Stock Market

Long-term buyers can still invest despite rally: Nilesh Shah

The recent bounceback in Indian and global shares mean that equities are back in the fair value zone, says Nilesh Shah, MD of Kotak Mahindra Asset Management Company.

“We could have little bit of short term volatility but this is still the time to accumulate,” he told CNBC-TV18 in an interview.

Shah outlined his view on a number of sectors, such as metals, auto, pharma and cement.

In the same interview, technical analyst Ashwani Gujral also shared his near term outlook on the market and discussed some stock picks.

Below is the transcript of Nilesh Shah and Ashwani Gujral’s interview with CNBC-TV18’s Anuj Singhal and Reema Tendulkar.

Anuj: Much more cheerful Holi than say, New Year was. What would you say about the last fortnight. It reaffirms of course your thoughts that the best way to play market is via Systematic Investment Plan (SIPs), play the volatility or use the volatility to your advantage. Do you think the worst is truly behind us and going forward the market is set to inch higher?

Shah: From the Budget day we are up about 10 percent. We are not the only market, which is up. Most of the emerging markets (EM) have also moved up. We have virtually seen 360-degree opposite behaviour in foreign institutional investors (FII). Before February 29, they were sellers on virtually every day. Post February 29, they have been buyers on every day.

So, clearly Budget has kind of given the hope on the path of fiscal prudence. Probably market was a little bit short in anticipation of certain taxation changes related to long term capital gain. So, by not giving that opportunity, the Budget created short covering and then the path of fiscal prudence gave hopes to the bulls and FIIs and we have seen a nice rally of 10 percent.

Certainly if the market moves in one month by 10 percent there could be little bit of volatility ahead. But as of today, as you correctly mentioned the momentum of market seems to be fairly strong. It dips a little bit but by day end, ends up closing at a higher level.

From a fundamental valuation point of view of course we are not as cheap as we were on February 29, but we are not as expensive as we were on say, last year’s Budget time. So, fundamental valuations are in your support. Markets are fairly valued and hence my feeling is that yes, we could have little bit of short term volatility here and there but this is all time to accumulate.

Reema: What about the metal stocks? Hindalco for instance has seen a rally of 30 percent since the start of the month. Tata Steel has recovered close to that since Budget lows. Is it just buying from oversold regions in commodity in select steel stocks or fundamentally have things approved?

Shah: Today if we see most of these metal stocks were available at a huge discount to their book value. Second, there has been some amount of dollar weakening which resulted into commodity prices around the world bottoming out and jumping up.

The government also took corrective action especially in steel sector by putting minimum import prices. However when you put minimum import price on steel, of course you end up supporting your steel manufacturers but then you end up jeopardising your steel consumers which are one of the largest exporters from India in terms of automobiles, engineering goods, capital goods.

So, my feeling is that this short-term aberrations in terms of providing support or bouncing back of prices are not really going to drive metal stocks further from current levels. They all have bounced quite nicely, 25-30 percent from bottom. But in order to move forward they will be looking forward to fundamental changes in the context of metal industry which is China’s overcapacity.

As of today, we don’t get the confidence that China is on the verge of closing down excess capacity or that it will not follow the path of dumping metals and metal products into rest of the world. So, my feeling is that considering the China issue and considering the fact that most of the metal companies in India have very high leverage, it will be probably worth avoiding this sector. The sector going forward should underperform the market.

Anuj: The other theme that really stands out is autos and especially the ones catering to the rural sector. We have Hero Motocorp at a new 52 week high. TVS Motors has hit lifetime highs, Ashok Leyland has hit lifetime highs and while the Nifty is nowhere near the previous highs. Do you think that is the space to be, so much focus was on rural area in the Budget. Do you think this could be a bit of game changer and would you stay invested in some of these big names?

Shah: Definitely we remain overweight auto sector. You correctly mentioned that today these kind of stocks are supported by the spending in the rural economy proposed in the Budget. This sector also will be benefit from good monsoon which we are likely to receive in this season. More importantly this sector will also get benefit from the Seventh Pay Commission revision recommendation as and when it gets implemented in second half of current year.

It should also benefit from the one rank, one pension (OROP) benefits which are given to the soldiers and retirees. So, automobile by virtue of support from the rural as well as the urban economy should be one of the outperforming sector in our opinion.

Reema: The other theme is pharmaceutical and the way it has started underperforming – Dr Reddy’s, Lupin, all ending in the red in the last few days. The risks seem to be mounting at least from the USFDA front. So, what should long term investors do now?

Shah: We must remember that while these companies are getting notices in terms of their manufacturing practises, we are not seeing any product recalls. So, it is the process which needs to be improved but the output which comes out of those factories they are still not being recalled, they are still medically fit for human consumption.

The second thing which we have to see is that, is there any Indian company which has successfully complied with USFDA norms? I quote an article in Economic Times where a small company called Windlas Pharma in Baddi has complied successfully with USFDA norms through ingenious method in terms of biometric attendants, in terms of taking data of manufacturing straight into the computers and so on and so forth.

So, if a small company can demonstrate how to run factories in compliance with USFDA, I am sure it is a matter of time before the bigger companies will capture it.

Pharma stocks are today falling because they were priced for perfection. For almost five years, they kind of delivered outperformance over market. And mpw they have started receiving these notices, which give a cause for market to correct. Some of the companies which received notices earlier, they have corrected quite beautifully.

