Don't bail out now, start nibbling as long-term risk reward is favourable: Sanjay Dutt
- Get your shopping list ready and start buying slowly.
- Major risk would come from global developments rather than domestic ones.
- In 12 to 24 months, the risk reward is very favourable in my opinion
Ever since the budget, the market condition is getting a little alarming. It is not just the FPI surcharge issue, but it seems the global party is also getting disturbed. What explains the rupee movement of almost about Re 1 this morning?
It is a mix of global factors along with what we are seeing in the domestic markets. The reality of economic slowdown has really sunk into the stock markets now. Of course, we have had these very clear signs but now it is getting more and more acute and complicated as we see numbers from companies coming in.
This week there is a near-term trigger in the RBI policy. The finance minister herself has been urging an aggressive rate cut a) What is your expectation on the quantum of the rate cut because inflation seems very well under control? b) How much of a rescue can a rate cut really be at this juncture ?
A 25 bps rate cut is more or less in the price -- be it the bonds or the equity markets. Anything beyond that would probably stem the fall or excite the markets a little bit but my own assessment is that it will be a combination of 25 bps plus some other adjustment that may be the reverse repo and repo window narrowing can compel banks to take action.
RBI has a lot of monetary tools to play around. It might be a combination of the two because enough liquidity is needed in the system and push the banks to start taking on more risk and move away from the ultra conservative positions.
As for global factors, nothing much can be done sitting here in India except to keep an eye on what is happening and adjust to it. That is what the policy makers will be doing. But in the RBI policy, they might come out with some innovative measures-- carry out a rate cut as well as ensure transmission of the rate cuts with various tools that are available with them. That may get some bank lending back into the system or make banks take aggressive risk positions in the next few months.
What is the bigger threat according to you -- the domestic slowdown and some amount of political uncertainty or global developments?
The bigger risk obviously is global. If we continue to see aggressive outflows from India and continue to see a slowdown across the world and further risk aversion stepping in, think then we will have a problem. Our domestic problems cannot be solved overnight. It will take time because of the economic slowdown that we all are experiencing amongst various industries but if the global factors start to magnify the existing issues in the global economy, then things are going to get worse for us here.
There is a silver lining here in India that we are quite an invert economy. As long as we can manage our own positions here in terms of stimulating demand, settling down and ironing out the various demand supply issues that we have within our economy and take, some policy steps, we are quite immune to the worst shocks that the global economy may see. More so, because we have already adjusted a lot whether it is the company estimates in terms of earnings etc. or stock prices in the last year or so.
Risk-reward is not that bad in India as far as individual companies and individual stocks are concerned but the major risk would come from global developments rather than domestic ones.
The domestic issues hopefully are going to get improved from here because cost of capital is going to collapse in the next few months. It is my assessment that the combination of some little bit of policy action along with cost of capital further coming down, will result in starting a revival in the next few quarters within India. But if globally we collapse, then we probably may have a different set of issues to deal with.
So what is the solution for the investors right now? Should you go in capital protection mode and book out some of Bajaj Finance, TCS, ICICI Bank stocks or do you use the opportunity of this decline keep that shopping list ready another 5% to 10% depending on how much the market fall is from here actually deploy these dips to buy into that list?
The risk reward right now is favourable you should start looking at individual companies and start buying in. It is not the time to really get out of the market or to sell and step aside. It is probably too late for that. As an investor with the longer term horizon -- 12 to 24 months -- the risk reward is very favourable in my opinion.
You should start looking into company specific opportunities and start buying slowly. When there is market euphoria and the markets are going up you cannot game what is going to be the highs of the market, they just keep going up. We have a similar situation now. We have got in a large number of pockets, extreme pessimism in the market. The valuations of some of the companies are becoming reasonable and some are becoming attractive. Get your shopping list ready and start buying in slowly.
You cannot time when hat the Nifty is going to be the lowest to turn a buyer. You got to look at individual stocks and slowly keep adding. But if you are holding and you are not in a position to invest more funds, you should patiently look at your portfolio and shuffle them to good quality and sit tight. I do not think it is time to really bail out now. In fact it is time to start nibbling to start adding to your portfolio because risk reward is favourable from a clearly longer term perspective. I cannot game the next month, two or three months but a little longer period yes definitely it is a good time to add.
And where would you be hunting?
It is across sectors, across the board. There are opportunities in the infrastructure space, consumption space, financial services because we cannot have India growing without robust financial services companies. There are good quality stocks that have corrected 30% to 40% from the highs. Start looking at them. There is a lot of opportunities in good quality midcap companies.
In fact, look at the tier I midcap companies which have corrected quite aggressively, building in an absolute collapse in the economy, collapse in demand. Whether it is capital goods or consumption, you will find lot of opportunities in midcap space where you can start looking right now. They are all part of the collateral damage because the last month or one-and-a-half months when you see the Nifty collapsing, they have collapsed much more -- 10% to 20%. So that is one space I think we should start looking at now.
You also talked about auto and how perhaps it is the first time in two years you might look at that space. Talk to us about the valuations there. You are not concerned that this is a structural change, possibly more cyclical. But what is the outlook?
I have over the last week-ten days,been of the view that contrary to what I had for a long time that this is a time to look at one or two top order companies to add to your portfolio. The companies that have reach, distribution, world class manufacturing facilities, who will be able to adjust this change that we are seeing in the sector both in terms of technology and in terms of broader transmission trend, etc. It will be a good time to start adding those companies because one cannot really replicate the models those companies have executed even though they may not be that advanced in the EV space,
They are well positioned to alter their models, they already are doing a substantial amount of work. They are also cognisant of the fact that the market has changed. Those companies should be added now because you will never be able to game as to when they will turn. I am not saying just go whole hog and kind of fill your portfolio with entire allocation with the auto sector as you want to be but this is a good time to start being a little positive on some of the companies.
But you said that a lot of midcaps are showing value. How should one identify stocks, which are the sectors one should look at? Should one completely avoid debt sort of companies because suddenly any company with a huge debt is seeing big derating?
Yes, in fact, in a way it is a good thing because if you have seen market kind of shunning companies which are overleveraged or do not have the optimum leverage and in fact leverage is now being looked at as a group as a whole and not necessarily the operating company, which would mean that promoter and his entire set of companies.
If you are looking at something like that, you got to look at companies which have manageable debt in their books. The best indicator obviously would be EV, EBITDA parameters. Look at companies with very low EV, EBITDA levels, look at companies with low debt servicing requirements over the next few years and who will have the benefit of really bouncing back once demand and consumption picks up.
I would go for companies which have relatively stable cash flows in the years ahead, some of them in the infrastructure space, some of them in the financial services space. Second rung financial services companies have been beaten down quite a bit. Those would be a good place to be in. Similarly, some of the infrastructure companies. I have seen one or two good quality companies have actually corrected by 40% to 50% in the last four to six weeks. They do not have really huge debt and are very good capabilities to execute projects. They are looking attractive.
Similarly, you are going to shun anyone who has got debt. The important issue here is the optimum debt level, which obviously is going to be a function of its cash flows and its capital on balance sheet, net worth, etc. Very little bit of work needs to be done by the investors. Take help of professional advisors and investment advisors and build a portfolio. For midcaps, you need to take help from advisors because it is very difficult to identify if any of these companies are living with bigger problems as far as whole group is concerned.