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We will see risk appetite growing over next few days: Mahantesh Sabarad, SBICAP Securities

Telecom stocks running a little ahead of what the fundamental seems to be telling us.

ET Now|
Nov 20, 2019, 04.56 PM IST
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ETMarkets.com
Mahantesh Sabarad, SBICAP Sec-1200
Risk appetite is now coming back into the markets and some midcaps and smallcaps are rising after having seen a substantial fall throughout the last fiscal year and the early part of this year as well, says Mahantesh Sabarad, Head, Retail Research, SBICAP Securities. Excerpts from an interview with ETNOW.

What are some of the key focus points for you in trade today because we are starting to see movement across the board. What is standing out to you? Would it be Reliance, would it be the fact that we are seeing a move in some of those PSU names on the back of that meeting on divestment?
The telecom stocks have surprised us by moving up sharply. Bharti Airtel, Voda Idea, all moved up from recent lows. In a way, Reliance is a quasi telecom stock as well so that has also moved up. The move is being backed by a possible tariff hikes that the telecom companies are talking about and some kind of relief coming in on the AGR issue which the Supreme Court has given an order on.

So both these news are actually taking the stocks up, but somewhere we feel they are running a little too ahead of what the fundamental seems to be telling us.

On the other side, risk appetite is now coming back into the markets and some midcaps and smallcaps are also rising after having seen a substantial fall throughout the last fiscal year and the early part of this year as well.

We find the risk appetite is growing. We have more retail participation coming in. DII participation is showing continuing uptrend and FIIs are back with a bang after a few months of selling in the middle of the calendar year. So, with the momentum building up, the risk appetite is growing. That is the trend we will observe in the next few days.

What are you making of the divergence in YES Bank? This is something that the market is ready to forgive because this is something that the market may have already priced in when the stock fell?
In a way you are right. The market was taking note of the likely divergence that can arise in YES Bank. It has been known to have such divergence of a large measure even in the past. It has that historical baggage of divergence with it and it was expected that some degree of divergence will arise but the quantum has been quite large in terms of the number reported. The Rs 3,000 plus crore that has been reported was a surprise to the market. But what seems to be happening with YES Bank right now is that the market is waiting with the patient breadth in terms of the likely equity infusion in Yes Bank, who are the deal makers and who are the ones who will bring in capital into the bank so that the growth is secured.

Otherwise Yes Bank is staring at a situation where growth could be compromised because there is no capital available. The market is just trying to take cues from what is available from the deal making process. Once we know the extent of infusion of capital that is likely to happen in YES Bank, probably the stock will be on a firmer footing. Until then, we will be very cautious about it.

We are looking at the quarterly earnings some of these companies gave. It definitely lagged in the quarter gone by. Are we seeing signs of recovery? Do you think that without the regulatory issues getting resolved, we would not see a convincing move in these pharma stocks?
We do not believe that pharma will be a sustainable sector in the long run, at least for the next few years. That is simply because regulatory issues have become a big burden on most of the pharma companies and they quite simply are not able to meet up to the regulatory needs.

Plus, pricing erosions in the US are creating a little bit of havoc for some of these companies. That is why we are seeing some companies realigning their business model. Lupin which was, for example, in the Japanese market, has sold off its Japanese venture because there are debt pressures on the company which is a big signal telling us that the business model is changing. Perhaps more things of similar nature can be seen.
Some of the PSU names will really do well. But more than the smaller PSU banks, the large PSU banks are the ones you should be looking at.

-Mahantesh Sabarad



We have seen Aurobindo actually changing its business model sometime back where they went aggressively after Sandoz and acquired it. Right now, they are facing challenges in terms of integrating that acquisition. Sun Pharma is taking that slow route in terms of getting its plants FDA compliant and continuing to maintain that status. Once they are through this, they would be able to benefit from the long pipeline of approved products.

The pharma industry and many of the leading business models are changing for the big pharma companies. Once those changes are through, we would be in a position to take a fresh view on the pharma sector. This will be a long drawn out process and we would be very cautious and would not like to recommend any of the pharma names right now.

What is your take on the smaller PSUs -- not SBI but outside of SBI? After the Essar Steel verdict, many are looking at PSU banks from a very different angle and it seems other resolutions might also be tilted in favour of banks as a consortium?
Yes. The story behind many of the PSU banks, including the small PSU banks, is about the recoveries that will come in from the stuck loans, the NPAs that are going through the NCLT, IBC processes. . The recovery is what we have been talking about.

It has been in the news and with the Essar news coming in, most of the PSU banks will come armed with a lot of recoveries this fiscal year as well. There will be a spillover of those recoveries happening in the next fiscal year. Armed as they are with these recoveries, there will be a shore up of capital and the business growth looks very promising with the low interest rates environment we are going through,

There is a slump in private investment cycle. We will therefore see a recovery. When that recovery happens, PSU banks are the ones who would be up on that curve and from a purely long-term perspective, some of the PSU companies will look good and then the government will consolidate a lot of PSU banks and making them large enough for growth to happen. Growth is contingent upon their ability to having a stronger balance sheet, good capital source behind them etc. We see that happening and therefore some of the PSU names will really do well. But more than the smaller PSU banks, the large PSU banks are the ones you should be looking at.

I think the first off the block in terms of the merger was Bank of Baroda merger and then we had all the other news coming in. Bank of Baroda, though it is a large bank from a markets perspective, is pretty small in terms of its market cap size. These are the stocks that you should be looking at in the PSU space.

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