India is for largecaps, there is no point in bottom fishing: Ajay Srivastava


It is a dead end street for the midcap in the longer run, says Ajay Srivastava, CEO, Dimensions Corporate Finance. Excerpts from an interview with ETNOW.

In the light of the real estate rescue announcement made by the Finance Minister yesterday, what do you think of the market?
We are working in an environment of negative interest rate globally which means liquidity flows will keep coming to India. So fundamentals do not matter. The sentiments matter. Today is one booster shot. If this does not work, something else will happen. NPAs will be regularised. At the end of the day, one of the reasons why we are bouncing round with the stock market is that we are expecting the government to give more and more and that is where it is. NBCC is a trading PSU stock, engaged in construction activity. Nothing much will happen there. It is all about liquidity saying, listen we need to buy stocks, we just need a reason to buy it that is all. Give us a reason we will buy it, we will analyse later.

What should one do in this market because benchmark indices are sitting at an all-time high but nobody is feeling excited or gratified by investing in stock markets because midcaps are down 25% to 30% on an average from their highs. Most of the NAVs of mutual fund portfolios have underperformed the Nifty.
What has happened is that a)we have all gone into a recovery stage. This market did not give any spectacular returns to anybody because we have survived a huge fall and then have come back. In a sense, the portfolios at best are at par or somewhere around that. You celebrate when you have really seen a serious amount of return but the returns have been muted.

b)Nobody is convinced that this market reflects the fundamentals of India at this point of time. Historic lows of growth and historic highs of market do not sound good together. That is why I said there are two caveats to that. One is global liquidity. This is the kind of stuff you will see when so much money is carrying negative interest rate in the global market. They will keep pouring in money and will worry about it when things happen at the end of the cycle.

Also, we find the government is on the defensive and is giving out sops to the larger sector first. The corporate tax cut was straight to the heart of benefitted. In fact, if you look at the results, the major benefit is the tax cut. All the operational results are by and large par, poor or average.

We have a situation where the biggest chunk of benefits from the government is going to the top 200 or 300 companies only and the tax reduction has brought the gap in tax dispensation between MSMEs and largecaps to zero. There is no tax arbitrage for being a small one in this country which they used to get when the tax rate was brought to 25% for companies up to Rs 400 crore.

In that scenario, when all the sops are going to largecaps, they are also getting the liquidity from global markets. You really do not need to look at fundamental because you are not convinced about the fundamentals, You just need to look at liquidity and the fact that more and more sops will come to the top end.

Even if you look at the real estate stuff, SBICaps is manning it. Now SBICaps has no domain expertise to manage real estate. I wish it was HDFC managing it. It would have given a lot more credence to where will the money go. It will circulate to the larger industrial projects and larger builders will corner most of those money. The real struggling ones are not going to get any.

There is some logic in large ones like Piramal, etc, getting a fill up in the stock market because some of their funding could get substituted by this fund coming in and to that extent, there will be a relief for them on their portfolio. So, it is good for the larger ones again and that is why the dichotomy will continue among the midcap, smallcap and largecap stocks. We are very clear that India is for largecaps, there is no point of bottom fishing. It is a dead end street for the midcap for a longer run.

Where does that put you in place when it comes to autos? That has been a beleaguered sector for a while with no signs of a recovery even if you go by earnings. Maybe an odd Bajaj Auto here and there. But RC Bhargava in his interview to Economic Times has said that Suzuki India’s future is not looking all that bright for the next five to six months and he does not see a recovery coming in anytime soon. However, stock prices have recovered across the board and even Maruti is now at Rs 7,300. Is it time to buy these dips or are the better sectors available?
I am biased because we are running short position at the highs. We brought into shorts and we are running short position on auto stocks. In our view, the market is ahead of itself on automobiles and there are two reasons for that. It is not only the economic growth, the competitive scenario is also changing for Maruti and for all others. It is going to be a really competitive market and in the next 12 to 18 months, you will see auto industry behaving like telecom where there will be a race to the bottom in terms of margins as well as the pricing.

Because so many new players have come in and so much capacity is idle, every accountant will do calculations and says marginal cost is so much, let us go do a new scheme. So, it is more than fundamental. Maruti is acknowledging the fact that new players have come and taken a large share of this segment of the market. Two, there is a brand fatigue with the old brands. We all want to check out the new brands. Maruti is feeling the pinch and this industry is going to be the telecom or the aviation industry in the next 18 months. It is going to be really bad news on the margin side.

