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    Shyam Sekhar of Ithought on 4 sectors you must not buy now

    Synopsis

    “I am very bullish on the agri input chain, in fact that is my most important focus area for the next year.”

    Shyam SekharET Now
    "There should be a very decent earnings recovery in the next financial year and I think it should be a top down recovery."
    In an interview with ET Now, Shyam Sekhar of Ithought says carbon stocks, microfinance, housing finance companies and NBFCs must be avoided in this market.
    Edited excerpts:

    Is it time to put money to work or protect your cash? This market will unwind more and we will get better entry points?
    Markets correct and there is a tendency for investors to buy the same stocks which they bought on the way up. Usually this is how people lose but it is a time to shop selectively. I do not see merit in blindly shopping stocks which have fallen from their peaks that is not a way to shop. The way one shops is very, very critical now.

    What are the basic rules which you are following while shopping in this market? The selling in the mid and the small cap space reminds me of like a 26th January Flipkart or an Amazon sale! Everything is available 15% to 30% cheap?
    The sale is only the first in the series of sales and that is the basic concern. One should look beyond the immediate. Most of these companies are selling at two times revenue. Price earnings multiples are well in excess of 20. So you are not really able to find great value in them on their near term earnings that is not the next year’s earnings. Essentially, if you want to shop in that space, it is going to be very tricky and I find that most people are trying to shop on the basis of how much the stock has fallen from the recent high. This, in my view, is a disastrous way to do small and midcap investing. You should quickly realign the stock price with fresh earnings estimations of the future. That is something that we need to do now and that is going to be very critical to our shopping process. On the contrary, I prefer to buy businesses where I am taking a three- to five-year view in the microcap and in the small cap space. I am not looking at the midcap space because the midcap space seems to be over invested into and I would only look at it when people are selling them, not now.

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    I am taking a look at your twitter page. Reading one from 7th of February… “placing orders for just 100 shares of a company at regular price intervals. The thrill of waiting, getting news of execution. Old world joy stays.” I could easily ask you which were those shares but I would not. Where are you really finding comfort now in the markets in terms of the overall earnings trajectory? A lot of experts we talk to say that is going to be a key trigger. How are you looking at the overall earnings mapping for FY18-FY19? Do you think that we can see a decent recovery?
    There should be a very decent earnings recovery in the next financial year and I think it should be a top down recovery. I am not unduly worried about oil at this point in time though it looked scary at the beginning of the year. This gap may slowly lift off as the year progresses. One should watch it closely to see the trends and to analyse where the oil price is going.

    My own thinking is it may not be too much of a worry. Oil prices may soften a bit rather than harden. That again will help the earnings recovery. I expect commodities to come back sharply in the next financial year. You are already seeing a number of commodity companies especially in metals doing well. I expect this trend to continue. The volumes are going to be strong and metals will again gain significant share of the large cap exposure and that is something that is certain to happen in the next financial year. This year there has been a very muted response from institutional investors towards metal stocks. I expect the prices to lower a bit in the next financial year.

    On economic recovery -- both local and global -- if you expect metals to do well, it means that now it is time to buy commodity producers, to buy companies which would gain if the economy picks up rather than betting on good old defensives. Are you making a case that buy banks but buy wholesale banks, do not buy NBFCs?
    I tend to agree with that view. I think that the NPA cycle and the slippages are all slowly receding. You noticed during the last RBI Governor’s interaction with the media there were no questions on slippages which I found very interesting because that was a point of contention every time he came and he interacted with the media. This time, people did not even mention it and that is a good indicator. We are also seeing news flows everyday on progress towards resolution of NCLT cases relating to the big metal companies. I expect that over the next 90 to 180 days, we will be putting this behind.

    Subsequently, the metals space is going to be far more consolidated than it ever was and this is a very good pointer towards the future. If the metals scenario improves, it is fairly straightforward to assume that the wholesale banking will also start looking up. Not only can there be fresh alternatives for wholesale banks to lend as well to the newer buyers of these businesses who have better balance sheets, better credit worthiness to take on those lows. Wholesale banking as a pack looks good.

    We always tend to amplify and focus extensively on what to buy and the Hindi term is kya lene ka. Let us switch sides. What should one not buy in this market? Like Buffett says that rule number one is that you should not lose money in stock market and rule number two – never forget rule number one because if you buy your junk stocks or low-quality stocks, the risk of losing money in this kind of market could be very high.
    Shyam Sekhar: So far as the market favourites of last year are concerned, one should be very,very careful because many of these companies have seen multiple expansions based on factors which are more short- term oriented, demand-supply mismatches and stuff like that. Companies like that should be viewed very carefully. Whenever we give multiples, it is an indication that we expect the earnings growth to sustain for a much longer time to come but that caution has been thrown to the winds in 2017 because the flows from domestic investors have been so strong and the pressure to show NAV growth has also been at its peak in our mutual fund history.

    There has been a lot of indiscretion in the way we have institutionally procured midcap shares. So, one should be very careful in what we buy in the midcap space. I am basically very caution on some parts and I have no hesitation in naming them. First, carbon stocks. Second, microfinance. Third, housing finance companies. Fourth, NBFCs. These are some of the spaces where I think one should be very careful.

