Dilip Bhat says that a combination of recent reforms like the Mauritius Treaty, P-Note amendment and a possible US Fed rate hike in June have been overwhelming for the market in the short term.
In an interview with CNBC-TV18, he, along with Amisha Vora of Prabhudas and market expert Ashwani Gujral, discussed various stock and sector strategies.
Bhat said that he expects microfinance companies to do better than traditional banks as they have a better outreach in the rural market.
He sees a lot of high net worth individuals (HNIs) and midcap funds shifting focus to microfinance companies.
Prabhudas Lilladher keeps a bullish stance on JK Lakshmi Cement and see SpiceJet to remain profitable even if oil touches USD 50-55 per barrel.
Below is the verbatim transcript of Dilip Bhat and Amisha Vora and Ashwani Gujral’s interview with Latha Venkatesh on CNBC-TV18.
Q: What’s your sense is 7,900 going to be a near term roof and we will have to wait for perhaps Brexit, perhaps the rains. Have we to wait for at least a couple of months before we break it?
Bhat: Surely it looks like that some of these events are bound to prove a little formidable, a little overwhelming in the short run, so possibly this as what you mention and also the fact that we are running into a Fed rate hike plus possibly a redemption of our coming FCNR, some of these events will put pressure on the economy, currency, interest rates everything.
But having said that, this market even if it comes down for whatever reason, that correction will still be viewed as an opportunity and should be taken as an opportunity to further acquire because this markets still remain a market to buy on the dip and I am sure that some of these events will prevent a runaway rise in the market and possibly see some kind of either consolidation on the sideways or may be some correction.
Q: How protected is the downside. Market took the recent negative events very bravely, not much was lost probably 1 percent. Do you think 7,500 is sacrosanct, 7,700 is sacrosanct or even 6,800 possible?
Vora: No, I am in the camp I feel that 7,500 will be in most likelihood respected and in any case in any eventuality if it is broken it will bounce back to those levels pretty quickly and some of my confidence stems from the fact that despite the fact that in a third consecutive year the Nifty earnings are hugely disappointing and maybe somewhere just close to Rs 360-370 kind of Nifty earnings, but it comes at a cost of cleanliness, no risk, less uncertainty and we have seen how some of the stocks when they give this kind of transparency and reliability they traded higher PE, so that’s give me a lot of confidence that even if we feel Nifty is at 17 times or whatever, whatever it is on the most depressed earnings ever, it gives me a lot of confidence and I think one more thing to add is those state elections as such are not as critical as we keep saying, but this will definitely lead to passage of GST which once again lead to more on the ground which is what we keep hearing that it is little less, so combination of monsoon, Pay Commission, GST can lead to sustainable improvement in activity on the ground.
Q: In your universe of stocks, your PMS stocks which have done so well, what kind of an earnings growth are you looking for in FY17? What was your universe giving you in to the FY16 and what do you expect in FY17 for your universe?
Bhat: Well, let me put it this way, that we have been following the index and then we have a top picks, so this top picks are the ones which keeps on changing with the time.
Q: So let me look at your Nifty earnings itself. What are you all forecasting for FY17?
Bhat: So interestingly as what I said, when we started off the year all of us thought that we are going to have something like at least 18-20 percent and as we know that the year end with most of the results out, it’s going to be zero percent or maybe negative. So possibly next year too from the current level we feel that maybe we will see at least 18-20 percent growth in Nifty.
Q: At least because the date is bad?
Vora: Correct. So from Rs 430 earnings expected we might mind down at Rs 370 and one is looking back to the Rs 440 kind of number for Nifty EPS for FY17.
Q: Well, this week itself we saw the public sector banks (PSU) taking quite a bit knock after Bank of Baroda’s numbers. I see that you all have a lot of financials but they are all private sector. Aren’t HDFC Bank and Indusind Bank and Kotak Bank, I mean Kotak Bank is over 5 times price to book, even at current levels you will persist with these stocks, HDFC, Indusind and Kotak?
Vora: I think important thing is that probably even next year PSB banks will have to keep focussing a bit either on, how to really take care of this assets which (a) they have declared non-performing asset (NPA) but they individually need to realise something out of it and for them to really get something out of it, be it Rs 0.50, Rs 0.60 or Rs 0.40. There are certain policy level changes that we need.
Q: I take your point that you don’t want to get into PSB banks. Aren’t your private sector bank expensive?
Vora: So for Kotak Bank just to give you an example, as per my analyst we are heading towards roughly 38-40 percent bottom line growth and on that FY17 it is less than 4 times book and for 2 years we are looking at return on equity (ROE) growth.
Bhat: Just to add a point over here, I think in the coming one and a half to 2 years will continue to see the PSB banks ceding market share further and further to some of these private sector banks who are very well capitalised and even to do business.
