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Better to avoid beaten down midcaps now: Sandip Sabharwal

There are a lot of beaten down midcaps but in the near term, if the overall market view is slightly cautious, one would avoid it at this stage. This week there is going to be so much news flow on trade, the UK elections and the US Fed meeting. We will have inflation data and IIP figures on December 12.

ET Now|
Updated: Dec 09, 2019, 11.13 AM IST
Sandip Sabharwal2-1200
There is a lot of news flow plus we will have the inflation data and IIP figures on 12.th So, let the macro data come out and then decide, says Sandip Sabharwal, asksandipsabharwal.com. Excerpts from an interview with ETNOW.

It has been a good quarter so far -- October, November, early December, but now things are looking bad. Can things get ugly?
The market has been good for select largecap stocks. After making a comeback, midcaps have given up some of their gains. One can pick out a few which have done very well -- some multiplex companies, some pharma companies. Divi's Lab actually hit a 52-week high on Friday. Some specific companies here and there are doing very well. Some of these pathological lab midcaps are doing very well. Dr Lal is up 60-70%. So, very specific micro stories are doing well.

Macro-wise, the global low inflation phase was missed by us in two ways. One, the RBI and MPC during the Urjit Patel regime, kept liquidity too tight, rates too high when there were no inflationary pressures and so companies suffered. Some companies which were doing well, saw their businesses going for a toss and demand fell.

The moves this year has had a muted impact as of now. So, whether it will have a positive impact next year is something which we have to see. Right now, it is not so significant. Secondly, we also missed the bus in terms of raising the sovereign bonds. There was fear mongering but global yields were so down in August-September, that the fear of higher fiscal deficit and higher borrowings domestically was not there in the near term. The policy response has been slow. The only real substantial reform at this stage has been the corporate tax rate cut which is real and significantly positive. I will not discount that.

But then, despite a lot of other announcements like the AIF for housing or the NBFC refinance or many of the other things or even the release of arbitration money to companies, nothing really has happened on the ground. If those things do not happen, then slowly people lose interest and on top of that, if you have some other markets doing well like the US market, you do not take emerging market currency risk. What is the incentive for people to come into India where the economy is actually at 4.5%?

Would you consider buying any of the beaten down midcaps or would you just stay away given the way the market is right now?
There are a lot of beaten down midcaps but in the near term, if the overall market view is slightly cautious, one would avoid it at this stage. Let the flows play out because this week itself, there is going to be so much news flow on trade, on the UK elections and also the US Fed meeting. Plus we will have the inflation data and IIP figures on 12 December. Let the macro data come out and then we will see.

No one is talking about the fact that there are two ticking time bombs. One is the telecom sector with its AGR dues. That spooked the market on Friday regarding effect on YES Bank or SBI. There is no resolution there. The deadline for AGR is January end?
Three months, Supreme Court gave three months so I do not know exactly the date.

The second time bomb is the YES Bank fund raising on 10th. If that fails, it is going to create chaos and then markets will start assuming that YES Bank is going to go belly up and in that case there will be pressure on banks!
Unfortunately, Ravneet Gill has got himself in a bind. He has committed $2 billion to everyone. Now he is trying to get that $2 billion whichever way. My view is that even if they get a billion dollars, they should raise it from whichever investor RBI approves of and that itself will be sufficient for them to go through for some time. They can cut down on growth and sustain the bank. The day this entire list of investors came in, I was doubtful because we have never heard those names before.

What about telecom? Kumar Mangalam Birla categorically said on a public platform that they would shut shop if they do not get relief.
Finally it is not his money, It is a public listed company. The Birlas hold 30-35% in most of the companies. Every company has individual shareholding. So you cannot say that they made so much money in Grasim. They are making losses here and so they should fund it. It does not work that way because every company in equity is limited liability. Every business is a separate business.

Now my calculations show that both Vodafone-Idea and Bharti will add around Rs 5,000-6,000 crore of revenue because of the tariff increases which they have done. For Bharti, there will be Rs 5,000-6,000 crore of additional income, combined with equity fund raising which they are proposing and which they can sustain. But Vodafone-Idea with the Rs 50,000-crore writeoff that they did, even if they gained Rs 5,000-6,000 crore in revenue every year, assuming that they are not losing subscribers, then it is a 7-8-9 year process for recovering just the AGR dues. Even before that, their balance sheet was stressed.