    You should subject those companies earnings to continuous stress test. Something happening somewhere remotely can affect these businesses. I am of the view that lending businesses are yet to factor in a technological disruption created by Aadhar. Once the Supreme Court puts the Aadhar debate behind, I am of the view that a lot of retail lending is going to become commoditised and that will open the doors to banks.

    I believe that going forward over a three- to five-year view personal credit is going to be measured far more acutely than it ever was which means that knowledge of the customer is not going to be such a difficult thing. Lending businesses are likely to be transformed significantly and commoditised in that process so that is something that we need to look ahead.

    How you are looking at the overall pharmaceutical space given the kind of earnings that we have seen? You have not seen some sort of a material recovery and the sense that a lot of investors have across the board is that one is remaining a little bit circumspect on the space, until things really clear out. How are you positioning yourself or what are you advising when it comes to pharma?
    I have been watching pharma quite intently. It went through a phase of having this USFDA scare. A series of them affected several companies then you had all those alerts being given. I think that that cycle is receding and it is on the way out. Companies have learnt to manage their systems far better and I believe that the USFDA is also being proactive in releasing companies from all its notices of the past. But there is an issue of companies’ profitability in the US markets that is still an overhang.

    Over a period of time, this will be addressed by the companies which have the ability to bring more products to market. So I think that doing more in that market is what will release companies from the pressure of lower revenues and consequently lower profits. We are now going into a positive cycle. It may be early days yet but considering that it is a defensive space and there is going to be a lot of fear in the calendar year 2018 in global and Indian markets, a lot of money will move towards pharma. I would like to invest on a graded basis as the news flow start improving I would definitely scale up pharma that would be my approach to pharma.

    We did see quite a bit of thrust being given to the agricultural sector in the budget. It brought that sector to the forefront very focussed on education, healthcare as well as agriculture. What is your outlook on agri inputs space?
    The whole agri value chain looks like a very good long-term story. If you look at it from a three- to five-year perspective, I expect farm incomes to go up and the number of industries to come downstream as well. You may see a value chain getting established. I expect the cold chain businesses to take off in a big way over the next three to five years. The agri space offers a number of parts of value chain. There are number of opportunities to choose from each part of this value chain. Input is an obvious part but if you look at how we viewed inputs, it was all based on the subsidies and other things in the past.

    Efficiency will be the key driver going forward. Businesses which are run more efficiently will tend to be those that trade shareholder value. The businesses that are not efficiently run in the agri input chain may not be the ones that will benefit and there are numerous ways of playing this and I am very bullish on the agri input chain, in fact that is my most important focus area for the next year.

    Everyone seems to be tweeting about and asking me the same question is this 2008 in making? Why do you think this is not 2008 in making, let me hear your thoughts?
    I do not believe that this is 2008 because in 2008 the index was overvalued more extensively than it is today and if you look at what has happened to the index though the index PE looks amplified, you remove the private banks and then you look at the valuations on the index it does not look all that scary.

    I believe that this earnings upgrade cycle that you mentioned will continue through the year, I do not think that this is one quarter I think that you will have at least one more upgrade in the calendar year. So, the earnings valuations will soften but what can be different from last year is that I believe that you could have healthy correction because last year markets just went up one way, we would not have that kind of strength in the markets in 2018. 2008 was different because in 2008 you had a combination of several factors you had business leveraging very extensively, today the leverage is the lowest among corporate India. So, the comparison with 2008 may be a bit extended.

    With such low leverage we should not really call the market run to a close, I would not do that but I think that one should be very stock specific, sector specific and we should look at the leverage in companies very carefully. And I believe that this trade towards companies which have a fairly predictable earnings like an HDFC Bank or all your private banks, all your HFCs like HDFC, is more or less a done thing.

    I believe that the trade will migrate towards risk in this year and that will happen with a lot of price movements. So, it is going to be a very volatile year but it is an year when a lot of opportunities will open up. One should look beyond the companies that have performed well in 2017, one should closely scrutinise the companies which are either heading into an earnings upgrade or have just got an upgrade. I think that this is a year to do a lot of homework, that is what I would say.

    We are trying to attempt here is trying to put out five topics of our today’s discussion, I have got four points from you already the fifth point has to be something stock specific so let us talk about the fifth point, what is there on your radar in terms of a large cap or a mid-cap idea?
    Large cap, I am looking to buy one good metal stock. I am just look at-- there are very few choices so it is fairly simple. In the case of TISCO there is a rights issue I would like to where it stabilises post that dilution and you have SAIL so it is not very difficult to see where to choose, I have not bought much but I am still studying that so that I could scale up my position and use the volatility to buy into one metal stock.

    Mid-cap is a difficult space and I am basically not looking at big mid-cap at this point in time I am more looking towards selling mid-caps because I find that a lot of stocks are being supported by the institutional investors by their SIP flows whereas the valuations do not support so it is only the money that is supporting I would only look to sell so I would not really look at naming a mid-cap stock.

    My buying is mostly in the microcap space. It is too illiquid and it could lead to speculative moves which I would not like to create through my utterances so you must excuse me from naming a microcap.






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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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