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Buy stocks despite Budget risk; bullish on cyclicals: Ambit

Even as the market faces a risk in the form of expectations getting ahead of what the government’s first full Budget can deliver in February next year, now is a good time to put fresh money into stocks as the markets could trend higher over the next two-three months, believes Andrew Holland, CEO, Ambit Investment Advisors.

In an interview with CNBC-TV18’s Sonia Shenoy and Anuj Singhal, Holland said he was underweight the so-called “defensive” sectors such as IT, pharma or FMCG and is bullish on the cyclical theme and is looking to bet on companies with some degree of financial leverage, as they should benefit going forward as interest rates fall.

“We all get excited about operational leverage,” he said, “once you get financial leverage and if a company can see through in terms of where the business is and it can now get working capital and start to move forward again that is the kind of company we would want to identify.”

Below is the transcript of Andrew Holland’s interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Anuj: What do you make of the current market scenario and in the month of January or for 2015 what is your broader call? Do you think India would outperform or is it now time to take stock of your positions and maybe take home some profits?

A: If you remember we were thinking that this correction was going to happen in January because of global events; it has actually kind of preceded in December. I think there are a few things to watch for between now and January, one is we have got the Greek elections on the 29th. So, if that goes for the opposition party that could have a bit more volatility for European markets.

However, January-February I can still see the markets moving higher here because I think we are going to get interest rate cuts of at least 50 basis points. So, that will propel the market higher and we are going to have the Budget which we are all going to have huge high expectations from.

Anuj: You believe we will have an interest rate cut even before the Union Budget?

A: Yes, I do, that could happen.

Sonia: What is the sense you are getting about whether one should put in money now or should one wait for the Budget to pan out before taking a decision?

A: I think now is the good time; I am not worried about the longer term for India, you are going to get volatility that is for sure and we have seen that more recently in the past month. My concern is more towards because the reforms are taking time to come through is that the Budget becomes one big event where everyone is expecting big bang reforms, every industry, every company is going to benefit and it can’t be like that. So, I am just worried that our expectations get too high before the Budget and then that lets us down. So, that is the only concern I have in the very short-term.

Sonia: Just to discuss a couple of pockets, in the week gone by one of the big gainers was Ultratech Cement  because of the deal that took place. In general how are you positioned on the cement space because many have been very bullish expecting the economic revival to aid some of these cement stocks?

A: It is not the sector we have been really participating in. We think the big theme is this mega supply theme. The RBI Governor even said whilst Make in India is good, it should be Make For India. So, that falls into our supply theme. So, the operational gearings in other sectors, autos are part suppliers and so forth so not really the cement sector yet, I think that is probably the second half of the year where we look at.

Anuj: We will have earnings season in January and this could be volatile – you have IT which could have some problems, oil and gas would have problem so is there a risk that the market gets a bit de-rated because of earnings season, is that an outside risk?

A: We will look beyond the earnings but it is going to be a volatile earnings season. The IT sector, we are seeing share prices move up, earnings have come down again and I think we are at the end of the IT story in terms of the huge growth that we have seen over the past decade.

How much more can company start to restructure when they are sitting on trillions of dollars of cash in US, how much more can they take out of the company. So, I think the IT sector will see slower earnings growth and I think this going to become more competitive. So, we don’t think the IT sector is something I need to be buying at this stage. I can’t see earnings doubling over the next two years.

Anuj: What would you buy because if your call is that the markets would still go up from here and IT may not be the leader, in that case where would the leadership come from – would it still be banks, cyclicals or would it be something else?

A: I would say a combination but the big leaders, the big theme for the first part of the year will be banks because we are thinking that if oil prices remain around these levels then you can see at least a 100 basis points of interest rates and over a two to three period a 300 basis points. So, if you go past the last cycle the banks use that opportunity with the bond holdings to reduce the NPLs so that would give them the growth of lending going forward as the economy starts to pick up. So, we think banking is a big theme.

Then we are going to start looking at all highly indebted companies, where you are going to get financial gearing. We think we are going to be very careful in that, we are identifying companies now but I spoke to one very heavily indebted company the other day and if you take 300 basis points off that interest cost, they still can’t fund their working capital. So, they have to turn away business because they can’t take on anymore projects. So, that is the problem. I think theme will play out in the second half but don’t look at all of the heavily indebted companies because it won’t be able to build the business which is what you are looking for.

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