HNIs keeping powder dry, not hunting for stocks: Vinay Khattar, Edelweiss Financial

Vinay Khattar, Head of research & Senior V-P, Edelweiss Financial Services, tells ET Now that if infra and housing stories in India play out, cement players are going to be key beneficiaries.


Edited excerpts:

Nifty continues to hold out at 10,600-10,700 led by 15-20 odd stocks. What is going on with the broader markets? What explains this kind of vicious selloff?

For the midcaps and smallcaps, everybody saw it coming. There was a huge amount of froth which had got built up. Last year, we had a massive bull run which was very focussed towards midcaps and smallcaps. A lot of these stocks had become multi-baggers and a number of them had prices running quite ahead of themselves. A price correction was anyway overdue. The trigger came in the form LTCG, higher interest rates and so on.

That price correction is well underway and to our mind, most of the damage is done. Second, what is hogging the limelight today is the significantly deteriorating macro situation. That could include the twin deficits. We are expecting current account deficit to go up almost 50 bps as compared to last year.

Similarly, with what is happening on the oil front, the fisc is going to be under a lot of pressure. There is enough talk that probably the government will be forced to cut excise if the oil remains at an elevated level or if you see more upticks in oil prices. That could impact government revenues. A Re 1 cut could lead to about Rs 13000-crore impact on the excise. If you have to take Rs 2 cut on the excise side, that is a sizable chunk. Plus you are a hit on the subsidy side.

Overall, both the current and fiscal deficit scenario appears to be a bit challenging and the oil has to stop rising for that pressure to ease off. But most of the negatives are in the price. A large chunk of correction is already done.

If I were to just minus Nifty 50 from the Nifty 500 and take the PSU banks out completely out of this, the rest of the universe is doing very well. The operating profit growth in Nifty 500 minus Nifty 50 and ex public sector banks, is close to 41%. This is somehow not catching any limelight because the sizes are very small and the numbers smaller.

Once the damage is done, the value will being to emerge and this steep correction will provide an opportunity for a lot of investors who have missed the early part of the rally to re-enter the markets.

You believe that a large part of the damage is already behind us. Do you try and time a bottom to where the mid-caps correction is going to end or have you already begun hunting on stocks and sectors which you wanted to buy in 2017?

As far as the HNIs are concerned, the hunting has not yet begun. People are still on the side lines, a lot of them have reduced their positions, the leverage is coming down. We obviously keep hunting whenever the opportunity rises and in this case, large price corrections have provided us with those opportunities. We are looking at a lot of stocks which were under our coverage or which have corrected significantly or the ones in which we missed because of high prices. Our view is that as we find the bottom of this particular steep correction, some of those names will come back vigorously.

Is pharmaceutical one of those pockets where you would be looking? Just yesterday, the DRL Srikakulam plant got the API nod by the USFDA. This morning we got news of a biosimilar clearance from the USFDA for Biocon. Is that a pocket that interests you selectively?

Yes, we are interested selectively. We have been quite negative on the sector. We have spoken enough about the distribution consolidation in US which is putting enough pressure on the margins for a lot of the generic players.

The structural story on pharma is still not on but selectively we are beginning to like stocks and Biocon was one of the names which we like because of this biosimilar opportunity. The drugs also have got USFDA approval. They have proved the R&D capability of Biocon beyond reasonable doubt and that becomes a very interesting bet, both as a company as well as the space in United States.

Second one where we are changing our view from negative to neutral is Sun Pharma. Sun Pharma has been discounted by the market. There has been so much of pressure on the price. If you were to just break down the whole business and look at various parts, our sense is the market is giving very little value to US generic business.

The numbers have been improving for the last three to four quarters from the bottom very consistently and our sense is that this trend should continue. So, Sun Pharma could again become a more interesting bet as the time progresses.

What is the view on infrastructure? A lot has already moved there selectively. But a lot of these infrastructure stocks are already sitting at year highs?

You are right. Let us look at China as an example. When the infrastructure construction cycle started for Chinese companies, by the time that cycle came to the fag-end, there were multibillion dollar market value companies. Our sense is that India is going to be no different. India’s top two players are Larsen & Toubro and Dilip Buildcon.

Dilip Buildcon’s market cap is reasonable but not very large in the global context. The size of the projects are going up. Almost Rs1,10,000 crore, Rs 1,20,000 crore worth of funding requirements would be there because of hybrid annuity model (HAM) projects over next 18 to 24 months. This will open up many more avenues not only for infrastructure plays but for the infrastructure financers as well.

New players in the financing side are going to come in because public sector banks are completely out. So, private sector banks, mutual funds with a debt books etc are participating. Look at the size and the scale of the projects! State government are becoming very active. In Maharashtra, the Mumbai-Nagpur Expressway is worth Rs 46,000 crore. The Purvanchal Expressway is worth Rs 20,000 crore now. Projects of this size and scale coming from state governments is very interesting and our sense is more and more states will participate with more mega projects.

Plus, the competition has come down for most HAM projects with five to six players tendering and the order books are almost four to five years’ worth. So, this is a long-term structural story. The market corrections like these will provide us opportunities for us and for our investors to enter but these are the stories which you should not get off very quickly. Either it is a buy and hold strategy or up for the shorter term investors entering in appropriate times during market corrections which will provide lower PE multiples as the order book and the earnings growth is not coming down any soon.

That makes ancillaries like cement interesting?

Cement has been a pretty punished sector. In last few weeks, the prices have come down for the stocks very rapidly but if I were to just go to fundamentals we are experiencing volume growth which is very very good. This quarter the volume growth on the cement side is more than 18%, capacity utilisation for this quarter has inched up to about 75%.

In cement, the cost pressures have gone up significantly and lot of that is happening because of the logistics. The overloading on the trucks have been banned across many states which is putting lot of price pressure plus there are the petcoke pricing issue as well as environmental concerns.

So, the pricing has been pretty firm, causing the EBITDA per tonne to be under pressure but the volume growth which is happening and the prices holding up in large parts of the country to some extent, tells us that future is going to be far rosier.

If the volume growth continues close to mid teens or high teens, it is only a matter of time before the capacity hits a point where pricing begins to improve dramatically. Cement manufacturers have not made lot of money in the last few years and that should begin to change. If the infra story and the housing story in India has to play out cement players are going to be the dominant beneficiaries in these stories. Overall the trend on the volume side and on the pricing should become better as we go forward.