Market will continue to fester but Nifty remains safe & and sound

Infrastructure companies will have a golden period this year, as maximum government spending will happen in next six to nine months, says Ajay Srivastava, CEO, Dimensions Consulting. Excerpts from an interview with ETNow.ETNow: Nifty has done precious little in the May series. Spike in oil price, confusion over oil price hike, a rather tepid earnings season and a lot of nasty news developments kept the market rangebound.Ajay Srivastava: No surprise. We need to divorce our stock market from the economic scenario. The top 100 companies, or top 200 companies are doing phenomenally well even in this very-very insipid economic environment. Our index is holding firm because of the index stocks, where you have still got a couple of underperformers, like L&T and ITC. If they turn around, the index can be held fairly.When the index is the hands of financial services, the HDFC twins for instance, and Hindustan Lever, nothing will happen. Economic policy of the nation tells us clearly that it is the best time for large companies vis-à-vis smallcap and midcap companies; they will gain market shares, they will have a clear run on the market, they will price in the benefits and they have a lower taxation regime under GST. Net-net, the scenario is built up for large companies, which are index companies. So, no surprise there.Where are we today? This is the 2M day: Mahindra & Mahindra delivered fantastic results and the news about monsoon is good. There is a market, and there is an index; the index is safe and sound; but the market faces a lot of problems and will continue to fester. It will get worse for the rest of the market, but the index will hold firm. So, if you are in the index stocks, you will do well. If you are not, then you have got to make a couple of serious choices.ETNow: Do you think there is more pain in store for midcaps or do you think a large portion of the unwinding is done?Ajay Srivastava: Leave aside the infrastructure companies; they are going to be fine in the midcap space. For the rest, share prices will surely decline. We have just seen the first big oil problem in the country; it will percolate down to consumption and cost of raw materials and through transportation over next three to six months. You saw how the impact of demonetisation took a year-and-a-half to come through in the whole economy. This oil bulge is going to come through in the next quarter; transporters do not change contracts overnight, you cannot change the MRP overnight, your people do not demand wages overnight. But let it sink through and then you will see the fallout of this in next three quarters. So, you will see major problems in the midcap space over next two quarters; they will lose margins. In any case, not many have made serious money in this quarter compared to the post-demonetisation quarter. So it is not that they have done some fantastic work.Infrastructure companies have done fantastically well. They will have the golden period this year, as maximum government spending will happen in next six to nine months, so you can expect midcap infra stocks to do fantastically well. But the rest will see de-rating in next two quarters.ETNow: In 2015, when commodity prices saw a vertical decline, producers still suffered because whether it was a paint company or an ancillary company or somewhere in the commodity supply chain, the pricing power got eroded. Do you think somewhere a marginal uptick in commodity prices will also kickstart a capex cycle and give commodity prices to the entire producer chain?Ajay Srivastava: Your point is valid. When you take pointers, you got to take a pointer from someone like L&T, who is in the thick of capex action. And what does the commentary say, it says private capex is at least two years away. They know it very well, because most companies would come to them at the drawing stage and at a consultation stag. So, if L&T tells you in a formal commentary that private capex is two years away, believe me it is more than two years away. This is a pretty peculiar time of the year when you have got a situation where a large number of companies are facing stress, credit stress, cost stress and ability to compete with the majors. In that scenario, you would really find that most of these capacities would start to either unwind itself; on one side you will have spare capacity in the market, and on the other side, you might need some capacity and larger players may still outsource.So, ultimately if the economy is not expanding, as it should, where is the need for capex? In power, we do not need capex for next five, seven years. In auto, apart from one or two odd plants, nothing much is happening. Maruti is even struggling at this point of time. Auto ancillary is the only bright spot there.By and large, I do not think capex cycle is going to work even if the commodity cycle goes a little more benign than what it is. The commodity cycle, unfortunately, is not looking benign. If the rupee- dollar pair is going to be where it is, cost of landed commodities in India or Indian cost is going to go up. That scenario does not tell us that capital formation would start over a year or so.ETNow: Private banks are what the market fancies a lot. Within that space, you have HDFC Bank, Kotak Bank, IndusInd Bank among largecaps, which have held the fort. How do you view what lies ahead for an ICICI Bank and an Axis Bank?Ajay Srivastava: You guys are in Bombay, you should know better what should happen. What should happen is that these banks should be bought over by somebody. Their managements should just be taken out one day, and the share prices will go up 10 per cent. I can guarantee you, I will be the first buyer in those two banks. They look attractive, but the fact remains that till you have the governance system, like in ICICI Bank, what do you think is happening in the organisation? It will be chaotic, it will be lack of decisiveness, who will take the risk, who will sign off, what is the sign of work?If you are a trader, you may trade in and out, but trades in ICICI Bank and Axis Bank have not made money in spite of all the arbitrage calls. Why do it when you have such a sweet spot in top four banks in this country, giving you 20-25 per cent return? Why take the chance with these lemons? Let these managements walk out, you walk in with your money; till that just time stay out.HDFC Bank has given you 20-25 per cent returns; why are you getting greedier than that? If you really like a smaller bank, go to Indus, go to Yes. For disclosure, we have holdings in all four banks; Kotak, HDFC, Yes and