Fear to come down and greed take over in next couple of weeks: Abhimanyu Sofat, IIFL

There are three pockets where we are seeing continuous interest from HNI investors and even FIIs, said Abhimanyu Sofat, VP-Research, IIFL, in an interview with ETNOW. The three themes are PSU banks, capital goods and the smallcaps and midcaps.

Edited excerpts:

What are you telling your clients? Is it time to cash out or time to just ride the good trend?
After the election, there are three broader themes that customers are clearly looking at; one is obviously the PSU banks side, where there is a clear thought that liquidity is going to improve going forward. There is also an expectation that because of the Bimal Jalan Committee recommendation, some money could come in and that could be used for the recapitalisation of PSU banks.

Second, on the midcap, smallcap side, there were a lot of stocks. Since they have corrected a lot, there is a lot of expectation of rebound there.


Third, on the capital goods side, one is clearly seeing a good amount of traction. These are the three pockets where we are seeing continuous interest, especially from HNI investors. From the FIIs side also, one can see a positive bias in the flows that one is seeing in the markets. Add to that, the crude price going down is an icing on the cake for the Indian markets over the last 10 days.

Crude is down. Should we start celebrating or realise that the slowdown in crude is largely because of demand constraints?
For a country like India, it helps even if it is because of a slowdown in demand. We are oil importers and with the kind of constraint that we are seeing on the fiscal front, when the crude prices go to higher levels, like for example, $100 in 2009-10, Pranab Mukherjee had to come out with a stimulus that hurt the economy a lot. So from that perspective, even if some amount of slowdown occurs, net-net, it is positive for India. I do not at all see that as a big negative unless crude price goes to $25 which is unlikely. That is likely to happen only when you see a real slowdown happening in the global economy.

From my perspective, if the crude price stays at the current level that is still good. See there is some amount of inflation which is always required in the economy. For India if you need a nominal GDP growth of between 13% and 16%, so that there are some amount of corporate earnings, a decent amount of crude is always good but if it is very high, then also it affects negatively.

At the current price, things look quite sanguine to us. A lot of companies within India are facing challenges because of higher commodity prices. Once you see this fall, ultimately impacting the prices of raw material, they can easily pass it on stimulating demand for the domestic market.

What is your best idea from the midcap space? Where is a six-eight month positioning warranted?
Gujarat Gas is one of the stocks which going forward could see significant improvement in terms of earnings. In Morbi, there has been an order by the National Green Tribunal and as a result of that everyone is shifting to gas from other conventional fuels and as a result of that, we clearly see that the volumes from Morbi doubling for Gujarat Gas.

For that reason, we believe that the stock should do pretty well going forward irrespective of what happens on the market, they have a clear advantage over other companies like GAIL in Morbi and for that reason this is one stock one can buy for the next six months and it is a high conviction pick from our side.

What would be your strategy within the financials?
When you have banks like ICICI Bank, Axis Bank and SBI, those would be the favourites in terms of going forward, in terms of what takes this rally up within the space. However, one can look at some of the smaller banks like Federal Bank which came out with very good set of numbers.

On the PSU side, BoB is likely to do pretty well over the next couple of quarters, as we see a significant reduction in slippages. Going forward, a lot of the issues with regard to funding, growth capital required for the PSU banks would be taken care of at least partly by the government because that is one major overhang.

The cost of income ratio of most of the PSU banks is coming down. Going forward, clearly with the mergers within the PSU banks, you can clearly see structurally the opex per branch coming down for most of the banks and that could add significantly to the ROA of these banks going forward.

I feel that financials is the right one to look at if you want to go on the non-banking space. Clearly, the macro finance companies or even the gold loan companies will continue to lead the rally going forward within the space.

Do you believe that all the positives are already in the price on a headline index level and may be now time has come to shift focus to hunting within mid and small caps?
Just four days back, we had an investor event where I asked around 80 people if they believed that the market could go up 15% from current levels over next one year and not even 1% was ready to put his hand up. So, there is this still a little bit of concern among retail investors whose hands have clearly been burnt in the last couple of quarters.

There is some positivity but that is largely happening on more of the HNI money which has started to come in. Going forward, we see recovery in some of the stocks, like we have seen in last one week. Most of the midcap, smallcap stocks are up 7% to 10%.

Going forward, we do see that the fear would come down and greed would probably take over in the next couple of weeks.