Expect market momentum to be positive for time being: Prabhat Awasthi, Nomura Financial Advisories

In a chat with ET Now, Prabhat Awasthi, Head of Equity & MD, India, Nomura Financial Advisories & Securities Pvt Ltd, shares his views on the markets and certain stocks. Excerpts:

ET Now: There is an election wave in the markets, which seems to be taking everything up. Should one participate in this wave, or it is time to exercise caution because historically, the markets always run up before elections and they always go down thereafter?

Prabhat Awasthi: There is still some time to the elections and the results will only be known by May 16. Depending on how the market behaves, we could look at a reshuffle in the portfolio. But for the time being, we are of the view that there will be a positive momentum in the market.

ET Now: Of late, the strength of some of the big performers of the last six months like IT and pharma has somewhat gotten challenged. Then, there seems to be a tilt towards cyclicals. Do you stick with IT, pharma and basically the exporter space and also dabble in cyclicals, or would you prefer a pure defensive play?

Prabhat Awasthi: Actually we have essentially been recommending a bit of both. Accordingly in the defensive pack, the sector we have been underweight on for a while now is consumers. But IT and pharma continue to be our overweight sectors. Along with that, we have a large overweight on banking and some of the reform plays like oil and gas.

So what we are essentially saying is that we are not really concerned about the growth in IT and pharma, even though there have been a couple of data points which have spooked the markets.

However overall, the US economy is doing well and there is some recovery in Europe as well. Hence, IT will do well. There will always be some correction in the stocks in these sectors, because they have been the strongest performers and there will be some sector rotations, but over a period of one year, we think that these are still good stocks to hold. Therefore, our approach is to look at exporters, apart from some of the domestic cyclicals.

ET Now: As a house, why do you feel that banks would be the best players during the elections? PSU banks may look cheap, but their balance sheets are dented and private banks are growing, but they are already expensive, with ICICI Bank being at Rs 1200 and HDFC Bank is also not far away from record highs.

Prabhat Awasthi: The point to consider is whether the private banks are really expensive on a price to book basis, if you see their history. The book has been growing and hence, looking at only the stock price might not be the right way to look at them.

The fact is that these stocks are still cheap in terms of price to book. For instance, ICICI Bank would have been close to 2.3-2.5 price to book and it is probably at about a 40-50% discount to valuation. We think that the macro environment has improved and banks being the largest sector, and any hope of recovery either on account of elections or because of macro easing in general will first reflect on banks. That is why we are positive on banks.

Their balance sheets are stressed, but that is a well-known story. Some of the balance sheet issues are largely related to policy. For example, power sector issues, SEB restructuring and so on, than related to cyclical issues with growth.

So if they start getting positive on growth, it will be less negative on NPAs, going forward. Thirdly, the trend of NPAs actually has improved somewhat. Thus, if you look at the delinquency ratios, there has been some improvement from the peak that we saw a couple of quarters back.

Therefore, we think that valuations in terms to price to book multiples and the macro environment, along with the outlook that people have on how the economy, will pan out. That will essentially be positive for banks.

ET Now: A lot of people now are staying away from banks, but NBFCs and a couple of microfinance companies are the ones which are finding favour with a lot of market participants. What is your view when it comes to these two spaces?

Prabhat Awasthi: We do not cover microfinance companies. So I would refrain from commenting on that. However, in NBFCs selectively, valuations are not too bad now because some of these names like Shriram Transport, especially, have been down since there has been a negative sentiment attached to the industries they operate in. I am not sure whether people have been staying away from banks.

We have seen private banks doing extremely well and there has been some life of late in PSU banks. So if you are looking to buy the India story in some measure, then you have to buy into the private and public sector banks. You really cannot buy a whole lot of NBFCs, but the financial space in general tends to move in line with the economy.

If the economy does well, then all these stocks will tend to do well. So if the economy does well, in the first phase, there will probably be some catch up by stocks which have not performed so far. Hence, there could be a catch up by PSU banks or NBFCs.

ET Now: With the assumption that the economy may turn around, would you bet at all on capital goods and infrastructure names, because of late that sector as well has been moving a fair bit?

Prabhat Awasthi: I am not sure whether green shoots are yet visible and a lot of things will depend upon the post-election environment. However, at this point in time, the industrial production has stabilised and growth has stabilised at lower levels, at around 4.5-5%, and it is not getting any worse. The data on current account have been better and the inflation data have surprised positively.

So you could say that the green shoots are on the side of stress getting reduced, but not really on the side of growth, because growth numbers continue to be reasonably poor. Earnings stabilisation to the extent that it has happened has been largely because of exporters. You have seen the earnings of domestic cyclicals being subdued. In this environment, capital goods probably will revive at a later stage and that too is doubtful. That doubt essentially emanates from the fact that policies post the elections will matter a lot.

So at this point in time, I am not in favour of that sector. I understand that if people bet on the Indian economy, they will probably buy these stocks, because there will be some hope especially if you are betting on the elections for growth revival.

These stocks have been beaten down, but I suspect that between delivery and the stock price performance, there might be a gap which will open out. So these stocks can continue to do well for some time, but eventually, there will be some challenges for the capital goods stocks, going forward.

ET Now: In your long only model portfolio, you have a preferred bias towards HPCL and BPCL. Is that more of a tactical buy, or do you think oil marketing stocks have got permanently re-rated, given the kind of diesel price hike that we have seen in last one-and-a-half years?

Prabhat Awasthi: There was element of undervaluation and these stocks were trading very cheap at 0.4 times price to book. But there is a good reason to be more positive here structurally, because the diesel price hikes have gone through.

So given the stresses on the fiscal front and given that you have committed to food subsidy, the food security bill and so on, it will be very difficult to control expenditure and control fiscal deficit without reducing one or two of the subsidies. Nobody has said that the diesel price hike is a bad thing. So this has gone through smoothly and there seems to be political consensus.

If this continues, then at some point in time there will be profits to be made and they will be able to stand on their own, without massive subsidy support. Hence, because of fiscal constraints, there is reason to be bullish on the oil sector.

ET Now: Data from China only seems to be weakening further. So at a time like this, how would you approach the metals pack back home?

Prabhat Awasthi: Yes, we are underweight on metals. We went underweight in November when the stock prices ran up sharply and one of the reasons is that, at this point in time, the Chinese data is quite weak.

Secondly, the stock prices are not very undervalued. Therefore, I do not see a big reason to be very positive. As I said, recovery in the economy will probably be delayed. Also, given that metal prices are where they are, aluminium prices are low, copper prices are falling and steel prices are not going anywhere, there is no major reason to expect earning surprises from where we stand today. So we would rather avoid that sector.

ET Now: The minute we think of a rupee correlation we always tend to think about IT and pharma. Do you think that within the manufacturing space also, there are a lot of export-dominated themes which could make money -- be it Arvind or an auto ancillary exporter like Motherson Sumi and is it time to really connect the rupee story with other sectors?

Prabhat Awasthi: Well, there definitely will be. It could well be that if you do not have that much of bargaining power and you are more a B2B player, then you could end up losing the rupee advantage even though there might be a longer term volume advantage.

So it depends on what kind of business you are in. In IT, for example, over the longer term, the rupee gains might actually sort of go away somewhat, but not fully, but in pharma, it is quite possible that the gains will be fully retained, because you are competing with countries where the currency benefits are not as large.

Similarly, if an auto ancillary company has a much larger bargaining power with respect to its counterparts, they might be able to hold on price gains. So either there will be price benefits, that is margin benefits, or there will be volume benefits. Volume benefits typically play out over the longer period and it could well be the reason why manufacturing companies are doing well and some are starting to do well.