June good time to accumulate stocks for next quarter: Nikhil Vora, Managing Director, IDFC Securities

In an interview with ET Now, Nikhil Vora, Managing Director, IDFC Securities, talks about the market and his top bets right now. Excerpts:



What is the sense on markets? Are you advising clients to deploy money at the current levels or hold down for sometime because there could be more correction on the downside?


Well, the way the markets are looking right now, it actually appears that we are in a narrow range for the next quarter or so. The factors that we have seen broadly the peak out of a lot of sensitive variables in the market, be it interest rates or inflation, I think there is possibly just the last leg of the peak out which should happen in the current period that we are looking at and the impact of the same on most of the corporate earnings in Q1.

My sense is possibly you have got one more quarter of pain in terms of absolute numbers which will get reported and post that there should be hopefully a lot more stability both on earnings as also on macros. We started to see the first signs of changeover, so if you look at inflationary indices at least it starting to look lot more stable than volatile that you have seen historically and our sense is that interest rate will get peaked out 25 to 50 bps upside going through which hopefully should lead to a lot more stability in the market and corporate capex really coming back. If you look at the near term, I think the issues have also been that lot of investments have not really happened from the private sector and that is a function of higher interest rate regime that you are looking at and we expect that to start to happen in the second half of the year.



From a stock-market perspective then, do you think now or perhaps some month down stepping into June would be a good time for investor to start accumulating on positions in stocks which have really fallen post the earnings disappointment that we have seen in the last quarter as you suggested there is one more quarter of pain left. Do you think this could be a good time to kind of accumulate and build on your portfolios?


Oh clearly, it seems to be a fair thought to go with that. One should be looking at accumulating stocks from here on for the next one quarter odd and this is specifically for more institutional investors to really look at that. The sense is that despite going through the headwinds of possibly the worst macros that you cannot think of, not just in India but globally, you are still looking at earnings growing at close to around 15%-16% in FY12, which is not bad on the comparative scale.


Once you see stability coming back, I think the earnings momentum will start to return to a stronger level and also it is interesting to note that right now the way the markets are close to 60% of the index right now is pretty much under the cloud. You look at numbers of lead players like Infy, BHEL, Reliance and so on, most of the numbers have been subdued and we do not really see that changing drastically in the foreseeable future. Despite the markets remaining and sizeable part of the market remaining under the cloud, you are still looking at earnings growth of 15%-16% with all the negative variables in place. So my sense is it would be a very good time to really look at entry points into a lot of businesses over the next quarter or so to build up a portfolio for the next one year.


What is looking good? Starting off with FMCG, the sector has shown some bit of traction in the last one month. Lots of individuals have done fairly well. How should investors approach FMCG?


Investors globally and in India have been averse to risk to interest-sensitive businesses and thereby are obviously buying into consumption businesses which are less impacted. So that has been one shift over. Second is you look at inherent performances of all the consumption businesses. There has not really been any demand slackening that one is talking about and clearly these businesses are ones which have gross contributions of 45% to 50% which means that intuitively the input cost pressure do not really impact them as much as it does in most of the sectors. As we have always been bullish on consumption as a business, we have been very bullish on the lead names, which are Levers, ITC, Nestle and at least in the six months to a year these businesses and stocks have done extremely well. On the back of continued volume momentum that one has seen in these businesses, I do not see that slackening. Obviously the fact is that valuations in most of these companies and businesses have reached and are in a fair price zone. So the ability for them to create a delta from here on will be restricted out.



How do you think foreign funds would be looking at their positions?



India is not necessarily the market of choice right now in emerging markets. From an international investor perspective, there are obviously options which they have exercised and that is a reason why you are looking at India possibly being amongst the worst performing markets in the recent past within the emerging market portfolio.



If you are looking at sectorial preferences, clearly you have seen a fair bit of investments which have moved into the top tier stocks, specifically in the consumption businesses and you look at the second tier businesses which have actually gone where the portfolio shifts have happened. You look at the second tier like Godrej, Marico, Dabur. The performances of those stocks have been fairly mediocre or average compared to that of the lead stocks like ITC, Nestle and Levers. They have grown at 30% to 40% in terms of stock price whereas the second tiers have delivered less than 10% in the last six months. There has been a portfolio reshuffle in the top tiers and for valid reasons.



