In an interview with ET Now, N Jayakumar, MD, Prime Securities, gives
his views on the market and shares his outlook for 2012. Excerpts:
ET Now: Do you think the bear market in 2012 will not end?
N Jayakumar: If you just go by the slew of chart based as well as
fundamental analysts at this point in time, we have never seen this kind
of a bare consensus in terms of which way the Nifty is heading. So
depending on whether you want to buy the Nifty or whether you want to
buy individual stocks, and even the experience of last year has told us
and taught us that individual stocks do outperform. So if you are
looking for expert views on the reasons why the market should go down,
there are reasons littered across the globe, if you will.
There are reasons that all your various analysts on the programme
whether fundamental or technical come and talk about. So I am not going
to go down that path. But if you want a slightly contrarian view or in
fact a majorly contrarian view, the index may continue to be hampered in
terms of an upward progress because few of the heavyweights kind of
weighing down on it.
But the real issue here is that we need to take away from what 2011 and
indeed earlier bear markets have taught us, which is that there are
individual spaces that are benefitted. So, if I want to quickly plunge
into those, you are talking about a rupee at 52.5-53.5 kind of range.
Most people believe that at Rs 50, it has got a very strong support. So
given this kind of orientation, the first thing that I would like to do
is to look at export-oriented companies that are seriously benefitted by
a structural change in rupee levels, No 1. And especially those who
have been competing with China on the export front where there has been
two components, which is the wage cost arbitrage, which has gone
dramatically in favour of India vis-a-vis China, and two is the currency
arbitrage, which has played out big time in favour of Indian stocks and
Indian companies vis-a-vis China. If I take a combination of these two
and take export-oriented companies, then really we have three or four
spaces that we can talk about. One is engineering exports, which could
be to some extent high-end auto ancillary, but broadly engineering
exports.
This could be precision and mission critical parts like shipyards for
instance, which means large ships or even ships where we compete with
rest of the world. So shipyards, engineering exports and of course
textiles. If you go down and take some of the key or the dominant
players in each of these spaces, the dominant ones, then you will see
that some of these actually are going to be seriously benefitted both in
terms of order book build-up, both in terms of bias. And with the US
actually now in terms of the buying side, pretty I would say if not
dramatically, but perceptibly improving its buying, especially on home
textiles, etc. Some of the textile companies will be benefitted in a
pretty major way. Pricing power should return and if reports on the
ground are expected to be believed in China, there is massive amount of
wage pressures.
Most of the districts have got wage increases in the range of 18-23%.
Some of these are going to be beneficial. So, the focus really is going
to be on where we think either stock or sector specific winners will
perform or will come from and these are some of the names that I would
look at. So yes, I agree with the fact that the Nifty could get weighed
down. There are a lot more macro variables weighing down on the Nifty.
Some of them created by our own self, but even from an individual India
perspective, some of the negatives that people are pricing in in terms
of government inaction, etc., may actually or could actually change at
the drop of a hat in a sense.
All you need is one set of election results to go your way and you may
have a situation where the government is back on reform path. The same
strident calls given by even some of the alliance partners may actually
be muted when it comes to some electoral victory. So all is not lost
here. India, history will bear me out, for the last any number of
centuries has been sort of performing on the back of adversity not when
things are going their way.
ET Now: The story of how Indian markets moved in the year 2011 was
largely influenced by local cues and commodity prices. What to your mind
could influence the script for 2012?
N Jayakumar: In 1992 we had the beginning of the tech boom in a sense,
which has been a game changer for India in virtually any parameter that
you take, whether in terms of foreign exchange earnings, whether in
terms of creating employment, etc., etc. We have had spaces in the past,
which have threatened to take on this big theme if you will.
But the move in the rupee, which has taken a long time coming, probably
is going to reignite some of these spaces, spaces like shipyards,
engineering exports, auto ancillaries, textiles, these are the spaces
which will be very big beneficiaries of this. And especially the view
that we also have is that 50-52 may well turn out to be some kind of six
months to a year at least bottom on the dollar rupee and were that to
pan out, you are going to talk about some serious sort of money moving
into all these spaces, which have been largely ignored.
