Bank on flows, not economic revival to survive in the market: Ajay Srivastava

New Yes Bank CEO has conveniently sandbagged his performance for the next year and a half by taking huge write-offs in the first year, said Ajay Srivastava, CEO, Dimensions Corporate Finance Services, in an interview with Nikunj Dalmia of ETNOW.

Edited excerpts:

There is recovery in banks and a slowdown in autos. The recovery in banks was anticipated but the slowdown in autos and consumers is something markets were not prepared for. Are we looking at a serious downturn and reboot in the composition of the market?

One, most people were apprehending that this slowdown is going to get worse but the key question was what is the relationship of the slowdown to the stock prices? On the Street, it is very clear that dealers were not able to push goods and it is apparent across segments. If you look at the results of Shoppers Stop, even bank results QoQ, there is very clear slowdown.

All the NBFCs are by and large flat. Most banks are flat. So growth across-the-board is kind of tapering off or is already on the path of a very big slowdown. The conundrum is why the stock prices are holding and that is where the liquidity comes in. Global liquidity is propping up the market big time. There is also enough liquidity coming from the stock market as well as the private equity space. You see the kind of deals that are happening. This is a market of liquidity and we may well recognise the fact that economic slowdown may not be fully reflected in the share . That should not comfort the investors but it is at least some sort of balm.Things are not going to turn turbulent in the stock market as long as liquidity keeps coming in.

But you cannot take liquidity for granted! There may be a 5-10% election adjustment and then markets will find a bottom. But the challenge is that I cannot figure out what is happening in the world. Bond and equity prices are rallying.

Of course, I would wonder even that kind of reaction would come in the market on the election day because by that time, two-three variables will start coming into play. One is the drought situation in the economy and in another 20 days, it will be very clear as to where the monsoon is going and what is happening in the major parts of India which are under severe drought crisis.

What will also become clear is the economic trends. In April, we may feel a little buoyant with the GST for March 31stbecause everybody sells whatever he can on March 31st but April could be a big dampener. I would tend to believe that this is the time to remain where we are instead of taking too hard calls of exiting some sectors like auto?

If you are already down in the dumps, one choice is to exit and hope that you will recover and come back later. The other choice is look beyond the next six-nine months and hope that recovery takes place. But the cycle is the same.

Last year, same time, markets were hitting peaks in April. There was the same commentary by everybody, economy recovery is on the way and then we had a huge correction. We come back to April 2019 and it is the same story. As long as the portfolio is stationed around the largecaps, you are fine. If you got one leg below, your portfolio could be in still deeper trouble because some recovery took place in midcaps, not too much but some recovery, at least liquidity and if you have not used that cleverly, you could be asking for serious damage to your portfolio even in the current year. Last year was bad enough. This year could be as severe.

Some of the sectors where we are seeing action include energy names where a fair amount of upgrades are coming in. Would you be looking at this sector?

Of course! Dividend paying stocks are a wonderful place to be in. Some commodity stocks are quoting below the book value of the stock with zero debt and giving dividend yield effectively of about 8% to 10%. That is a wonderfully safe place to be. Even if the share prices collapses by another 10-20%, you have enough scope to recover the money back and be in a stable platform plus get tax-free dividend income year on year. There are big pockets of metal and energy companies which have got a very good dividend paying potential. You can be there. Lots of them are PSUs. If you do not like PSUs, there’s not much you can do there. That is one segment.

Aviation remains a good place to be in because no matter what happens to oil, you will not get a new player coming back. Jet Airways revival is almost impossible now, so I do not know. But aviation is a safe place to be. There is no problem at all.

Then there are chemical companies. With the downturn in China -- the API manufacturers of pharma -- it has been a good time because Chinese have supplies have dropped dramatically and Indian API manufacturers have got a very good run on the profit at this point of time.

I think there are pockets which are doing well and in the consumer space, the top dogs are going to do very well because the bottom is falling out in terms of the smaller players and competition is gone.

The key question is how is your portfolio aligned to the realities of the market? Is it aligned to an economy revival or is it aligned towards more liquidity focussed stocks? That is the key gamble here. If you gamble on the stocks which are going to benefit an economic revival, that is a danger where you might have to sit much longer than you thought about, compared to the stocks which can get bouts of liquidity.

Liquidity can come and go but the Fed has declared very clearly that this year is not going to see any more rate hikes. With Donald Trump there for another at least two years, it is not going to happen. Globally, there will be back to liquidity status if the growth peters out. At least in Europe, it has petered out quite dramatically. Japan is also looking weak. Only America remains the strong man out there. You are likely to see more flows. If you are banking on flows, you could safely stay here. If you are banking on economic revival, I think you are looking along bumpy road ahead.

