With correction in prices, realty revival likely soon: Birla Sun

He believes this cash cleanup will facilitate formalisation of the economy and more money will into MFs, into debt and equity.Below is the verbatim transcript of Mahesh Patil’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.Prashant: As a fund manager how has this demonetisation been? Changed the way you are allocating capital and before you get to what you will do from here what have you done over the last 13-14 days?A: Yes, nothing much one can do because it is very sudden what has happened, no one was anticipating it. Clearly, the portfolios, which were aligned in a particular way to play the consumption theme consumer discretionary interest rate cuts to that extent there has been some kind of relook into that at least from a short-term perspective and we are trying to really see and assess where the impact is from a shorter-term perspective and whether it is going to be slightly more longer-term.So, if you break it down they could be very short term for the next two months, in a few sectors it could be next six months or so, a couple of quarters and then other sectors it could be slightly longer-term up to a year. So, one needs to be clearly break it down into these three segments and where there is a short term impact clearly because of liquidity and as that comes back into the system one will be comfortable to hold on. In fact buy in this correction because specially the consumer staples those kind of stocks we don't see that specially low ticket consumption items where people who can't stay away from that for too long as liquidity comes back, which we expect to happen in couple of months you will see demand coming to normalcy and in this correction some of the good quality stocks if they are available at better valuations it will be good to look at.There are other stocks where the impact could be slightly -- six months or so where it would essentially be the discretionary and the low ticket discretionary items. There again we have already seen a meaningful correction in some of these stocks. One has to wait and see how things pan out in the next couple of months though it won't give a real impact because the numbers will be all over the place.Prashant: Would banks also fall in this second bucket or non-banking financial companies (NBFCs) and banks?A: Yes, banks also and NBFCs. Again NBFCs one would break it down into two components over there. There could be some which could see a short-term temporary impact when the Reserve Bank of India (RBI) has given a reprieve in terms of recognising in case the payments are due. There is a window, which is given until December end. So, for example in the mortgage finance companies, people catering to the salaried class should not get impacted over there but some of them catering to the unsalaried people. There could be some stress on the businesses, one has to wait and see.Prashant: What about the third bucket? I am saying third bucket in terms of the first is lesser impact near term.A: So, the NBFCs also there could be people in their loan against property (LAP) portfolio with the correction in the property prices and also a lot of this funding is given to the trading community the small businesses which could have a short-term impact in terms of cash flows and there you could see some stress build up. So, one needs to de-alienate to various parts even within the NBFC sector could get impacted.More longer-term impact sustainable could be clearly for companies specially for very high ticket discretionary premium high ticket consumption because of the wealth impact, which will take time to really recover, you could see impact over there. Some extent on the real estate side you will see because real estate will take some impact.Though I would see this move as positive for real estate from a medium-term perspective, so, if we were to have more than one year view what will happen is this will accelerate the revival in this sector because what we are seeing in the real estate sector up till now is that there has been kind of a stagnation. Property prices had held up and there was kind of pretty much holding capacity with lot of the developers. Now with this move, you will see now distress sales start to happen. I am already hearing some sales starting to happen in the real estate sector.With price correction the revival in the sector would be much faster. So, that will be good in the longer term for the real estate sector and with interest rate cuts people are forgetting the benefits of this with lower interest rates that could also spur demand for a few sectors and that is going to be slightly more sustained. We have been talking about lower interest rate but this move will probably precipitate that. We are expecting probably 100 bps cut in the policy rates. Our earlier view was around 50 bps, it could be to that extent and that would help to kick-start the economy.Ekta: 100 bps over what time frame?A: Over this cycle. There is a potential where it could go through 75-100 bps. The government also will want to look at some of these sectors to revive. One is the gains which will come in through this either they could be passed down to the lowest strata of the economy and that will help to drive again the basic consumption but also to revive real estate or housing for all has been the PM's long-term plan and that could come reality.If you see - land prices specially -- one is property, but land prices clearly correct then affordability can really be within the horizon of a common man and coupled with lower interest rates and some further interest rates I have mentioned coming through because of the gains if the government is to translate that that could be a mechanism where things could revive. So, there is clearly a short-term pain, which is undeniable. It will have an impact on earnings. One has to segregate which are more short-term and much more structural and accordingly play that in the