Bank Nifty has been an underperformer and the market is differentiating between low impact, moderate impact and high impact stocks, says Co-Founder & CEO, Complete Circle Consultants.
Are you surprised by the selloff? How much further can it go?
Difficult to really put a figure to how much more downside but the fact is markets will get a little lighter leading up to the US elections. It is a combination of factors – the dollar index gains strength, issues with European banks and renewed concerns on further lockdowns due to rising infection. All of it came together. The market was looking for a reason to correct and it found a couple of them.
Our view is that investors do not have to jump into everything and buy just because markets have corrected 7-8%. It is better to have a more balanced asset allocation in place. I will be maintaining that the return expectations have to come down a little bit in the scenario we are in and so look at offshore equity as well. All the big tech names are off 15%, one can gradually accumulate them; the five-year bond is still above 6.5%; HDFC Limited raised money at about 6.5%. So if you buy a medium duration debt fund, 6-7% is there on the table and keep accumulating quality stocks with decline. Be more balanced, do not simply buy just because you have seen a 2,000-point correction in one week.
What is your take on Bharti Airtel after that phenomenal drop that one saw post Jio’s lucrative offers coming out for its users? What is the call on telecom now?
There was almost 20% correction in a week or so. The first overhang was the MSCI rejig and the judgement which meant that probably it will continue to remain a three- player industry and then there has been some concern as Jio became aggressive. But if you look at the post paid plans Jio has, the price discount is more at the lower end which is the 399 plan which is around 20%. As you go up to about Rs 1,400-1,500, the discount is more 6% to 10%. With Airtel it is more on price, with Voda it is more on content as they offer more data and they tie-up with various apps.
My sense is even Voda-Idea will have to up the game. It may not be in terms of discounts but may be in terms of more value offering which means that for Airtel, it would be a drag of Rs 1,000-1,500 crore which could be 5-7% of their EBITDA. But for Voda it could be substantially higher. Also in the post paid space, Voda market share is about 43% and Airtel is about 29% and the balance is others. So I see more churn with Voda-Idea on 4G rather than on Airtel because Jio already has a 199 postpaid plan. There is some customer stickiness as far as the Bharti is concerned.
Secondly, the bigger play would be when Reliance launches the low-cost smartphones and the feature phone and the 2G customers switch sides. To me, that will be a bigger disruption. But eventually we will have a duopoly sooner or later, maybe in the medium term. In that case, Airtel should do well. On any dip, any correction, one can gradually accumulate and may not rush to buy everything right now just because it has dropped substantially.
What would you gradually accumulate then? Where do you feel valuations are nearing a more attractive level along with growth potential?
There are a few pockets. For example, pharma stocks have given a breather after a spectacular run. Divi’s is likely to enter Nifty, a great mix of business. The generics and the CRAMS mix is 59-41 for last quarter. On the API front, it is one of the leading global players and the API portfolio is a high volume selective portfolio of 30 APIs. It gives cost advantage and a lot of operating leverage. The capex should be completed this year so that should further add to the revenue trajectory. On the CRAMS front, Divi’s has a great relationship with innovator companies. Six out of 10 innovator companies are Divi’s clients. It is a good business with superior chemistry skills and that is something one can gradually accumulate.
We also like some niche financials, something like let us say a CDSL which is a proxy play on financial savings. It has 55% market share in individual depositories and about 33% in the corporate issuer segment. The IPO corporate action will also add to the revenues and then you have other services through their 100% subsidiary which is KYC, insurance depository, etc.
Another could be the CAMS IPO. Once that gets listed, provided you get a better entry point, again on a very annuity business, 70% market share in mutual fund RTA, 9 out of the top 14 fund houses have tie-ups with CAMS, very marquee names as far as even the shareholding goes. So that is something one can look at.
Where within large caps are you sensing opportunity, particularly within the tech and banking space?
The market is sensing trouble with asset quality and that is why the price action. The focus seems to be more on collection and keeping cash in the balance sheet than on incremental lending. If you look at ICICI Bank, overall provisions — which is Covid plus the other provisioning — is almost 2.2% of the net advances which is the highest.
In these kinds of scenarios, with the balance sheets are more conservative, the PCI is almost touching 79% and a great CASA book hovering around 43-44%, they have successfully made the retail book on the lending side two third of the book. It used to be 40:60 in favour of the corporates and 60% in corporate loans till about seven, eight years back.
They have done the fundraise by selling various stakes in subsidiaries as well and so are very well positioned. Once the asset quality concerns abate,that should be a bank one can look at.
In the tech space there is TCS. The market expects Tata Sons to buy back stake from the SP Group. I do not think it likely at $ 20-25 billion assuming the Shapoorji Pallonji stake sale of Rs 1.8 lakh crore will happen immediately. It will take its own sweet time and it would be wrong to compare it with the fundraise that a Jio platform or retail has done. But any pressure on account of that on TCS could be looked at.
Last quarter, the TCV which is the total transaction value was about $ 7 billion and the digital vertical seems to be doing very well. We are seeing clear trends of companies strengthening their core offerings as well as improving their customer interface. The annual outlook even by BFSI seems to be better for 2021 which are the two largest verticals for TCS. Maybe one can look at that as well.
The biggest cut yesterday was not in the financials, it was in IT, auto.
The last time the Nifty was 10,800-10,900, Bank Nifty was 30,000 and today at 10,800 Bank Nifty is 20,000. It has anyway been an underperformer and the market is differentiating between low impact, moderate impact and high impact stocks.
So the low impact ones are HDFC and Kotak which are down about 20-30%, the moderate impact ones are ICICI, Axis which are down about 40-50% from their peak. And then there are the high impact ones where the Street probably thinks that the impact of NPA would be much larger which are IndusInd and RBL and some of the others.
The market is differentiating and it is doing that in the NBFC space as well. But there is an opportunity to add good franchise names there. In the NBFC pack for example, HDFC Ltd is available at one book value, Bajaj Finance has bounced back from the lows. To me, it is a consumption stock in the NBFC basket. Once the broad recovery happens, it is a proxy play to consumption in my view.
So you can accumulate quality names but do it gradually, there are too many events right now starting in the next 30-40 days and a gradual accumulation is what is needed. Having low expectations is the key.
