Valuations for Indian market have gotten out of hand and the next 12 months could be “very painful” for some parts of it, believes Dimensions Consulting’s Ajay Srivastava.
In an interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Srivastava said that economy looked “fundamentally positive” in the wake of reforms undertaken by the government, but the steps will take time to percolate down to earnings.
“Some correction has already happened. More has to happen,” he said. “The investor should reallocate his portfolio away from stocks that have made him profits. Also, don’t make large commitments [to stocks].”
But still, the analyst said pockets of opportunities existed within select stocks and sectors.
He picked out telecom stocks as one that are poised to double in the next two-three years. “After the spectrum auction, their cost of material has become fixed. They will have assured revenue. They can’t be many new players in the market,” he said, adding that the shift in dynamics will cause valuations for these stocks to go from the 2 to 4 times price-to-book they are currently at, to 7 to 10 times.
Metals, minerals and large industrial companies were also stocks he picked out to gain from the increased economic activity that will take place from the coal auctions as well as the broad pick-up in activity.
“The stocks are cheap and under-owned. Pricing has reached extraction cost levels. It’s a bottom or thereabouts for these,” he said.
Latha: That big fall yesterday, you were kind of shaking your head and saying that a bit of a correction was on the cards when we last spoke to you. Is this it? Is this a time that medium and longer term investors can start looking at stocks, buying them or do you think they are going to get better levels?
A: No. There are certain sections of the market which kind of becoming more attractive at this point of time and I would allude to things like industrial metals and you were just talking about telecom stocks etc. Now nobody can say a bottom to the correction, but corrections are a little more late to go purely because of the over-ownership of the private banking stocks which have been really rallied up to a level that does not justify fundamentals.
So, if that kind of a sell-off takes place which continues as of yesterday, yes, market could be wobbly. But the issue here is that you need to re-allocate your portfolios more than once, that is one. Number two is hold your commitment, do not make large commitments and the reason being that apart from international factors, the domestic market is looking very weak at this point of time. And therefore you would tend to be more cautious than aggressive and this is not a correction which you go aggressively buy.
This is a correction you wait out and start, as you discussed last time, keep re-allocating your portfolio away from where you made profits to newer sectors because newer sectors are going to give you better returns like industrial metals, etc compared to the older ones.
Sonia: That is an interesting point. Is this still a long term bull market in your mind or do you think that for the near-term perhaps, the upsides will be restricted now?
A: I do not know long-term means what but yes it is a reasonably positive oriented market at this point of time, except the fact that I keep saying that the valuations have got stretched to the point which did not justify fundamentals. Some corrections have happened. Some more has to happen further more. Purely because it is out of sync with what is in the ground.
So, yes, fundamentally we are positive, good things have happened, the coal auction has happened, the telecom has auction and the latest which is not so publicised is the package for the power producers who were shut down for the last 4-5 years because of gas problem down south. And there are lots of positives building in system. The problem with the government is that while they are longer term positive, in the immediate 12-18 month horizon, there are lots of dark clouds and uncertainties.
And that is what is holding this rally back; one is over-valuation, thanks to liquidity from abroad. The second is, in the immediate future we are not seeing the traction that we had expected to see. So, expectations are being pared down which gives good credence that yes, it is a good bull-run, but the entry-points have to be carefully calibrated. Entry-points have been an issue in this market all the time. So you got to be careful about your entry-point in the market.
In a bull market, the guy who bought at 30,000-29,000 Sensex is wondering what happened to the bull market. The guy who bought at 18,000 is saying: yeah, the bull market is intact. So, entry-point is a relevant point and I still stay that longer term yes, but 12 months are going to be very painful.
Latha: Very painful? So, what you are suggesting for some parts of the market, you can still get lower levels? Your point is well-taken about the government setting right a lot of industrial block or a lot of infrastructure pieces. But will you have the courage to enter any of these? Which parts would you lay the metal stocks, would you play companies like power stocks? Which is the part of the infrastructure that you will enter?
A: Three parts to the market. Metal stock last time also we said yes, it is becoming good entry point, the prices are recovering, the raw-material prices have recovered and so we have really now looked at the bottom of the market. So, it is a good time to get in, is my view that is one.
Number two is largecap industrial stock, yes, it is again people are going to be involved in execution of contracts. If the coal mines have to come in, there are only two or three or four or five companies and lot of downstream companies are going to get a good amount of orders. That is why I said, it is not going to happen in 12 months, but 24 months down the line, these companies are going to gain a lot of order book interaction. So, industrial execution, I would say metals and minerals, I would say are the two safest places one would try to buy into because the valuations are cheap, it is the most neglected part, under-owned part of the market.
