What are you making of recent market moves?
The way global markets have shaped up over the last one or two days and the coronavirus scare is affecting the global companies and global sentiments and this was expected. If you look at large global corporations, they are also getting scared and are kind of predicting a dip in earnings because most of them have supply chains out of China and that is getting impacted. So, global growth probably will get impacted for maybe a quarter or two and that does not bode well for markets like India. Having said that, the entire confusion over the AGR dues is also creating a huge overhang over Indian markets, particularly Indian banks. It does not augur well for the health of the Indian market. At this stage, we have to be a bit cautious and wait and watch how things pan as far as the global event and the AGR issue are concerned.
What is the biggest risk currently? Why would you reckon that ‘wait and watch’ would be the correct step? Do you think this global event will only be the sole risk as of now for the Indian equity market?
Not really. This global event is definitely a risk and it is not only affecting the supply chains but some of the pharmaceutical companies are already having problems in procuring the APIs which come from China.
Beyond that, the sentiment significantly gets impacted. We should focus on local issues and this AGR issue is becoming a huge problem for the local banks and if something unfortunate happens to Vodafone-Idea, then its impact will be significantly felt by Indian markets, particularly Bank Nifty. By and large, a lot of banks will take a hit on the chin. We have to be prepared for that and also a bit cautious on account of that.
For someone who asks what is the way forward? Then Vodafone is not heading the Jet-way and that it will have some operating business. If they inject capital, they will have to take out a loan or increase the equity. Bottom line is that they will survive. So at Rs 3 what is there to lose? You are buying pretty much an option value and if it survives, it could go to Rs 10-12.
If you are an aggressive investor, you are taking a bet that eventually good sense will prevail and some kind of solution will work out. It is worthwhile taking that bet but the way things have been moving over the last few months, it does not give much hope. I am not sure that one should be taking that bet at this stage unless you are a really aggressive investor or in other words what we call a ‘punter’. For an investor who is looking at steady returns, some amount of safety of capital, then you must definitely avoid it. I would say the same thing for the entire telecom space, leaving aside Reliance as that is a different ball game altogether. I would avoid Bharti Airtel under the current circumstances.
This AGR issue is a big headache for PSUs. SBI, once again, has the biggest exposure to Vodafone-Idea followed by a couple of other PSU banks. What would be your take on these names? How would you go about looking for an opportunity in these PSU banking names?
As far as the PSU banking pack is concerned, we were all assuming that we are heading towards a phase where the asset quality will gradually start improving. Post the NCLT recoveries and Essar or Ruchi Soya verdict, we assumed that things will start improving and those recoveries will start coming to the bottom line. Unfortunately, this entire telecom space issue is throwing all the calculations out of the window and one is back at the point where one has to speculate as to what kind of hit may be coming to these PSU and other large corporate banks.
It is a matter of concern and one needs to be really careful. However, considering the fact that SBI has significant exposure in Vodafone-Idea, if I have to recommend a PSU bank, it will still be SBI. Beyond this Vodafone-Idea issue, things have been improving. There have been recoveries through Essar. There has been value unlocking possibility through the sale of the card’s business via an IPO. There has been talk of some traction in the general insurance business of SBI which will again unlock value. Value unlocking along with gradual asset quality recovery as well as recovery of the written of assets through the NCLT process will probably take SBI to a different level by the end of the next fiscal. Hence, a long term investor can definitely look at SBI at current levels. One has to brace for the telecom related confusion but beyond that, I think SBI is worth picking up.
We had seen a recent uptick on some of those pharma names including the big ones like Cipla, Lupin, Dr Reddy’s and also in the midcap basket. Would you go out on a limb and pick something from the pharma pack even at these lower levels? Are you anticipating any kind of comeback with regards to the theme?
Pharma does look interesting but in pharma, one has to be extremely stock specific. Every pharma company has its own areas where they are vulnerable as well as their own areas of strength. At this stage, we believe domestic pharma is something which is giving good returns and growing at about 15% CAGR. Under these circumstances, companies having a significant domestic presence are our favourites. So, Torrent Pharma, Natco Pharma, even Sun Pharma look good at current levels and are worth picking.
In regard to the disturbances in China, I think one sector which one needs to look at is the chemical sector, speciality chemicals in particular because they will be significant beneficiaries of supply chain disruption in China and one should definitely look at these agrochemical companies and chemical companies like Deepak Nitrite, UPL, PI Industries.
What else would you buy given the opportunity this fall presents?
We are getting a feeling that as far as rural India is concerned, probably green shoots are slowly becoming visible. Look the government is trying desperately to put money in the hands of rural people. The rabi crop is expected to be good. Also, the MSPs and the market prices of most of the agri products have increased significantly which does imply that money will be going more in the hands of rural population. This augurs well for FMCG and consumer durable companies having a rural focus. So, a company like Voltas which sells smaller air conditioners, room air conditioners and has a significant presence in rural India can be looked at. On the FMCG side, Dabur which has got a significant rural presence and a distribution network can definitely be looked at and of course, if somebody wants to play very safe the HUL surely can be looked at.
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