Last we spoke to you, you said you liked the market but was not fully invested. What have you done after that?
Nothing at all, because as I said, the two new sectors we picked up about a couple of months back were pharma and metal. These have done okay, nothing extraordinary but they have been safe and sound. As I said, we remain invested in the largecaps unconvinced about the economic fundamental, but very convinced about the liquidity flows at this point of time. We still hold about almost 20-25% in cash and the reason we do that is because the lesson of this recovery is that the real money we made was when we were buying at the bottom and we did not buy enough. Buying at the top does not exactly look to me a bright idea irrespective of what is happening to the market. This is a time to stay put, calm down, keep your money intact. You will get the bottom and we will make the money because three years have been bad for returns. We need to catch up with life, life is running short.

Is that a very philosophical comment or what are you trying to indicate here?
I am trying to indicate that my wife tells me you have not brought enough money home.

What about the whole concept of power of compounding be patient, think long term, do not worry about what is going to happen?
It is right but then what will be the role of investment managers if I go and sleep. I need to find new reasons to be active every morning and that is why I said we are inventing new things for ourselves and this is one time I will not invent a reason to buy in this market. I will stay calm and quiet and put my 20% cash in the side and wait it out. It does not matter if you lose some money here or there, but I think we have invested reasonably. We do not need to go more than this at this point of time. You see when the market turns around by March-April, what comes around to us. For the current year I think our investment portfolio is fully up to the extent we want to invest.

You are looking at paper, sugar, healthcare as well as a couple of other themes which we have not seen play out for so long. What is looking promising? Which ones are you focussing on?
We have started building position in the largecaps or pharma, the four largest of the pharma companies nothing to go below that circuit. We believe just three or four companies are undervalued significantly, compared to the cash flows. You see an enormous interest on the private equity side on the pharma. You do not see enough on the side and the liquidity in the stock market but these have tremendous value.

If you are getting good quality pharma names in India, which is so so under penetrated in terms of pharma products, you are really looking at substantial increase over time. Gradually, the USFDA issues will resolve itself or US will become smaller portion. The reason why we changed our stance is because that I think government is also going slow on price control. There is some pressure on the MNC pharma companies which have done exceedingly well. Keeping that in perspective, the price controls will remain on the sidelines for some time. These companies could double in the next year or two. That is our fundamental play at 2 to 2.5 times book value. For such large established names, having such a large domestic market, it is a criminal waste of money not to be there and we believe they should double in a year or a year-and-a-half. Once price control comes in, all bets are off. But I think price controls will not come under US pressure.

Would you be drawn into the PSU euphoria because that is where the real honey pot is. If BPCL, SCI are divested and the government brings their ownership below 50% in Container Corporation. Some would say some of these stocks could be on fire then?
I agree absolutely. We had a large holding in PSU, we still have a large holding in PSUs. It has been a year now since we have invested in PSUs and the reason we went in was not because of divestment. Because of the dividend yield which we were yielding, they have been pretty substantial.

Even if no action happens, it is a very good dividend playing stock like Embassy REITs has done with phenomenal returns plus dividend plays. IndiGrid Trust will do the same thing but PSUs is a play on the government at this point of time. Dividend yields are extremely good and so you are safe on that side.

But having said that, the performance of PSUs has been disappointing. BEL is supposed to have been a star at this point of time. But it gave disastrous performance. If they delay the divestment, we will see erosion of further value. At this point of time, you are evenly poised to get dividend yield and expected return. It is pretty cheap even today. They are pretty cheap stocks and the play is relative to the market. It is very cheap with high dividend yield. The government will pull in dividend and if these tax sops continue, these will be sold and when they get sold, doubling is the least you can expect from any of these stocks. Leave aside a few dogs, but buy MTNL, BSNL kind of stuff. You can see doubling of the stocks in most of the cases.

Why don’t you name a few one you like?
OMCs have been with us for a long time. We have got the power transmission company, we do not have Container Corp. Container Corp is off the table. We have metal companies, NALCO in our portfolio at this point of time. It has a pretty good dividend yield at this price; we have NMDC. So we have metal, OMCs and power companies. We do not have defence companies like BEL. We did not believe that they will perform and rightfully so, they have not performed well.

But we are in the other three sectors and I think the first to go perhaps will be the resource companies because they are not doing well. They need the money to expand and diversify; the cycle is adverse for them but they will also be the easiest to sell. Resource companies will give the best return amongst all these sectors.


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