMC) does. How would you invest say an incremental Rs 100? Which would be the sectors you will prefer?

A: The FOMC decision is going to have an impact if at all on the Indian markets vis-à-vis in the short-term in which will be more of the carry trade money which comes into the Indian Market and which generally flows into the very largecaps stocks. Now at this point in time we are seeing the positives in the economy, we are seeing the corporate margins are expanding we are seeing working capital requirements going down. We are also seeing the initial signs of capex pickup which is two quarters down the line.

So we are switching from the so called defensive sector that is the pharma, FMCG and IT and getting into the capital goods area or the capital intensive business. Because in our opinion the moment the dollar stabilises the rupee will start appreciating and which will put pressure on the interest rates and which will come down sharply. So therefore all the capital intensive businesses are the one where we are switching to or shifting to at this point in time.

Sonia: The sector that has performed the best this year so far is pharma. Names like Lupin are up about 32 percent or so. Is this a space that you would increase your allocation to?

A: Now most of these stocks or sectors are asking for a very high growth from the, particular the US economy. Lot of generic products needs to go out; now based on my experience in the pharma industry the numbers of products which are there in the pipeline are not going to justify that so some of the stocks are costly. So we are looking to book profit is some of them.