portfolio.Ekta: Retail investors are currently not scared. They have redemptions increased, are Systematic Investment Plan (SIP) amounts changing, are people just fearful that there could be a bigger correction coming for the markets and they would rather go for safer havens?A: It is still too early for retail investors to react. The SIP book is steadily continuing. We have seen that earlier shock also in the earlier part of this calendar year in January-February when the markets corrected by almost 27 percent we saw the retail flows were still pretty much intact.Now here there is another impact because of some amount of liquidity, which has got impacted. Some wealth effect, which could be there. So, one has to wait and see whether it impacts some of the high ticket investments. I don't think the retail flow will get impacted like the small ticket but some of the high ticket HNIs whether that gets impacted in the medium-term one has to wait and see but the initial reaction has been to invest in this market because any first fall in the market, lot of investors who have been waiting on the sidelines, waiting for a correction -- and we have been expecting that if you look at in our earlier conversation that has come in but now one would probably wait and see a lot of these smart money will wait and see how things develop over the next one month, what are the steps taken by the government to address the situation.We have seen some negatives, but some positive stimulus would also come in down the line. So, that will determine how the flows will pan out I would say. But longer-term, this move would clearly further facilitate formulisation of the economy, more money coming into the financial system and more money into mutual funds, both into debt as well as equity I would say. Cut in interest rates would only stimulate that because if one year fixed deposit (FD) rates come down to around 5.5-6 percent or so then obviously that is inflection point where we see people start to move in from normal bank deposits into other riskier asset class.Prashant: Do you think in a way yields have also bottomed out? This is the best you will get essentially.A: There is still some room. Normally, one would have thought that -- that is what our view was -- but the deflationary impact and what you would see and also the contraction in the economy what you will see and the government response in terms of trying to cut interest rates, we see some more probably downside.Prashant: But maybe lesser now, the bulk of it is done in a way?A: Yes, so we see bond is now at around 6.2 near about 5 or so, another 50 bps or so from here is possible.Prashant: So one clear take away from you is consumer staples in a way become buyable again?A: Yes, I mean valuations if they correct to the level.Prashant: Have they already corrected to a level because that was one space across institutional fund managers people used to complain. Growth is there but they are just too expensive?A: So, one has to wait and see. What will happen is they will also get hit in this quarter. So, when the earnings number cut in that could be an opportunity where stock -- they have corrected but not as much as they become attractive I would say. So, there is probably more downside over there. It is difficult to see at what level. However, clearly there the revival in earnings will be much faster to look at.There are other sectors where earnings growth has not been compacted clearly. These are utilities, good cash flows where obviously lower interest rates could increase, the cost of capital will go down, discounting rate goes down. So, the equity value of those things will go up. So, those are sectors where at this stage should hold on in this kind of correction. But the real gain would be to identify companies where the hit is there, where the price correction happens and able to get into it so that we can play the bounce back also which happens.Ekta: What is your approach towards midcaps? How you would approach the midcap index specially because we had a lot of these stocks which were darlings of market, the NBFC space, how are you approaching it?A: The midcap sector would probably one would still be a bit cautious because A] the midcap story was about the strong earnings growth revival over there. The impact on the midcaps will be much harder and especially when you see a kind of a liquidity squeeze short-term as it may be and the valuations they are also higher. So, the downside in the midcap space even if the markets correct potentially by around five percent in the Nifty and the midcap downside could be much larger from here. So, this is a time to focus more on larger cap names, frontline names and then as the stability returns back to the market one can start looking at the midcaps.Prashant: You said that the real gain will be made in identifying companies where there is a meaningful hit, business hit. Stocks also take a meaningful hit, but which are resilient enough to bounce back as well? That is where the real gain would be.A: Yes.Prashant: Which are those sectors very briefly?A: The sectors could be -- one is small ticket consumption.Prashant: Which are staples?A: Staples and even small ticket consumer discretionary also will come back. It might not happen in couple of months.Prashant: Which space just to give an example?A: Consumer durables would be one sector which could fall into that category. Even in NBFC sector there are certain things where there could be short-term impact over there because of liquidity, people not able to pay the loans what they have taken. That will again come back and the window which RBI has given will probably help the companies to report some of these non-performing asset (NPAs) which would have triggered over there. Obviously, the liquidity which has come in will also help a lot of the NBFCs because their cost of funding will go down and that will help them to again -- demand will take time but in the longer-term that should benefit.