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We are buying small ticket consumer cyclicals, banks and infra cos: Chakri Lokapriya

Corporate earnings are weak and therefore a rate cut will benefit, says Lokapriya.

ET Now|
Apr 01, 2019, 05.35 PM IST
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The position portfolio is more towards the cyclical end of the curve, said Chakri Lokapriya, CIO & MD, TCG AMC, in an interview with ETNOW.

Edited excerpts:

What is the sense that you are getting from the upcoming policy on the street? By and large, the consensus call is that RBI is going to cut rates this time around. What are you factoring in and how do you see banks poised ahead of that?

It is very important that there be a rate cut because there is a genuine slowdown on both corporate and consumer earnings. It is very visible. Auto sales are down, the IPP index is down and they are all trading at multi-year lows. The RBI has been doing a very good job in infusing additional liquidity into the system in the last few weeks.

So, that is very commendable and against this backdrop, in addition to that, we would need a rate cut because some of it has not been passed on because of the way the bank was structured and also the deposit and lending mismatch. Against this backdrop, it is time to overlook some of these or look past some of these weaknesses in both corporate and consumer stocks and look at a pickup in credit growth. The position portfolio is more towards the cyclical end of the curve.

Would you advice that may be partial profits can be booked in some of these corporate banks?

Some of the big big banks like HDFC Bank have held steady over the last year-year and a half simply because they were safety in sitting in those names. Meanwhile, other companies like SBI, Yes Bank are fundamentally turning around. They have become much stronger banks. There is in some terms, a move away from the heavyweights of HDFCs and towards the other banks which are likely to grow faster. These banks are still great banks.

Quite a few factors seem to be working in favour -- be it China, FII flows, the Modi win, the upcoming RBI policy. How are you approaching this market? Is it with a bit of trepidation and caution or is there only way right now and that seems to be higher?

You have summed it up pretty well. There are a lot of factors which have made it a good Monday today and this probably will continue. The market is assuming that there will be a 25 bps rate cut in the coming days. So, that is very important. Against this backdrop, corporate earnings are weak, consumer earnings are weak and therefore a rate cut will benefit. It is time to go cyclicals and that is what we are doing -- buying small ticket consumer cyclicals, banks and infra companies.

Infra is the interesting one. Strategy-wise what you are looking for in infra?

In infra, I think there are various companies. Till the elections happen, nothing much is going to happen in terms of execution but post that, we hopefully will see a pickup in execution. Against this backdrop, there are companies like KEI Industries. They supply to various end industries right from steel, cement and various other infra sectors. They have a good balance sheet, they have a very good order book, very good clientele and against this backdrop, when a company is growing at 20-25% with reasonable valuations, that is one company that we are looking at.

What are your picks in the broader markets?

The broader market has corrected fairly significantly over the last several months on the back of both very weak sentiment, which is now turning positive. When we are standing positive. we would rather look at the smaller-ticket items which are easy to buy like a Relaxo. They make sandals and slippers and they sell majority of their products at low price points. It is a mass-market consumer product much cheaper than Bata. It has very strong band ambassadors in Akshay Kumar, Salman Khan amongst others. They have a good amount of traction and the company is moving up the premium ladder. These are easy bite sized products that the consumer can buy.

Rather than a bike or a car it is easier to buy a mattress. Sheela Foam is a mattress making company it spread across the whole country they have 12 manufacturing outlets. Sleepwell is a brand under the brand name fairly well known brand, good market share company had corrected in the past and is looking attractive now. So, it is companies like this or NBFCs which we will buy on dips.

A few of the auto sales numbers have trickled in. 1.58 lakh units for heavyweight Maruti. What according to you is the outlook given the kind of sound bites you are hearing from some of the auto majors as well as the overall macro environment?

If you look at the overall macro environment, given the fact the consumer is weak and liquidity has been tight and as a result, the discounts for the automobile manufacturers have been high and on top of that inventory is piling up. All this tells us that it is unlikely that the auto companies are going to see any pickup in sales at least for the next six months. There is an election in between, there is a monsoon right thereafter. Against this backdrop, the stocks have corrected quite a lot but there is time to wait before you buy the main auto companies. It is better to focus on smaller-ticket consumer durable items.

What exactly is the take when it comes to oil marketing companies given the fact that we have seen quite a decent rally already play out? Is there merit in investors betting on names like HP, BP and IOC?

This is going to be a very strong quarter for the likes of HPCL, BPCL, IOCL, Gas Authority of India. Also, the election code has kicked in and so the government cannot really tinker with petrol and diesel prices. Elections are anyway a couple of weeks away. Against this backdrop, they are going to report fairly strong earnings because they will have a good amount of inventory gains and their valuations because of fears of all these things have been. Now, they are sitting at very attractive valuations. Whether it is the refining companies or Gas Authority of India which is also expecting to see a company specific announcement in terms of a price increase and therefore should see a strong uptick to both its earnings. Both refining companies and petrochemical companies are looking strong.

Within this consumption space, is there any particular theme that you like or do you think it has run its course?

It is only the big ticket or rather the consumer staples which are at huge valuations -- the Unilevers, the ITCs of the world which have done well in a bad market over the last couple of years. If you look at the Maricos or the smaller companies, they clearly trade at a greater discount. They will also benefit from a consumer which will eventually strengthen and those are the names that I would look at -- the midcap names or the big companies but not the Daburs of the world. Maricos rather than the Hindustan Levers of the world.

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