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Money coming out of equity markets due to political uncertainties: Pashupati Advani

As the rupee gets weaker, it is obviously good for IT and pharma companies, says Advani.

ET Now|
Feb 19, 2019, 02.10 PM IST
The only good thing is that there are not a lot of new issues except for the Bharat 22 ETF that took some money out of the market, Pashupati Advani, pashupatiadvani@globalforay, tells ET Now.

Edited excerpts:

How long are we going to move around in a range? Up until elections will be quite a stretch, right?

Unless we get some direction that something is happening. So, maybe after the voting and some polls. Then there will be some excitement. But a lot of people are sitting on the side because of the fear of not conclusive government, one way or the other. That is what the challenge is right now.

What are you expecting?

I think the present government will continue but maybe not get a majority and that will actually put brakes on things. It will be nice to have one government or the other but having a hybrid is a bit of a challenge. But that is Indian politics. It has been hybrid for so long that we have forgotten. This is the only government that has been conclusive for a long time. Let us see what happens.

What are you going to do? Have you already built a portfolio or are you waiting for some certainty with regards to elections because that way, you will get a deeper correction?

You have to sit on the sides. Our market works on supply and demand and right now, FIIs are sitting on the side waiting for something to happen because anyway we are at highs, not exactly a cheap market. The domestic FIIs, SIPs seem to be going down. They are still positive but they are actually lowering, going down and the insurance companies are investing in this government divestment and things like that so that is also sucking a lot of money out of the system. So net-net, money is coming out of the equity markets.

The only good thing is that there are not a lot of new issues except for the Bharat 22 ETF that took some money out of the market. We are in this holding pattern which is not good for brokers or for people in the industry. It is very frustrating and in this kind of an environment, a lot of people will walk away from the market and that is not healthy.

But where is the opportunity? The currency move is benefiting certain sectors.

The rupee will probably get weaker in relation to the dollar. There is that flight to quality in the sense that the US is pulling money back but their economy is also not in that great a shape. As the rupee gets weaker, it is obviously good for IT and pharma companies. Pharma seems to have got hammered recently. So, there are opportunities in that space. I should be in IT but I am not and so that is another challenge that I face. But that is a personal bias.

Are you behind the ICICI, Axis and Yes Banks of the world or not quite?

I do not think the issues are over yet. Yes there is a flight to quality and so HDFC, IndusInd and Kotak are trading at huge multiples. The three that you just spoke about are looking like value buy but again Axis was at an all-time high and suddenly the government decided to unload some, so who knows? I personally do not believe the problems are over at ICICI by any remote chance. I would wait because there could be some more explosions to come because corporate India is not yet sorted out.

So you have completely stayed out of ICICI Bank?

Well I was out and in but I am not particularly bullish about that sector and I think the NBFCs are hurting even more because they are not able to get funding at a cheap rate. The so-called risk-free rates should be a lot higher than it is. FDs are at about 7-7.5% and they should be even higher. But since the government is the major borrower, they have pressured the banks not to raise the FDs but we are having inflationary challenges also and things are not working with those kind of interest rates.

There are lots of companies that are perhaps biting off more than they can chew. We saw the Essel Group with respect to their investments in infrastructure which the management acknowledged is a very big pain point for the company. Emami is now selling off its shares and they have got money in businesses like cement and solar etc which have not worked out. How are you looking at this sort of a trend?

Yes, both the names that you spoke about have actually come out of the blue because they were perceived as very strong groups and that is not so great and when Essel is talking about selling some of the jewels, that is a challenge. But let us see what pans out. Emami has sold 10% but they have got a huge debt and they have also got a huge foreign business as well.

Again, the capex expansion has not worked and there are a lot of companies that have gone in for capex and we will have to see which ones work and which ones do not. Companies in speciality chemicals are doing well. So, they will turn because the demand seems to have gone up. We are substituting some part of China’s trade and those companies should also continue to do well.

What else do you buy and stay away from?

If you want to speculate, you can look at real estate, infrastructure which have got hammered. There are going to be opportunities but with those, there are going to be high risks. I have played a little bit in Jai Prakash Industries which is now below 5.

NBCC is in fray for JP Infra assets?

Yes. Again they are picking the assets, but at some point it does not make sense to do the deal.

Do you like cement as well?

Yes, I like cement because there is some development. The government is a big buyer of roads. So that is also happening and builders also have to finish their projects. The original builder may not own the project but some one’s going to finish it and that is also happening. So, the demand for cement is there. Certainly midcap cement looks a lot cheaper than largecap cement and therefore those are the places to buy because there will be consolidation.

What about the consumption space? Nestle earnings did not really meet the mark and analysts are very concerned that the valuations that it is demanding, is not going to sustain. How are you looking at the overall valuation scenario within FMCG or even the consumption space as a whole?

We are a nation of consumers and our incomes are going up. The consumer space is good. Nestle has got other challenges because we have got Patanjali in the works trying to undercut them on just about every single product that they have except the Maggi. Fortunately the Maggi problem is behind them because they seem to have sorted out their supply chain. That space is growing because people are moving to quality and are willing to pay a little bit more.

But I think it is the wrong time in the cycle and so to pay 50 PE for a stock like Nestle is a challenge. But again, you are building a portfolio from the scratch. It is probably not a bad stock to own in your portfolio. It is like HDFC Bank, very highly priced but it is in everyone’s portfolios.

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