Deepak Shenoy: Look long term, pick midcaps in these 4 sectors

Deepak Shenoy, Founder, Capital Mind, remains bullish on pharma, IT, manufacturing and even NBFCs. As short-term volatility is very 66445824 66441979 66441007 high, these stocks can be picked up at very good prices, says Shenoy. Edited excerpts: Would the spat between RBI and the government have any market repercussions? The whole RBI thing has been blown a little bit out of proportion. Governments forever have had problem with the central bank. RBI is independent. It makes decisions on its own and to a certain extent, the government does not interfere. There are phases of overlap but in general, I do not think, RBI is strangled by the government. We have seen this with Subbarao. We have seen this with Rajan and we have seen this now with Mr Patel. There is a belief that the government is interfering too much perhaps on specific topics. I feel the government is not justified in asking that the PCA banks may be allowed to lend again or that some of the reserves of the RBI be brought back into the government. That is a very bad idea. It is just not done here. Economically and technically speaking, that is not the right way to do it. But there are obviously faults with the RBI in terms of the fact that they have no accountability. They have promised us a lot of things in the past. They have reversed retail access to government bonds. It has not happened five years after it was announced. A lot of red tape originates from the RBI. We have had lot of ad hoc decision-making as well. I would not go into specifics but these are topics where the government should be taking the RBI to task. Unfortunately, what is happening right now is they are probably trying to pressure RBI to do things which perhaps should not be done. As much as this lasts, it will be short term. I am sure they will come to an arrangement. Obviously, the bureaucracy knows about this and they will eventually get to some kind of middle space. This should only be a temporary problem. The issue really is larger. We are going to have NBFC rollovers of CPs in November. We are going to have elections coming up in November. We are going to have Iran sanctions and we are going to see how that affects our economy. Those are bigger chapters that will play out in November. What are your top two-three high conviction ideas among midcaps? I would not name them because we are still buying them but we are actually very enthused by the results. Some of the results in auto ancillaries continue to be quite good. The pharma and IT space in general has seen some extremely good results and some mediocre results. We are assuming that is a signal of a turnaround in these sectors. In IT, the stocks have moved up quite a bit but the recent correction means one can get them at better prices. We continue to like a lot of the manufacturing industry and the results show that whether it is an auto ancillary or pure industrials, we are seeing pretty interesting recovery in earnings, even from chemical companies which we thought may not do as well. So, earnings on that front have been good. Short-term volatility is very high and you are going to see deep cuts in anything you buy in all probability by December or January. If you take a longer term perspective, this is the time to pick up stocks in these sectors and even in the beleaguered NBFC sector, there are very strong players whose stocks have been beaten down. The banks are not going to come back and lend to everybody that the NBFCs have lent to and then wipe out the NBFCs. I do not think that is going to happen in the next 10 years. So there is opportunity there.A lot of stocks have corrected from the high beta space. FIIs have been selling while mutual funds have been buying. Mutual funds are buying IT and FMCG and more defensive names. Doesn’t this mean a cautious approach? Mutual funds have an inherent bias because they are part of the debt markets as well. They have seen a few corporates pull money out of liquid or ultra short-term funds. They want to avoid financials. The debt crisis is going to get worse before it gets better, but we are starting to see that stronger banks and financial players continue to retain market share. Even though credit may slow down a little bit for the next couple of weeks or months, they will come back fairly fast. India needs 12 to 14% credit growth per year and 70% of the banking system consisting of public sector banks either cannot or will not lend. Overall financials will return, mutual funds interest will return once there is a little more confidence in the system. As much as possible, they want to avoid names with any debt at this point. Today, it is a one-day phenomenon. Let us see it actually play out. IT results have been good so far. FMCG has done better than expected because last year’s quarter was GST laden there was a heavier component last September versus last June. I would have expected results to be much lower but we got better results than expected and there is a bit of interest coming back from that front as well.

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