My feeling is that they have taken corrective steps to come back into this US generic business.

So, if you can build a portfolio of pharma companies, one which have received notices earlier and have corrected and some of the domestic focused pharma company, which is also withstanding the current turmoil where government has banned certain combination drugs, my feeling is that pharma stocks will continue to be volatile in the near term but it gives you a good accumulation opportunity provided you are long term investor. All of us are living quite unhealthy and our consumption on pharma spending will continue to increase as we move forward.

Anuj: The other space which was really giving big gains to investors this month has been cement. I don’t recall when was the last time I have seen a 25 percent move in Ambuja Cement for example in a matter of 2-3 weeks. Cement was supposed to be boring sector, what has led to this rerating in all the large cap cement names?

Shah: In the cement sector it is a play on the affordable housing segment which should get support from the 7th Pay Commission recommendations. As people start receiving Rs 75000-80000 in their hand per annum, they are likely to spend this on EMIs for buying affordable houses.

From the demand side clearly it looks like the demand should be increasing in the affordable housing segment.

More importantly government is also taking out some of the cement demand in the road construction sector. This year road alone should have consumed about 10 million tonne of excess cement. So, that demand side road construction , railways construction and affordable housing are all supporting demand for cement.

The second thing is related to supply of cement. Courtesy passage of laws like land acquisition and environment, time taken to put up a cement plant has actually moved from about 3 years to probably between 5-6 years. So, newer capacities of cement is unlikely to come at a speed at which it had come in the past.

In fact if I remember correctly the kind of cement capacities which we added about 7 or 8 years ago was more than what we have added in last 3 or 4 years. In one year alone we had added more than 50 million tonne cement capacities and now we are adding 10 million and 15 million tonne.

So, your supply is restricted, demand is going up and cement as a commodity you can’t be importing from abroad. So, this whole put together created a nice combination.

The other thing which is happening in the cement sector is that some of the fringe players which were kind of operating to disrupt the market, they are all being taken over by the larger players. So, that disruption which was coming into market by fringe players that also has been demolished to a great extent.

Put all these things together and you find that cement is more like a structural story rather than a cyclical story.

Anuj: What is the broader texture telling you about this market, both for the Nifty and for the Bank Nifty? Do you see a move towards the 200 day moving average (DMA) on the Nifty and maybe even on the Bank Nifty?

Gujral: It appears clear that given this sort of strong momentum, what the market is planning is that probably it will go to the 200 DMA first and then retrace half of it, which means come back to 7550-7600. Because I feel that level needs to get tested, that was the low of the previous year. So, once you complete your one excursion to the 200 DMA, this market will give you an opportunity for entry. Maybe post March quarter results, it will come back to 7550-7600. So, couple of 100 points can still happen in a jiffy.

Reema: Do you like anything in the banking sector? If yes, what would your recommendation be?

Gujral: Private banks have run up fairly sharply and it is expected that probably they would correct a bit from here but possibly the housing finance stocks are again getting some traction. So, that is where you look at. Probably Indiabulls Housing Finance, LIC, HDFC — those are stocks that still haven’t done their rallies. So, that is where you would look at along with say an State Bank of India (SBI) or Bank of Baroda (BoB) because private banks have moved so sharply that they are extremely over extended. So out there the risk reward is not favourable now.

Anuj: We usually talk about your hourly targets and daily target. But on Taking Stock, we get viewers your slightly longer term targets and some midterm stock picks. What have you identified?

Gujral: This has been a very strong month end. The way I had done the first show I had said that possibly a lot of stocks will be reverting back to the mean. So, first of them is probably Ambuja Cement. Cement has had a large move. This kind of a move cannot be created by retail creditors. Definitely there is some strong hand buying. So, Ambuja Cement you can probably buy now with a stop around Rs 200 and look for medium target of about Rs 320.

Similarly ICICI Bank has had a large move. Still only the first month after many months of decline again people who could not get in, didn’t get in can buy this with a stop, say around Rs 200 and still look for targets of Rs 290.

Infosys is probably one of the few large cap stocks which didn’t correct and now are pushing against previous all time high. So, that has broken out this week. So, that has broken out this week. So, with a stop say, around Rs 1,100 medium term targets of Rs 1,400 now are opening up on Infosys.

Reema: Would you recommend profit booking in cement names like ACC, Ambuja Cements, Ultratech Cements which have rallied sharply in the last one week?

Gujral: If you are a weekly sort of trader 3-5 day maybe you can but, this indicates that more buying is on its way because anybody who bought cement stocks like that probably did not buy it for just one move. Stocks will back off a bit but I believe that you will have an equally large rally in the weeks to come.

So, something may be turning in cement we will know the reasons probably later on but this kind of a strong move in a highly unexpected sector cannot happen without a great inflow of money.

Anuj: What about midcap pharma. That has been your favourite trading spot. You have identified both winners and losers at times. How would you approach that space and any particular name that stands out?

Gujral: Midcap pharma has had its decline. There is an odd case like Cadila which can often happen but a lot of these stocks are now post their declines finding support at the 200 DMA. So, things like Strides Arcolab, Shasun Pharma, Ajanta Pharma today all of these stocks, Torrent Pharma on decline are again looking good for further upsides.

So, all of these stocks including Aurobindo Pharma are now possibly buy on dips because the bloodletting on pharma also seems to be getting over. So, maybe large caps can be avoided but midcap stocks are holding on to their supports.