Maruti is raising production after 9 months of cuts. There was also news of price hikes a little earlier. With the EV overhang being pushed down the line, is 2020 going to be a better year for auto than expected?
2020 should be a better year but unfortunately we have come to such a pass that just a 5% increase excites people. That is the irony of the situation. People were just becoming happy if there was no decline and now there is a 3-4% increase. But that is not what is going to push this economy. You need maybe 12-15% kind of growth or 10-15% kind of growth for the capacities to get utilised for employment to get generated, for the entire ecosystem which supports auto industry dealers and auto suppliers, Everyone has to revive 2-3-4% here.
2020 should be a better year for auto but unfortunately we have come to such a pass that just a 5% increase excites people.

-Sandip Sabharwal

A Credit Suisse report talks about how expensive consumer stocks are and slowdown there. What happens to the consumer staple space now? Leaving out Asian Paints and HUL which have grown, the space is in serious disarray.
What will happen is that because of valuations and near-term concerns, we could see some corrections coming in those stocks. People have been buying those stocks only. That is where the maximum money has gone in. There could be some profit taking on the table but this report could be a bit late because typically when inflation moves up, rural incomes move up because the inflation impact on wages in the rural areas is pretty positive.

But this time it is only onions!
No, the basing has happened in a lot of products -- be it pulses or other agri commodities. We are seeing some uptick there and if the rabi production is also good, then we get that cycle going. I would think that this report would be slightly late in the day. If the market view is cautious in the near term, then we could see some corrections coming through but I would not support most of the arguments. Some arguments are coming that the telecom tariff hike will impact consumption because people had to pay more. I do not think that will be very significant.

PSU banks took quite a beating and post the RBI’s move, we are expecting to see further pressure on SBI perhaps today as well. What is your expectation? How do you see some of these banks move?
Yes, near term, we could see some pressure because the 10-year bond yields could have bottomed in terms of yields and we could see them rise near the Budget as people become more concerned about fiscal deficit. That will have a negative impact on financials. Now, many of the private sector banks tend to be insulated from that but PSU banks tend to take a hit. So if the bond yields keep trending up, we could see some more selloff.

Would you read too much into the resignation of Axis Bank CFO Jairam?
No, I do not think so. One-off resignations should not impact the overall performance of the bank as such unless this is followed by some other top level exists subsequently, which we do not know about. But just because of that people should not be negative.

Plus it has happened almost a year after Amitabh Chaudhry has taken over as CEO & MD at Axis Bank. Successive quarterly numbers have come out. This is not a case of Ravneet Gill coming in YES Bank and the top brass changing. It could be a personal reason also.
Yes so that is what I am saying that just because of one exit, nothing changes. He might have just got a better opportunity. So, who knows? Every exit is not a negative exit.

Right now, markets are talking about SBI’s exposure to telecom. But nobody is talking about ICICI Bank’s exposure to telecom. Markets are not talking about what could go wrong for ICICI Bank, everybody is talking about what could go wrong for SBI and YES Bank. Why is that?
ICICI somehow seems to have avoided a lot of potholes like DHFL and IL&FS. ICICI also turned out to be the one which was smarter and got out early or did not have too much of exposure. On telecom, I am not really sure how much ICICI’s exposure is, but I believe it will be much lesser than many of the other banks. To that extent, they are getting the credit. But that said, it has also outperformed so much so that it could give up some gains.

Crude and inflation are the two things which will force RBI to rethink and that is what they have done. Vegetable prices going higher means inflation goes higher but somebody makes money in the supply chain. Crude goes higher and nobody makes money, it is cash out of your balance sheet?
When import prices go up or imports increase, you are paying more to the outsiders. That is pure economics. Brent is near $64 and it has gone up by 12-13%. I think to that extent, it will have an impact. Now these production cuts also have been announced just over the weekend. We have to see the actual impact, going forward. Crude has shown resilience despite all the economic woes -- not falling much below $60. If there is a spike up, then that could be an additional risk.

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