Q: What about the non-bank finance, I see Capital First in your list. Will you add more non-banking financial company (NBFCs)?
Bhat: Well, I think this is one space which we think that we are still researching quite a few stocks, but certainly this space looks the one which can give very good return and I think Capital First is one of the stocks that we like.
We think that they are going to grow by something like 45-50 percent in the bottom line for next couple of years. Of course, their ROEs are bound to improve, they are just around 12-12.5 percent, but I think that also will go right up to around 15-16 percent in next two years time and they will require some capital, but they are doing all the right things to really capture the growth at the moment.
Q: Is GST also a stock pick related theme, will that govern your theme when you pick stocks?
Bhat: That theme has really been played out and time and again we have seen that even in the momentum stocks we have seen this theme being played out. However still some of the logistics stocks that we have been recommending is largely because of GST and also because we feel that economy will slip into accelerated mode which is where we will see lot of action.
Q: So, Allcargo Logistics is one of the stocks you mentioned. When I look at your stocks there aren’t so many index stocks in your long term bets. You have the usual HDFC and the Indus Ind Bank and Kotak Mahindra Bank. You are largely into midcaps, why? You think that will be the outperforming segment in the year ahead?
Vora: When the macros are very stable be it in terms of inflation, be it in terms of fiscal deficit and I think more or less in terms of interest rates also we are done.
So, when those macros are as stable as we see and we are on a recovery path, I think index because of some of the global headwinds could still be little more volatile. However if one still wants to invest and get a very good handsome return which market and economy can offer, midcap is the space to be and one has to be very stock specific.
Q: You still prefer to invest in pharma stocks?
Vora: We still feel that select pharma stocks where there is a good amount of permissions in place, they will continue to post upwards of 30 percent kind of bottomline growth.
So, the stocks which probably we have not been able to take under our active coverage but is a space we like a lot is entirely this Thyrocare , Dr Lal PathLabs .
We think diagnostic is a very largely growing segment of the market. Similarly stock like Syngene which is offshoot of pharma but very steady kind of return and operationally good cash flow generating company. So, I think even those could be good selections.
Q: The other set of stocks that have hit the IPO market have done very well have been have been Equitas , Ujjivan . Will that also interest you?
Bhat: Very much. In the days to come we will see that how these microfinance companies will really go all out to capture more and more market share. They will be able to do business in a much better way than the traditional banks have been doing because they have a rural touch out over there and they have bandwidth and that kind of workforce.
So, some of these companies will really standout and in a way we are interestingly seeing that lot of HNIs and lot of midcap funds are already shifting to some of these names at the moment because the long term really appears to be good.
Q: I want from both of you given the earnings season at this point in time, your best picks but before that, Spicejet numbers last week were not as exhilarating, you will still keep the faith?
Bhat: Very much. If we were to dissect that result I think the actual profit is much more, there has been some amount of tax planning which has gone into this particular results which will prevent the cash outflow but interestingly the company if I understood from the banks the loan has now come down to zero.
What will happen to Maran’s share we don’t know. Going forward we still think that even oil at USD 50-55 can lead to a net profit of around Rs 700 crore which is still very good and the sector also looks pretty good.
Q: Given the earnings season so far what is top of the mind, top 2 or 3 picks?
Vora: One stock which I like for investment a lot is JK Lakshmi Cement. They have expanded their capacity.
Last year interest depreciation went up but the EBITDA per tonne was under severe pressure because of prices. I think the turnaround will be equally strong and that is one of my strong top picks.
Bhat: Their result has still not come but Larsen and Toubro still looks very interesting because it has corrected very seriously from the top. I think with the kind of order the government is releasing in this space plus the defence which is long overdue, I think L&T will be able to capture all such opportunities.
Q: I give you one more turn roads is the best sector, we are doing this two year performance of the Modi government and roads is the best performing sector. Anything in that space?
Vora: If one really wants to play directly through roads then I think we like Sadbhav a lot?
Q: What is your outlook for the market next week and what are your top pick?
Gujral: Nifty is likely to break the 7,700-7,900 zone and possibly next week we should get 7,600-7,620. Overall, global markets are narrowing quite a bit and that’s sort of building of energy which leads to fairly sharp decline.
As far as stock calls are concerned, Pidilite Industries has had a fresh breakout on the monthly chart from a sideways movement, so longer term target here could be Rs 900, this can be bought.
BPCL seems to be topping out at about Rs 900-950, so BPCL is now a short and a target of Rs 750 seems possible in the next few months.
Meanwhile Sundaram Fasteners is a stock which has completed its correction. It’s in a long term bull market and out there if you take long positions, a target of Rs 220 could be easily possible.