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Broader markets have seen 50%, 60% corrections which is a sign of bear market: Nitin Raheja

We are going to see a liquidity pressure as far as the markets are concerned, says Raheja.

ET Now|
Feb 15, 2019, 04.45 PM IST
Nitin Raheja-AQF Advisors-1200
Just 10 or 12 stocks are holding up the indices to the levels where they are at present. If you remove those 10 or 12 stocks, even the rest of the stocks in the indices are down close to 20% year on year, Nitin Raheja, Co-Founder, AQF Advisors, tells ET Now.

Edited excerpts:

Would you say it is best to avoid pharma names right now or is it a buy on dips?

These issues with the US FDA keep on recurring are a huge risk. It is also possibly one of the reasons why pharma has derated so much over the last few years. However, there is also a scenario on the ground where you are seeing faster clearances from FDA on various products. I would say pharma has to be played in a very stock specific manner and not per se across the sector. Dr Reddy’s has been facing issues just as Sun Pharma was facing issues for some time now and they have not been successful in resolving these issues. That will have a huge overhang on some of the larger names.

Crude has been rallying and we have seen Brent push pass $65 per barrel mark for the first time this year. We are seeing stocks reacting to it as well. Is it too volatile still or should we perhaps focus on the trend?

I do not think really why crude should have been around $60-65 and this is where it is. It aberrated on the upside, it aberrated on downside. Every time it goes up, you have the whole shale gas supply coming into the market which breaks even at around $60 barrel. This is the price where I really think crude should settle. But the short-term price of crude is anybody’s guess because there are so many more factors than just pure demand-supply fundamentals which play a role.

Let’s us talk about the overall market trend. Let us take a look at the index once again and despite that slide pickup, the overall mood continues to be incredibly cautious and yes everyone is talking elections and so on and so forth. But is that really at play? What is your view on valuations, earnings and where do you see us headed over the next couple of months?

Valuations are getting very interesting over the broader market. Unfortunately, the index is giving a completely misleading picture because the broader market is in such shambles. You talk to people in terms of the stocks that they hold. You talk to a retail investors, HNIs, they have seen 50%, 60% losses in stocks. Those are all characteristics of bear market which we have seen even in the past where we have seen 50%, 60% correction.

It is just 10 or 12 stocks which are holding up the index to the levels where they are at present. If you remove those 10 or 12 stocks, even the rest of the stocks in the index are down close to 20% year on year. This is actually coming on the back of a couple of factors. One, in the last few months, especially post the whole IL&FS issue, liquidity has become tighter in the market. As NBFCs have had reduced access to liquidity, you are also seeing them pullback on capital market based lending. You are seeing a pullback in terms of loan against share and you are seeing price collapse of promoter holding where promoter pledges are high and that in turns feeds the vicious cycle where NBFCs start increasing their collateral value that they want against what they are lending.

All of this is creating liquidity issue as far as the markets are concerned. On the other side, you are seeing high credit deposit ratios and that is also a function of the fact that credit demand is picking up. It is led by the government’s fiscal deficit and is led by the fact that there is a small uptick that is being seeing in the economy as figures have shown in the recent past.

However, deposits are not keeping pace with that. On top of that, RBI possibly spends some amount of money to defend the value of the rupee vis-à-vis dollar. We are getting into the advance tax season coming in March. We are going to see a liquidity pressure as far as the markets are concerned.

On the valuations front, clearly there has been a selloff and if I look across the broader market, valuations are turning extremely interesting. They do not necessarily reflect the results which have been positive for a a lot of these companies.

For the overall market, the results have once again disappointed and it is no wonder that the market is getting derated. This trend is probably going to continue for next month and month and a half. I have seen a lot of liquidity coming into the markets post April, but overall I do not see the markets running away anywhere.

Jet has been in focus on the back of the entire plan that they have come up with now. What is your take on Jet and the overall aviation space?

In this space, I do not think anybody has been able to crack the code. You have an airline which does well for a few years, gets into a rapid expansion mode and then invariably crude prices run up and it starts facing issues. We have seen this whole cycle repeat itself in this sector time and again. No doubt, at one level, there was an underpenetrated market. The demand is growing a lot but the basic business economics where the variable costs are huge in the form of fuel prices makes it difficult for you to really sustain and make long-term wealth.

You can play some of these bounces where you have restructurings and turnarounds but I do not think you can create sustainable wealth here.

What about YES Bank? Two of the big uncertainties have been lifted now. We have seen the exuberance on the stock as well. But you would say it is justified and should investors look at buying into YES Bank from a longer term perspective?

This franchise has been around for long. Clearly, it was top heavy. Those issues are getting resolved. The RBI clean chit is a huge positive for the stock because one of the key elements why YES used to trade at a discount to its peers was always this fear in terms of its quality of book. But the RBI clean chit really helps in that. YES does have quite a bit of space even from here to run up. It might not happen overnight. People are looking more and more at the new management’s vision in terms of what kind of growth numbers they are ready to put. Clearly in the short term, there would have been some amount of suffering as far as the bank would have been concerned. As far as getting new people to sign in, depositors and so and so forth, they will need to address these through a confidence boosting campaign.

Auto seems to have not inspired the market at all. We saw Ashok Leyland spike up post its numbers yesterday but still concerns remain over the overall market going forward. What is your call over there?

How the NBFC crisis has percolated is made very clear when you hear the Ashok Leyland management. They talked about how funding has dried up and you are seeing that impact on passenger vehicles as well as commercial vehicles. Of course, two wheelers are facing their own set of challenges with rural distress being where it is. I would not really expect great things happening as far as auto companies are concerned. You would see growth but my own estimate is it would be towards the higher single digits for the following year.

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