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    Election results factored in, markets may see a general pause: Mahantesh Sabarad, SBICAP Securities

    Synopsis

    Banks a far safer bet for any investor in the financial services sector, says Sabarad.

    Mahantesh Sabarad, SBICAP Sec-1200
    The unfavourable macro environment on the demand side, commodity prices going up and the not-so-great fiscal position of the government will mean that markets are likely to be very cautious and will remain in a pause zone, said Mahantesh Sabarad, Head, Retail Research, SBICAP Securities, in an interview with ETNOW.

    Edited excerpts:


    What are you making of the markets? Do you think that the big win by NDA has been factored in or are we in for a decisive move on the upside in the coming days?
    The market is factoring in an NDA win and continuation of the government. That is sometimes good for the market simply because there will be continuity in policy and you are generally aware of the initiatives that the government is likely to take. The market has given a thumping welcome already on Monday.

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    I would guess that it is factored in but now the major thing ahead would be related to the ongoing earnings season. Most of the earnings are already out. We should therefore see the markets trying to factor in what the earnings have been thus far. If I were to put a broad brush to the earnings, they have been a little unsatisfactory so far.

    Cipla, IndusInd Bank earnings came out today. What is your view?
    IndusInd Bank was a bit of a surprise actually on the negative side. They clarified about the large exposure that they had on an infrastructure company and I guess that is IL&FS. They have provided substantially for that so you saw sequentially both the GNP as well as the Net NPA rising quite substantially.

    But excluding that provision that they have made, the NPA numbers seem to be lower than the previous quarter and that is why the stock is now reacting quite positively. Plus, there is the merger with Bharat Financials on the cards. They still need certain approvals but most of the approvals are actually in place just the final NCLT and RBI approval is required. With the merger, this bank will probably have a better future going ahead.

    What about DLF? There is a lot of volatility but there is a line of thought that given that it is a market leader and considering the kind of clean up that we have seen, it could possibly be a good buy at these levels. Do you agree?
    No, DLF is strictly not a stock that we recommend from a fundamental perspective and that has been the case for several years now. I find no reason for us to look at DLF despite the cleanup that you are alluding to simply because on the top of the mind, for most investors, particularly in the real estate sector, the demand is slowing. There is a huge amount of unsold inventory that is building up and with the tighter regulations that we have seen over the years, particularly on the RERA side and the GST side coming in.

    It is becoming a little difficult for real estate players to churn out cash flows which will help drive shareholder wealth. It is a difficult period for real estate companies and DLF has had this issue. We do not think the cleanup has completed.

    What are your thoughts on this space? It seems the liquidity issues and the ripple effect of the IL&FS crisis is nowhere close to over, barring a few quality names within the NBFC space. How would you look at the news flow on DHFL and also the NBFC space as a whole?
    DHFL has taken additional measures to curtail premature fixed deposit withdrawal as the company is struggling with asset-liability mismatch. There is also a bigger problem for the industry in terms of liquidity crunches. Also, rollovers are not really happening and suddenly the market has frozen.

    That means that even quality NBFCs have to look outside the typical funding circles for innovative funding mechanism so that asset-liability mismatches do not crop up. Also at the same time, the interest rates in the market compared to the policy rates are stubbornly high. That stubbornness means that for the weaker players, it is the higher cost of funds at a time when the demand environment is not too robust and would lead to a compression of NIMs going forward.

    All in all, for the NBFC space, it is a difficult environment. I do not think this will get resolved any sooner with the lot of regulators also stepping into the picture. We typically advice our clients to stay away from the NBFC space barring certain sub activities within the NBFC space related to such things is an auto finance, gold finance or consumer durable finance. Corporate governance is something which one should always remember before stepping into the NBFC space.

    What is your sense a) on the developing issue and b) in terms of where you would actually put your money with regards to financials?
    We as an analyst community and the market in general are really getting worried on the NBFCs and it is not about the risk related to the security whose liability is more secure relative to the other. I am generally referring to the credit ratings that you have for various papers. It is all about defaults for a few days to a few weeks. Such defaults and delayed payments would necessarily hit a finance company in terms of its cost of funds because they have to arrange for the rollover.

    If the rollover is not happening, they have to arrange for the funds from somewhere else and that becomes costly. So cost is the underlying factor for the NBFCs and we are getting worried. So for investors while the larger financial services space is an attractive space to be in one has to be a little cautious in terms of investing in such companies as we have seen particularly DHFL who have a greater liquidity problem. And at the same time, if one has to really play the NBFCs, you can always play through the banks. Some of the banks have large consumer loans and they compete against the NBFCs in that space. So banks would be far safer to be in for any investor to take a bet on the financial services sector.

    What is the outlook when it comes to media? Any thoughts as to what is happening with the Zee Group? Quite a bit of negative news flow has trickled in.
    Zee will probably stick to their deadline or the stake sale, the question mark is what happens next for the investor? Whoever comes into the company, how will they treat the minority shareholders? That is the larger question mark and that is making the investors a little edgy.

    Some investors are right now preferring to stay out of the company to figure out what happens next. Therefore, there are other genuine problems with some of the media companies because as a group, some companies are exposed to various other sectors where they should not have been in the first place and that is having a ripple effect on to the media led businesses.

    There were promising sectors within the media businesses a few years ago particularly on the radio side. Somehow, the value creation has not happened on the radio side in a manner that was anticipated.

    There is a bit of a problem on the media side but suffice to say some of the companies still are able to generate huge amount of cash. But the worry is on the promoter side and like I mentioned on the Zee it has to be-- the question is what happens post the stake sale, what is there for the minority shareholders going forward.

    What about OMCs? They are quite upbeat in trade today. Do you like any of the names?
    First of all, we like the OMCs within the oil and gas space and virtually all three OMCs in the public space are in a way within our investment radar. Despite the crude prices going up, it is all about the refining margins and where they are headed. We have seen that for the entire fiscal year. The refining margins were gradually contracting but you now have an opportunity for the margins to really grow. Not only that, the marketing margins are likely to expand because the elections being over, it is generally believed that the prices will be passed on to the consumer side.

    If this thesis really plays out, we will see the marketing margins jump up and that would mean better profitability for the oil marketing companies going ahead.

    Not just that, the overall demand environment also while has remained subdued thus far and it is likely to improve as we go forward, coming from a low base. If there is any move of fuels being bought under GST net, then it could turn out to be quite favourable for some of the OMCs, not necessarily on the refining side but on the marketing side.

    These factors are playing on the investors mind when it comes to the oil marketing companies. We generally favour the OMCs for investments.

    Where are we looking in the broader markets? Would you be looking at some new themes or cyclical stories?
    I did mention earlier that the corporate results have not been satisfactory and so the hat markets will pause and look forward to what happens next. We have a monsoon forecast which suggests that we will have a lower than normal monsoon rains and that is particularly not good for consumption.

    We also know that the government finances right now are a little stressed and any new government that comes in will have the first rollout policies to see to it that the stress on the government fiscal side is contained.

    All these point to the fact that the markets will start looking at the effects thereof and they are not going to be positive for the markets. There will be a general pause that we anticipate while the euphoria linked to the general election results is now factored in and is over this challenge on the corporate earnings front. The unfavourable macro environment on the demand side, commodity prices going up and the not so great fiscal position of the government will mean that markets are likely to be very cautious and will remain in a pause zone.



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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