Whenever there is a shift of mood, you saw what happened in nationalised bank. The mood shifted, the price sky-rocketed, it has come back to ground again, thank God for that. But, these two sectors should give a good healthy return. And third you spoke about telecom, telecom the pure price-earnings (PE) expansion of price to book is going to double the share price in the next two years.
The raw material cost is now fixed and therefore they behave more like consumer companies which have a price to book of 7-10. These are running their price to book of 2-4. So, I can see lot of value expansion taking place in these companies purely because the uncertainties are over and the cost of raw material are fixed which you cannot actually say to about most of the fast-moving consumer goods (FMCG) companies.
Sonia: You are saying prices in the metal space have bottomed out. The last we heard, steel prices are still at five year lows and iron ore prices are still plummeting. Do you think that there could be some more on the downside or do you think this is it?
A: We have reached the bottom. I will be honest to say plus, minus 5 percent, I am not a genius in that, but I have a sense to say that you were in the zone where you can start calling a bottom at this point of time. I do not think there is a 20 percent reduction happening in the market.
And, you can already see the basic speculative position in the material market have moved in the last 7-10 days. They are reaching kind one month, three month highs. So, traction is coming, capital is coming, demand is coming and you can beat up a stock up to the point. Now we are reaching extraction cost level pricing. That can go on for some time. Beyond a point we need to get into a positive zone. I would definitely say it is a bottom or there-abouts.
Latha: Now I know you are not a fan of public sector (PSU) banks but these are the guys who are saddled with these industrials, saddled with these metal stocks. Is the worst over for them?
A: The problem with nationalised bank is not that the stock is saddled with something which is metal and manner will recover and so on, the problem is the lack of transparency on the balance sheet. If you know the extent of the problem, you can deal with it. I do not think even the chairmen of the banks today least of all anybody else, analysts, know the problem these people are placing that is one.
Number two is I do not think they have attitude which is flexible enough to take care of the problem. That is the second issue. The third issue is that which keeps happening. The management quality in these banks is not the quality which can go and restructure Rs 5 lakh crore of debts and ensure that we recover in the next three years. So problem is not the loan itself, problem is the execution of loan recovery.
Loan recovery cannot be: ‘sell off everything’. That is not recovery. Recovery is about nursing the company, merging the company. And you saw one large defence contractor company got merged and bought over so, that is a good sign. So, it is not the loan per se. I would say the management quality, the lack of transparency which bothers me with nationalised banks more than the loan per se.
Sonia: Just coming back to the point you made about telecom. Now we have more representation in the Nifty from the telecom space. Idea has just been included in the Nifty. But, these are stocks that have already rallied about 20 percent this year. Do you think most of the juice is out or is it still okay for a long-term investor to get in Bharti 400 and Idea at around these 200 levels?
A: I would still say that there is a lot of traction in this company is to look at 2-3 year perspective and ignore the nonsense which comes out of the company saying, “Oh we have been bludgeoned into paying some serious premium and now this hell will break loose.” That is just political noise that is being made. Ignore everybody else.
This stock will see expansion in valuation parameters. And I said the reason being assured revenues, assured costs, healthy rate of return, lack of new players. There is no new player coming into the market.
Reliance Jio you can say, but I do not take them very seriously at this point of time and believe me, in my discussion with them, neither does any telecom company take them very seriously at this point of time. So, lack of competition, raw material is fixed. You cannot go buy spectrum tomorrow from somebody so you cannot start the new venture, what else do you want in the matrix of a company? It is a phenomenal matrix for the industry which is being built up.
And as I said, I would put my bet on this price is going to be two times in the next 2-3 years. That is the kind of return we are looking at. Yes, first 15 percent is gone. But do not worry, the next big one is coming and if you are looking at doubling your money in 2-3 years, these are the places to be.
Latha: Let me come to the other ancillary companies that gain because of things turning around in metals or in infrastructure, non-banking financial companies (NBFC), CV companies?
A: Today the situation is that the main line companies’ valuation gives you more credence to go into the market than go down the ancillary path. So, if you really want to take the exposure, take the exposure to the prime companies because their value is pretty well in line with what expectations you have to get a healthy return in the market. The stage two will come when you go down the ladder, but stage one right now, you want to be with the guys where the big moolah is going to come in.