Nobody has made money in textiles ever. So maybe a contrarian call at
this point in time could set off some kind of money flow into this
space. Especially, if you look at some of these spaces and I would like
to focus on textiles for a second, in the past promoters in these
companies kept diluting. Promoters of these companies and these spaces
kept putting up capacities, which effectively kept killing return on
capital and return on equity.
Dilution was the order of the day and more importantly people, there was
no competitive advantage. Capacities were way in excess of what the
actual productions were. All this is changing as we speak. Capex cycle
for most of these companies is over.
Companies in the space are actually focussing that much more on ROCs and
you even have a few cases where promoters are increasing their stake in
some of these companies in the space. If that combination of reasons
what we put together, I would like to believe that textiles will be a
space to contend with pretty seriously in years to come. Mine would be a
very stock specific approach. We in prime have taken that view for a
while now, but more so now than ever before and especially if some of
these companies have surplus, non-core assets, real estate, etc., which
also is being sort of put on the block to be sold off, then it is an
added bonanza for shareholders.
ET Now: What about the other currency sensitives, the likes of IT? How would you trade there?
N Jayakumar: IT I would say that is in public domain. It is a space that
has performed well. It has been a safe haven. Money has parked itself
there as a sort of a shelter from the general depression in the world,
which in most other indices or most other spaces, so I do not believe
that IT is an undiscovered space. Here I am talking about spaces that
are not being noticed or have been ignored for a long period of time. IT
has not been ignored by any stretch of imagination. It is an index
heavy space and it has been meeting with its fair share of money coming
in.
ET Now: So whenever markets will bottom out in 2012 because one day they
will bottom out, which group to your mind will bounce back the fastest
-- industrials, financials, materials or exporters?
N Jayakumar: I think financials will lead the way simply because they
have been the ones that have led the downslide in a very major material
way. Interest rates will start getting cut almost immediately. I would
almost put my bet on the fact that in January the interest rate cycle
will start getting reversed. The RBI needs to make itself felt. They
have been seen as far too conservative in the past and far too
aggressive in their rate tightening cycle.
So financials will lead the way without a shadow of doubt. When
financials do, the impact will flow through elsewhere. Maybe it is a
small step, but one bank has announced a drop in PLR, which maybe more
token kind of step, but it is indicative of the mood that we are in,
which is that we need to see.
Clearly this rate tightening cycle has only hurt corporates and while it
may have had a limited impact in controlling inflation, it has had a
far greater impact in hurting corporates and hurting the economy and
that realisation is very clearly now in RBI thought process and I
clearly believe that financials will lead the way in terms of market
revival.
ET Now: What is that one key catalyst that could change the market direction potentially from here onwards?
N Jayakumar: Oil has been toppish for a while now. It has not broken on
the Brent below a 100. It flirts with 102, 103 and has not gone any
further. I believe that the speculative fervour in oil has come off,
anytime now expect a move which will take the Brent significantly below
100 that along with an interest rate reversal cycle could be the two key
triggers.
The third I feel as a trigger from India perspective while small steps
on the policy front may be good, but the big trigger could well be the
fact that some announcements which indicate that the government is keen
to control the fiscal deficit.
There is a peculiarity which I wanted to point out that all the PSU
holdings that they have neither are consolidated in terms of the
earnings of the PSU, like if a company had a subsidiary the earnings of
the subsidiary actually get consolidated in parent balance sheet.
In the case of government, either you hold the PSU stocks, so that the
holding of a PSU should be at market price in which case you can show
that when you divest these you can actually take credit for the fiscal,
but as of now they are held at cost and the earnings also not
consolidated.
So, actually you can ask yourself the question that our deficit in
realty is actually much lower, were the government to divest across the
board all the holdings in the PSUs other than the absolutely mission
critical ones or those that have security implications.
So, this government move to divest their holdings has to be seen in the
context that were the government to take aggressive steps in actually
getting rid of their holdings rates notwithstanding.
Why should they be sort of hung up on exiting a BHEL stake at a
particular price or not any other price? They need to go out there and
may be even give 40% discounts get it out to the public dramatically cut
their holdings down because that in a sense changes their fiscal
position much better and more directly than anything else. And this has
been seen as a holy cow, this has been seen as an issue about what price
to divest things at, it is irrelevant.
