Market undertone remains negative: Gurmeet Chadha

The government and the market needs to watch not only transmission, but also the availability of liquidity. Liquidity in the informal sector has virtually collapsed, says Gurmeet Chadha, Co-Founder, Complete Circle Consultants. Excerpts from an interview with ETNOW.

What are you making of the market texture? This move to 11,000 does not seem to be all that convincing .
You are right. It will be good if we see some consolidation in the market because it is going to be a slow grind upwards and it is good if the broader fundamentals improve before the market really tries and makes a bit of a recovery.

If you see the GDP print and break it down into consumption, that is down to 3%. Gross fixed capital formation which was trending 11% last year is down to 4% while export demand is halved. All three parameters involve the demand side -- which is consumption, investments and exports. Exports are flattish and seems to be struggling. Some policy intervention is needed.

Also, there has been a very broad negative wealth effect. Real estate prices are depressed for four to five years, especially the residential prices. I am not even commenting on the real estate projects where the money is stuck. A 15% erosion in market cap is roughly about $380-400 billion. When there is a broad-based negative effect, it has an impact on the sentiment which in turn affects demand.

Another thing which the government and the market needs to watch is not just transmission, but also the availability of liquidity. Liquidity in the informal sector has virtually collapsed. Even if you see the bank credit number, while the headline shows about 10.1%, bank credit to MSME is actually negative. There are a lot of steps to be taken and so rate transmission alone would not help. Liquidity to the last mile is also extremely critical.

What is your sense on the overall market? It seems the five-day runup has come to a halt. Does the undertone of the market continue to remain negative? Would we see some amount of pullback?
The undertone remains negative and as pointed out earlier, we have to look at liquidity reaching the last mile. We have to see a serious reversal in demand and sentiment and we have to watch a few global developments as well. One interesting thing is to look at the dollar index. There is obviously an upward pressure on the dollar with global risk-off environment and money chasing dollar investment grades.

And also there could a downward pressure with FOMC cutting rates. I am also expecting ECB to announce a bit of a QE which could see a bit of a reversal in this entire risk-off sentiment. We have seen commodity prices staging some kind of a pullback. From the near term, those are important figures but you have to be where the sectors or themes or stocks have managed to buck the trend and every downturn has a new set of winners.

In this entire downturn, life insurance, general insurance, FMCG, the large IT names, some of the MNC pharma names are actually bucking the trend as are some of the home improvement themes like Asian Paints and Pidilites of the world. It is better to be where we are seeing preservation, earnings growth and use only cyclicals when you see sharp corrections. It is going to be a slow grind and a long process and you really have to be patient in terms of buying into them.

Insurance is the other theme that a lot of people are talking about from a longer term perspective. Where do you find preference within this space?
I am extremely positive and I think this is a structural long- term story as far as both life and general insurance are concerned. We like SBI Life and HDFC Life. SBI Life is leading the industry in terms of the gross premiums it has collected. In their value to new business, they are clearly ahead with ICICI and HDFC coming second and third.

The value of new business (VONB) margin is the premium which reflects the profitability of the new business source doing well as there as well. On the cost operating ratios, they are the market leaders, having the lowest cost operating ratio at almost 11.8%.

The movement from ULIPs to non-participative saving products is really shaping up well. Despite the market volatility, the ULIP portfolio has not done too badly. Also, in the overall assets under management (AUM), there is more than 25% growth as well. It is currently at about two times embedded value which is much cheaper than some of the other private insurers with HDFC being almost five times. Embedded value for users is basically a term used for insurers which is basically the net worth and the present value of future profits because the policies are of very long periods and gestation and they have a massive distribution reach.

There are 22,000 SBI touch points which is SBI and the affiliates. There are another 6,000 odd reach points with Indian Bank and Syndicate Bank tie-ups shaping up well. That is a massive distribution reach. The number of lives insured, the last quarter numbers were almost 2.5 crores. So it is gaining market share amongst the non LIC players very clearly. I also like ICICI Lombard in general insurance.

How are you looking at some of the OMCs in trade? Brokerages are of the view that there are strong fundamentals, strong earnings momentum and that there is potential for the likes of BPCL and HPCL as well as IOC. What is your pecking order?
That is an avoid for me for now because we do not know what are the plans as far as the divestment goes. If they decide to again merge BPCL with ONGC like they did with the HPCL, it would have a negative impact. Also, there is the fact that there has been some recovery in refining margins. The oil prices remain soft. So, it could be a bit of a trading or a tactical play but you cannot take a fundamental view on it.

If you really want to look at this space and which is not really a refining and a non-marketing space, Reliance is a better play where you can have a more medium to long-term outlook. If you see the EBITDA now, the consumer facing business which is Jio and retail now make up 32% versus the traditional oil and refining and petchem business. It is a much longer play so avoid for me right now. Somebody wants to be a little tactical here. You can probably get into OMCs with the shortest timeframe, having your entry and exit prices in place.

What is your take on infrastructure sector as a whole?
There are definitely some opportunities and there have already been talks of strategic divestment, of land parcels being put to good work. You just spoke about how the central government buildings can be redone. Other than that, there are a few players who are still looking good in the largecap, EPC space. L&T looks good. The order book remains healthy.

The working capital ratios are steadily improving. It is a quasi infra play. L&T fits in the bill perfectly. NCC after a sharp correction from a value proposition looks good. They have been working on their receivables and working capital a bit.

Another good plays in this space is KNR. One can look at this space and selectively buy on dips. But it will be a bit of a long drawn process with the investment horizon two-three year plus wide. It is one space where we are advising clients to buy on dips.