The price at which some of the PSU banks are trading now is attractive. You know there is a challenge for next 1-3 quarters. But if someone says he can can take a 10% downside, the stock could go to Rs 145 on a bad day and can touch Rs 300 in two or three years?

I think you are talking about Yes Bank.

Yes Bank is one of the worst cases of corporate governance I have ever seen, not because of what they reported but because the new CEO has conveniently sandbagged his performance for the next year and a half by taking this huge write-offs in the first year as he comes in. It is one of the worst examples of sandbagging and I think the promoters were too weak, RBI was down the throat and he has had a free run on this boat to say he is taking this write-off unjustifiably and therefore next year would get assured income sitting there. Reversal of fees I will book income next year without doing anything. For business done in current year, he is going to take income benefit in the next quarters. The issue in Yes Bank is a gamble. How long will this continue in terms of this leadership, because this leadership is not going to give you returns. It can take a year, two years but the stock will not double. If there is something like what happened in Infosys, a movement towards new leadership, you can bet that this Yes Bank stock can double but not under this leadership which starts on a very, very questionable exercise of writing off to take future incomes and take benefit of that. That is what is clouding this stock today.

Once you come with that mindset, you automatically seal the fate of the stock. Luckily, we are very small investors in this stock. I would not wager my money on this kind of leadership. Banking is all about leadership and in a scenario where economic pie is shrinking, how will this man compete when his mindset is let me take some income from this year to next year so I can do a profitable exercise and show my results are great! It does not work.

If Infosys too happens here and the leadership change happens, this stock can do well because it is a wonderful bank but if this leadership continues, I doubt people will see doubling of money.

But there is another way of looking at it, that he is getting the poison out of the system in one go and starting off afresh on a clean slate?

Fee income been booked on loan is a non-refundable fee income. Even if the loan gets repaid next morning, it is an income booked. Every bank books it in the year. It has been done all these years. If you want to change the practice and want to amortise the fees over the loan, you start the practice on your watch say from April 1. Why do you write back the fees for the past year and therefore you can book that income next year? That is not poison, that is sandbagging.

What have you been catching up on -- Game of Thrones or Avengers?

Game of Thrones is my favourite. The first episode was disappointing but the war was excellent! I think Indian politicos could take a lesson. It is doing a lot better in terms of excitement than that show at least.

So what do you buy PVR or United Spirits to keep all these shockers absorbed?

You know my two weak spots, I cannot help it. I love it absolutely because when you want to forget all the misery of this market, you go back for a tipple and then you go and see the End Game and you say but this is not the End Game, more will follow! It is unbelievable that the most obvious pleasures of life are the best stocks to have also.

Do you really believe that even from these levels, because there is still money to be made in the next one to two years?

I do not know about one year-two years but I know that at the end of the third year, if both of us are talking this stock will be at least three times what it is today because quite simply they have not even touched less than 10% or 15% geographical India! Please remember, it is not a recommendation. In purchasing power, they are touching a lot more people but in pure geographical spread they are nowhere compared to the potential.

We are talking of India with 10000, 20000, 30000 screens of each company; we are talking of an India where in Delhi’s Connaught Place 80 bars opened in last three years. If you look at progressive India, liquor consumption and cinema consumption have not even been started properly, we it is just the beginning.
So from 3-5 years perspective’, there will be phenomenal returns on capital employed on a guaranteed basis.

Some respite seems to be coming in for Airtel. There is a possible stake sale in Jio as well. Lots seem to be brewing in the telecom space. What is your strategy there?

We have not got a holding there but at some point, the sector is reaching a point where you want to do some investment. It has been very boring investment time for the last two-three years. The same stock keeps performing, the same stocks keep disappointing. Having said that, we do not know the inflection point of this sector when it is going to rebound. We have already seen two rights issue coming in at steep discount.

Now Airtel is coming in at a discount. It is asking investors to put a lot more money in the segment. If I buy the stocks and a big rights comes, either I dilute or I have to put more capital around it even if it is at a discount. Till the overhang of this equity issues goes away, you will not see enough participation, but at some point we will get back to the game. It is again a question of how the government policy comes through in terms of telecom because if 5G comes now and they have to pay again those kind of licence fees, then where is the redemption for this company? The whole capex cycle will start again.

Whichever government comes in will desperately need money this year. You have already seen drought, you have already seen fiscal deficit; there is Congress with NYAY, BJP with the pension plan everything. So, at 5G auction, whether we like it or not, one has to be circumspect how much money this company will have to shell out to get to 5G and therefore provide shareholder returns. That is holding the sector back in terms of investment by shareholders.