Once you determine that you are not going to part with the management
and you want to get out of these PSU holdings you have got to do this
quickly and share it with the public which in any case effectively
directly or indirectly is the owner of these stakes so that is the big
thing.
So, when you see the deficits in more European countries etc. there you
are seeing virtually no public enterprises being held with the
government. Here a whole bunch of them, a large percentage of the market
cap is held in terms of PSU, strategic and that needs to be monetized
very quickly.
ET Now: So for those who are buying the market with the assumption that
this year markets will give you a return of 15% which is reasonable are
they too early in the game?
N Jayakumar: First of all I do not think you can assume that the markets
will give you because I do not think anybody is buying the market. You
need to be able to say that can I stomach a downside which even if I go
long with the worst estimates which are 3800 on the Nifty.
Some people talk about 4300-4400, I am not sure if consensus have plays
out, but if the consensus is a downdraft and a Nifty in the sub
4200-4300 range, then the question that public needs to ask itself is am
I happy holding on to stocks where the market as a whole could go down
by another 10% and if the answer to that is no, I cannot, then you
should not be in the stock market. Because individual stocks are trading
at Nifty levels which to my mind are well and truly at the 2500 or 2000
Nifty levels. The markets are half current levels if not lower if you
take a broad brush sweep of midcap corporates into account.
ET Now: But as 2011 shaken you up and you think it was one of if not the worst one of the worst years of investing career?
N Jayakumar: It has been gut ranching every sense of the word, any stop
that you arbitrarily picked up without actually having a full degree of
control of what is happening in the company and you did it only on the
basis of hearsay. Obviously, the idea was that you would get cut to
pieces, but that apart even companies that are doing well have had the
stock prices saved pretty dramatically.
So, clearly it has been a gut ranching year, it shaken up a lot of
people, it shaken me up and shaken everybody else up, but I do not think
that is the issue. The issue is that when you play this stock market
game, risks are something that we only mouth, we do not internalise the
fact that the risk in the game and 2011 taught us that anything that you
assumed cannot go wrong actually turned around and said no, no it could
go wrong and that is the way the markets have played themselves out.
So, it has been a huge eye opener in that sense of the word, but I must
confess that there are stocks in every portfolio I am sure, may not be
in every individual's portfolio which have had stocks that have run
extremely well even in this down draft.
A stock that is down 5% in a year where the market in dollar terms is
down 45% is I would consider good stock. When the tide goes down, a lot
of stocks go down with it. The question is do some stocks go down a lot
less. And as we speak I do believe that the confidence in terms of
entering this market at least from my perspective has gone up
dramatically and even more knowing that consensus on the downward side
has never been higher.
The fact that risk that nobody as in nobody wants to touch stock markets
and virtually the number of sell calls in the market on the street are
more strident and more aggressive and more rampant than they have ever
been. So, in this scenario you have to be if not a bull, but you have to
be a buyer in the markets.
ET Now: Leave us with three names where you see value emerging, you have
talked about the sectors but give us three specific stock ideas?
N Jayakumar: Being the first of the year programme, it is not that
relevant to talk about, people can read in between the lines, go back to
these spaces and figure out and there are more by the way a Tata Motors
for instance and I like to talk about stocks that we do not own rather
than talk about stocks that we own, because that is always good practice
for fear that these are seen like promotional sort of plugs coming in.
So spaces that we are interested in we have talked about. We have
deliberately not talk stocks, on spaces that we do not own Tata Motors
is something that other than a very very small desire to hold and a
small personal investment that we have in our family portfolio, we do
not own Tata Motors, but that in a front liner and my recommendation
otherwise is not influence by the large liquid stock that it is. But an
Infosys at these levels, a Tata Motors and a State Bank, these are
exceptionally good buys at these levels.
If your time frame is beyond the end of this programme or indeed beyond
the end of this quarter, these are extremely good buys. And I would sort
of do a table thumping buy on these saying that a year out or a year
and a half out, Tata Motors will be substantially higher or SBI will be
substantially higher from these levels with a very limited downside on
both these.
ET Now: With a disclosure 30 seconds how are you planning to invest your
personal money, the family money, the prop money for the year 2012?
N Jayakumar: In some of the names that I mentioned and continuation some
of the stocks in the sectors that we have mentioned, but whose names we
have not talked about.
