Not only demonetisation, GST to also hit unorganised players: Girish Pai, Nirmal Bang
In a chat wth ET Now, Girish Pai, Head of Research, Nirmal Bang Institutional Equities says over the last week or probably 10 days, IT index has outperformed the domestic plays and I think that wll continue for some time. Edited excerpts
ET Now: What is the sense, what have been you telling clients to do this fall”? Invest selectively? I know you have been bearish on certain pockets but I do not quite know what your market view was, what have you told your clients to do in the recent fall?
Girish Pai: I think it is going to be painful in the near term but obviously in the long term, it is positive. The question is when does a long term really start? Does it start two quarters down the road, does it start four quarters down the road or even beyond that because I think few things need to be taken into consideration. It is not just demonetisation, GST is also going to come in 1st of April 2017 and there is a Real Estate Regulation Act which is going to be coming through around the same time. So I would think that three-four things coming together which will going to lead to some kind of tumult in the business, in the economy once and which is going to lead to some kind of slowdown beyond just demonetisation that could be a bit unsettling.
On top of it, we have been basically talking about cash related black money. Now the government is saying that they are going to go after gold and jewellery and real estate and stuff like that. There could be a negative wealth impact also coming from those particular aspects which I do not think the market has taken into consideration. This could probably set back the big discretionary consumption or big ticket discretionary consumption play coming back quickly.
So I would probably think that earnings recovery is going to be a little bit more delayed than what the market is currently anticipating.
But having said that, we continue to believe in some of the same stories that we have pushed in the past. We still think that some of the NBFC plays which have got massive cuts of 25, 30, 35% in recent times still look good. Especially, the gold financiers, the microfmance institutions because they address customers, consumers who are low ticket value consumers in one sense and SKS or a Bharat Financial inclusion probably finances consumers or players out there who run businesses which are very essential to the needs of a particular area so I would be focussed on those kind of stocks.
ET Now: What about consumer durables that is a basket that has gotten hit albeit for the right reasons? Any channel checks which suggest some pick up or otherwise and are the price cuts pricing in the earnings cuts that will come in?
Girish Pai: I cannot speak specifically of consumer durables. We had a call with I would say a semi-urban retailer V-Mart yesterday and we had some very interesting insights out there because that the semi-urban retail is fairly unorganised at this point in time. So there seems to be a massive hit out there in the semi-urban retail sector which is almost like unorganised sector and forms almost 90% of the space. But what we have seen is organised players like V-Mart for instance seems to be gaining a lot of market share/. The overarching theme that one would probably play going forward in the economy where there is a fairly large unorganised sector – be it retail, be it plywood, be it in ceramics, be it in NBFCs. There are various pockets of economy where there is very large share of unorganised players which will get hit not only because of demonetisation but also because of GST.
These are the spaces that I would probably look at for investing.
ET Now: Are you excited about some of the capital good and engineering businesses related to infrastructure? Do you think that investment linked businesses are picking up?
Girish Pai: I think they are picking up in pockets, I do not think it is a broad-based investment recovery as yet. It is picking in the road side, in the railways side. I would not get too excited about it. I do not think it is a broad-based recovery as things stand right now. I think what we will probably have to happen is I think the government will have to probably pitch in a little bit more than what it has done thus far. I think the investment growth that was kind of pencilled in into the budget for FY17 has not been too great.
Going forward into FY18, the spending has to be lot larger than what is going to happen in FY17 because I think there is going to be a down draft from consumption which has to be negated. The government will probably spend a lot more on the infrastructure side which could lead to higher orders coming through for some of these companies.
ET Now: What is it that you like if not at this time and if not at these levels then may be at a later time at better entry points? What is it that you would look out for to buy if the opportunity arose?
Girish Pai: We would like to look at auto. The demand in the near term is going to get hit quite a bit but I think unlike some of the other areas of consumption where it is perishable consumption, here we have a situation where you can at best put off consumption by a few quarters. So I would bet on both two-wheelers especially Hero Honda as a stock that we like. Maruti is another stock that we like though I would probably play Maruti a little later than Hero Honda. Probably Maruti will recover later than Hero Honda. So auto is a space we like, we also like tractor companies out there.
In the financial space we like consumer facing banks I think they have a fairly diversified portfolio yes there will be some pain coming through from a possibly the LAP portfolio because I think the secondary market in real estate is going to take a fairly good hit and good result in some issues in terms of asset quality.
In the NBFC space, we like the MFIs and we like the gold financiers. So we continue to like Bharat Financial inclusion as well as Manappuram and Muthoot. These have taken fairly sharp hits if anywhere between 25 and 35% ever since the demonetisation was announced. So these are the kind of stocks we would look at in terms of buying into with a two plus year time frame. I do not think one should if one has to get into these with a slightly shorter time frame I would look at a better price point may be if market is going to go down by another 5-10% that would probably be giving me a lot more margin of safety for buying into some of these stocks. We could probably get a fairly swift bounce in some of the stocks but if you are buying now I think one would have a two plus year kind of time frame for some decent returns to come through.
ET Now: You would still be bearish on IT that view would not have changed?
Girish Pai: On IT, my sense is that while we have seen pressure on or we will see pressure on earnings in the domestic oriented sectors. So what has kind of played out over the last nine, eleven months is basically a situation where people have played for domestic revival, people have played for the Seventh Pay Commission, a good monsoon, lower interest rates and stuff like that.
Basically a lot of the stocks which were domestic oriented did very well under the expectation that earnings are going to pick up where as with demonetisation we have situation where earnings will have to pegged back quite a bit and one really does not know to what extent. Under such a scenario, we have IT which has been an underperformer for a while now and people have been paring earnings for quite some time is not facing an incremental pressure as things stand, right.
So we have seen over the last week or probably 10 days, IT index has outperformed the domestic plays and I think that will continue for some time. So if you want to play a tactical game in the very near term which could be maybe three, six month timeframe to hide from the probably pressures on earnings that are going to come through on the domestic front, yes I think IT could be an area to get into but I do not think that that is a sector I would bet on from a structural perspective.
I think there are a lot of structural pressures that the industry– I have highlighted this in past many times, I think it will continue to face even going forward. And on the cyclical while there is some buzz about economy picking up in the US on the back of infrastructure spending by Trump and stuff like that. I have my serious doubts about that because I think Republican Party has been fiscal hawk, it has not allowed Obama to spend too much in the last five, six years. So unless you see a completely different Republican Party I doubt whether a lot of the proposals in terms of very steep tax cuts and higher spending that Trump is indicating will go through. And my other big worry is with protectionist measures that Trump is planning to take up going forward.
I would probably think that some of the multinational, the American multinationals will probably have to rejig their operations and will probably have to spend a lot more, their margins could potentially come under pressure if they have to shift operations from China and India and elsewhere back to the US and there could be some kind of rethink in terms of the spending that they have to do in IT services. Source – http://economictimes.indiatimes.com [23-11-2016]