Apart from that, investors have been more cautious on a lot of infra names, specifically as also on financials which last year led the rally in the market. So I think till the time you do not really see the peak out happening, which we think will happen in the next three months, I think investors will be slightly more sceptical.



What do you think about liquor stocks? They have done very well in today’s trade.



Ironically we have been very positive on liquor business for quite a few years and I have just actually downgraded most of the liquor stocks, specifically United Spirits and United Breweries. Both for different reasons. I think United Spirits more on a structural downgrade that I think will happen in the business. The issue will be that they have been catering to the customers of the past or the customers of today and not really the customers of tomorrow, and that is where the market is gravitating and that is why the profitability of the business is gravitating. I do not think the quality of earnings of United Spirits will be of extremely high orders as we move forward and that could lead to a derating of the business.


For United Breweries it is more a case of valuations for a business which is right now getting valued at literally Rs 15,000 crore. We do not think the inherent profitability of the business for the next two to three years will support this sort of a market capitalisation. My sense is you will see some amount of drawback on the stock in the near term or in the medium term. Obviously the rationale and it is actually very contra to a broader theme that I am playing with which is positive on consumerism as a business in India, but the largest consumption play I am negative on which is United Spirits right now, which is ironic.


There is a very strong and aggressive call given out by IDFC on Educomp Solutions. Is that a stock that you can talk about?


Yes, fundamentally obviously if you look at education as a space, it is the second largest space in India after foods as a business. Education is a large spend in India. It is twice the size of financial market in India. The size of the market cannot be ignored. The fact is that space is also possibly the most fragmented in the country where the largest player is not even half a percent of the entire market size and it is a space where I think incrementally the public-private partnership will really play a bigger role as we move forward.


You have started to see the first signs of that if you look at the National Steel Development Corp. and how steel development has been jointly framed with the quasi government entities and the private sector. I see a lot of salience in the way businesses and companies are shaping up in that space where a lot of investments are moving into the biggest sticky part of education, which is K12. So Educomp has moved close to Rs 1500 crore into K12 in the last three years. Everonn is doing a similar move to educate well. So I see a lot of salience in the way the market is shaping up for these education companies over the next few years. Till date there has been scepticism for may be the structures which education companies have had till date in India as also the fact that there has been a fair bit of opaqueness in the way lot of these businesses have been run.



I am not debating either of them, but the fact is that in a business which globally runs not for profit, clearly structures which are opaque are something which will run for quite sometime. They are not illegal. They are opaque structures so one cannot really debate that point of view. Second is education in India is an extremely profitable business to be in and I see lot of that profitability starting to get reflected on the corporate side as we move forward.


Lastly, the credibility of the space I think will only increase as you see lot more credible players getting into the space either getting listed or getting into the space themselves. So if you look at Manipal, which possibly can go for IPO in the next year or so. Aditya Birla Group possibly consolidating the education business or a lot of other players like even credible players looking at education space per se as an entry point. So I think credibility in the space, size of opportunity and extremely compelling valuation that you are looking at now should be good starters for people to start to re-invest in education.


What are your top bets right now and this is a long term perspective. What is it that you would really look to add to your portfolio at the current levels or may be at slightly lower levels?

I think firstly on consumer businesses, I am extremely bullish on ITC as a play in the top tier stocks and return from the current levels. I think Agro Tech looks extremely interesting as a mid tier company in consumption space. Education Educomp and Everonn both look very interesting to me. I am still fairly bullish on Tisco as a stock. I think that is an interesting play to look at especially as a quality of earnings and Tisco moves more towards the Indian margin structure rather than the international margins that they have till date. I would also be bullish on the pharma names right now. I think there is fair bit of consistency in lot of those businesses and some amount of private sector financials. Not so much PSUs, but private sector financials. I think those could be interesting places to look at.