Portfolio boosters: UBS' top stocks to beat volatile market

As markets worldwide are eagerly waiting for the ECB meeting, Gautam Chhaochharia of UBS is not so hopeful. He feels that that there would not be significant takeaways from the meet today.

In an interview to CNBC-TV18, he cherry picks stocks to beat the volatile Indian market. As an investment strategy, he is cautious on banking sector due to its exposure to coal-related sectors. Chhaochharia also prefers Zee Entertainment in the media sector. Don't miss: Nifty to remain rangebound between 4950-5400 says Vibhav Kapoor Here is an edited transcript of his comments. Q: What's the UBS' expectation of what the ECB might deliver today?
A: I think our house expectation is that you might see some possible rate cuts. We don’t expect much to come out in terms of details on the entire bond buying programme. Q: Banks have been the main cause of worry for our own market because of rising impaired loans. How many more quarters of pain do you expect to see on the asset quality side?
A: Our view is that this will continue for a few more quarters. It’s difficult to time it but for next two to three quarters we don’t see any improvement both in terms of the news flow which you see in terms of specific assets as well as top down macro concerns on the economic recovery which keeps on getting delayed. On the other hand, it is surprising that the banks themselves don’t indicate a very big stress in terms of their individual banks asset quality.
In fact, at the conference, ICICI, SBI, Federal Bank etc seem to be indicating for their individual banks, atleast the asset quality or the provisioning they have made, is bottoming out and seems to be under control. So, there is a disconnect between what our view is and what the banks are trying to indicate. Our official view is that top down we will continue to see the stress continuing for a few more quarters. Q: You've recently removed ICICI Bank from your model portfolio. Take us through why you are negative even on some of the larger private sector banks?
A: ICICI Bank is still a buy. We have just removed it from our model portfolio top down because of the same non-performing loans (NPL)concerns for the entire system. Therefore our view on banks is slightly more negative than it was three to four months back and we see that pressure continuing.
If you look at the recent coal scandal, for example, that creates even more doubt about the sector as a whole not necessarily for ICICI but the sector as a whole. This kind of overhang we are seeing in terms of NPL pressures and that’s the reason why we have decreased our weight for banks in general from our portfolio.
_PAGEBREAK_ Q: Would you be equally cautious about the capital goods sector as well and stocks like BHEL?
A: BHEL and L&T are still 'buy'on a bottom up basis but top down we are definitely underweight on infra and cap goods. For next couple of quarters or even for next one year we will not see a meaningful recovery neither government policy making or in terms of investment cycle recovery. The best case scenario is things stabilise and bottom out but in terms of real catalyst for the stocks to do well on a top down basis you need a proper recovery investment cycle and for that the ingredients which we’d like to see are still missing. Q: What's your stance on real estate, that’s not a segment which is done very well but you’ve included Phoenix Mills recently in your model portfolio?
A: Real Estate is more of value call. Again the stocks are trading at near distress valuations. If you look at individual stocks it’s about those stocks as such they have real assets and those assets are basically getting commissioned. For example, for Phoenix Mills, the Kurla asset is getting ready and is ramping up well and that will start showing up in numbers and that’s not reflected in the valuations currently. From that perspective they look reasonable bets in terms of specific stocks not overall sector. Q: On the back of the expectations of digitisation which would be the best media stock to pick up right now?
A: Our view is very simple, digitisation is real and in India you have seen historically also how any deregulation in any sector throws up huge opportunities for players in the industry and the stocks therefore do well and this digitisation could be a big one for media space. In that the biggest beneficiaries are the broadcasters because increased disclosures and subscription revenues will flow directly to the bottomline without any incremental investments required.
Clearly Zee and Sun TV are the best plays to benefit from digitisation. The second beneficiaries would be the DTH companies which is Dish TV. So they should again benefit a lot more than the cable companies and cable companies will be third. The cable companies also should benefit and will co-exist with DTH but the investment required to execute that as well as the on the ground execution challenges and the stock valuations imply that Dish looks very good while Hathway doesn’t look an attractive stock here.
_PAGEBREAK_ Q: What's your picking order in the FMCG universe? Which ones would you be buying and be avoiding now?
A: Out top picks would be Colgate, Marico and Godrej Consumers. We also like ITC. We don’t like HUL, it’s too expensive. A lot of the growth which we have seen over last three to four quarters may not sustain in our analyst view. Q: In the month gone by, the auto ancillaries have done really well, the likes of Exide, Apollo Tyres even something like Motherson Sumi. Which would be your top preference there?
A: We like all three of them but at this stage possibly Exide looks the best placed and then Apollo Tyres and Motherson. Motherson is ramping up including its European acquisition. Apollo Tyres, though the commercial vehicle cycle is weak in India, but they presented in a conference indicating that the replacement truck market is actually growing this year what was de-growing last year despite the weak CV cycle. So, they are not yet seen any demand slowdown for the tyre business even though OEs have slowed a bit.
For them the big catalyst could be rubber prices continue to fall down which could be a big margin boost. So, that’s the thing for Apollo Tyres. While for Exide the key delta is that the next two to three quarters they should benefit from the big recovery in car sales which we saw three years back post the financial crisis.
It’s a three year replacement cycle and replacement part of the market is where they make the most of the money and that should hold well for them. This is apart from the inverter demand which is doing very well. Both of this should place them very well from next one year perspective. Q: Any picks in the sugar space because interest is livened up again in that space leaving from expectations of some reforms or policy changes, do you have any buy there?
A: EID Parry is a buy for us. Sugar is always a difficult sector to call given higher level of government intervention both in terms of sugar prices as well as sugarcane procurement. But it looks like the worst should be behind us and there should definitely be some uptake in terms of sugar cycle. Now whether we go near a proper bull cycle in sugar will again depend on how the government really treats it. We saw the Rangarajan Committee report coming out they are recommending some sort of decontrol but again it depends how the government implements that. Q: Would it make sense to keep a short term positive view on the oil marketing companies ahead of the impending fuel price hike or do you think that rally may not be sustainable?
A: Tactically they may do well but our view is that that rally will be difficult to sustain as you have seen many times in the past.