FIIs turning sellers as economy and earnings outlook remain weak: Nischal Maheshwari
- Still positive on pvt sector banks and some PSUs.
- There is big uncertainty in auto sector.
- Pharma could turn around this quarter.
In the last three months, the FIIs have remained net sellers. With the finance minister and CBDT categorically saying that they are very firm on the super-rich surcharge, do you believe that sentiment will continue to take a hit and we will continue to see a strain on liquidity?
Basically the flows that we have seen post the budget is more temporary and it is going to settle. We have to go back to seeing where the earnings are coming from, what kind of valuations we have. The bigger problem continues to be that we do not have a very strong earnings outlook. Economy is not doing very well and that is disconcerting the FIIs. I believe either our valuations come down quite a bit from here or the earnings and the outlook on the economy change. Then only this turnaround is going to happen.
What about auto sales? It’s the worst data we have seen in two decades. What would be your positioning on both two-wheelers and four-wheelers?
At the moment, it is an avoid. I do not see any positives on the horizon both for two-wheelers and four-wheelers and maybe a quarter or two down basically. Whenever we turn positive on the autos, it would be two-wheelers first because we are seeing some well spread out monsoon and that should bring the demand back in the system.
The second problem the auto sector is facing is there is not enough credit available in the market to buy it and even I was talking to an NBFC which fund second-hand motorcycles, they are saying there is not enough cash for the second-hand motorcycle to actually be bought. So, that is another issue. We have to wait for credit to start coming back.
The third overhang which is long term is electrical vehicle (EV) segment. As far as EVs are concerned, there is a big uncertainty over the timeline and the government policy. This going to become an overhang across the whole sector. As far as EV is concerned, only the HCV or the CV sector is going to be not impacted immediately. But the government is pretty clear that they want to do something about the two-wheeler and four-wheeler segments by 2022. Companies have to start planning, preparing and investment have to start. This is a big uncertainty on the whole sector. It is at best an avoid and maybe a couple quarters down, as number starts coming in on a positive note, then we should start looking at it again.
What about financials? Credit Suisse has come out with very positive expectations from some of the heavyweights in the earnings season. What is your view on Axis, ICICI and SBI?
We continue to be positive on the private sector banks and this quarter and this year as well as the next we are very positive as far as the corporate banks are concerned. Obviously, a lot of recovery is going to start happening. We are going to start seeing positive flows coming back as far as profitability is concerned for these banks. The other thing has been the falling yields.
Most of these banks, especially SBI and the PSU banks, have large held to maturity portfolios and there would be gains as far as their bond portfolios are concerned. On both the fronts, the banks are doing well and given that the NBFCs are sort of out of the market, they are gaining market share. It is good for all these banks. We continue to be positive and believe their numbers are going to be strong.
In the pharma pack, a lot of approvals have started to come in. Is it a sector that you would want to look at or it is not the approval which is the issue but pricing and that is why you will stay away from the sector?
The valuation is definitely comforting in the pharma sector. We have to look at a couple of things including the outlook for the US, which is the largest market for most of these pharma companies. They have been having issues out there both in terms of pricing and margins and also the regulatory issues. I do not think regulatory issues have gone away. We continue to hear one or the other plants getting either an inspection or warning. Something or the other keeps on just happening across the whole sector.
So that thing has not gone away and I think that is a big dampener on the whole sectors’ valuation. The domestic sector is doing well. They have got a good valuation on the side. I will give it a couple of quarters. Maybe pharma will turn around this quarter.
What about banks?
Yes I said so earlier basically. We are positive on the banks, especially on the private sector banks and some of the PSU banks also.
What is you take on the spat between the promoters in IndiGo? The stock of course, bore the brunt of it declining the most in the last three years. What does one do at the current juncture in aviation?
If I go through the complaint which Mr Gangwal has made to SEBI, as far a shareholder is concerned, I do not see anything substantial, something which is to do even in the arm length relationship. Basically, some of the issues which he has mentioned does not seem to be substantial as far as the corporate governance issue is concerned.
The problem between the two shareholders is whenever they signed it, a lot of power had gone to one part of the shareholders but I think that point should have been sorted out at some point of time earlier. Given where we are, it will be negative for the stock, definitely because nobody likes uncertainty and this is creating a lot of uncertainty on who is going to get the control of the airline. A lot of time of the management will go away in this fight and the airline may suffer. That is why the market is reacting and this uncertainty will keep on pushing the stock down.