Indus. But leave that aside, why would you want to risk your money with something which is so unknown factor with a bunch of people you would not like to trust your money with?ETNow: I will keep it very simple and straight: what was your last purchase? Ajay Srivastava: Last big purchase? You would find it very strange actually, my last biggest purchase was Kotak.ETNow: Which means you pretty much added to your positions in Kotak?Ajay Srivastava: Of course. I have.ETNow: Why did you think so much before coming out with that name, just sort of inquisitiveness? You really pressed your mind for that one?Ajay Srivastava: No…ETNow: Was it that long back?Ajay Srivastava: You asked a tricky question, last big purchase. So I had to evaluate in terms of quantum of rupees, as to what we have bought and advised. We have bought a lot of stocks or we sold a lot of stocks, but what is it that we bought the most and the name came out was Kotak. To be honest, we did not have much of Kotak till about a couple of months back. It is only a couple of months back that we started adding Kotak.ETNow: There is also this entire financial inclusion theme, which is at play, whether it is Motilal Oswal or IIFL Wealth or for that matter Edelweiss. Would you bet on a Rashesh Shah or Motilal Oswal or Nirmal Jain? These are fine guys who started with pennies and chawani in their pockets and now they have built billion-dollar empires. Last 10 years were dominated by private lenders. Do you think next 10 years will be dominated by asset managers?Ajay Srivastava: I have known Rashesh for years. Of course, he is a great guy and we have held the stock for a long time. We still believe this magic will continue. It is not going to be this or that, it is about how do you spread your portfolio, because with banks you are clearly in a safer zone.Whether we like it or not, these people have diversified their revenue streams, which is a wonderful thing, because they are asset-driven and they are advisory businesses and they are commission businesses. So, there are three separate legs. These are the few institutions focussed quite a bit on advisory work and, therefore, they are not so dependent on money market instrument, etc. Having said that, money market can impact any of them at any point of time.Therefore, you would tend to believe that you would put a greater allocation of money towards banks, than these. Among these companies also, you see a great distinction. There is Edelweiss, whom we are holding and which has a very clear retail franchise built out, not only retail, they have also gone into ARCs, fund management, and they want to do many other things. Of course the bugbear is the insurance project, which I think they should get rid of sooner or later . It will do well for the company. They have spread out their basket of products a little bit. So it is not a lending institution. The other two are in the same path, but a little behind in this game. I think Edelweiss has stolen the march over the other two in terms of the pure breath of businesses and expansion of capital base.ETNow: A year from now, where do you think the market would be headed? Because a year from now, we would be very close to the general election. We would have also seen a clear yes or no on whether the earnings visibility is real or not and whether the hope of an earnings recovery will be dashed or cemented. The next 12 months would be more about sentiment, more about political gupshup; it may not be about pure fundamentals and liquidity?Ajay Srivastava: Unfortunately, this is the place I disagree with you. I still believe when we allocate money, we still look at international situation; we still look at what has happened to the flows, be careful with our money or advice we give to your customers and political issue notwithstanding.We still believe economic policies, which give a clear edge to the top-class companies, would continue to go into the system. You cannot change it. Elections cannot change the economic flow of events or economic policies. When you want to buy a car or what kind of a toothpaste you want to buy that does not change. And our call is that before next year, we will see a new high on the index. That may not be true for most midcap stocks, but the index will score a new high, because these companies are going to do tremendously well in the new, more competitive scenario for the midcaps and the smallcaps. They will get market shares. They will have cheaper access to money, and more importantly, money will gravitate towards them. You will find less and less allocation going to smallcap funds, etc, more people buying. You saw the big shift to IT. What happened suddenly in April? People had no IT, suddenly they pushed into IT. You saw the ITC stock got a new life after five years. That is what is going to happen to the largecaps. They will continue to thrive.The index will scale a new high before the start of the next election season. And let us not overrate ourselves that political party A or B or C or a political rearrangement is going to destroy or change this market. It does not work this way. We are too large an economy. We are too linked to the global system. Lots of things are working parts in it. A political change or a political impact does not necessarily change the long-term direction of the economy. It takes a while. It takes a demonetisation to change it. It does not change by elections.ETNow: Let’s talk aboutyour optimism on MNC pharma. How do you view the pharma space right now, and all that is happening with the US FDA? Are you avoiding domestic pharma or Indian-domiciled pharma companies, primarily on the FDA issue? Ajay Srivastava: MNC pharma was a call which has worked well so far. At the end of the day, Trump will push and push hard for countries like India to remove price controls on products coming in from abroad. Take it for given, it will happen. These companies are in for a big killing and if even the killing does not happen, they are very profitable. They have no debt. They are high dividend-paying stocks. Once in a while, a buyback comes, you get a 20 per cent kicker upside. Therefore, these companies are there for the giving, and they are not very expensive either that is a beauty of it, they are not expensive.Yes, they have been subjected to price control, but with Trump sitting there, you will not be able to ride rough shod over these companies. So, MNC pharma is going to be a great big bet for next two to three years. Yes you can risk money in another place. This is one place where it is almost negligible risk for significant returns.

from The Economic Times https://ift.tt/2J3LQgU