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Macros turning positive now; go pick Coal India: Quantum

The risk reward is favourable for long-term investors, said Sanjay Dutt, Director at Quantum Securities, who believes second-rung companies would be big beneficiaries of the next move.

Speaking on the lending rate cuts taken by top three banks, Dutt said though the move is a definite positive but not much should be read into a 15-25 bps rate transmission.

He is positive on banks, NBFCs and midcap engineering / capital goods companies. In the banking space, he is bullish on public sector banks, with being overweight on select PSUs.

Dutt advises to avoid export-oriented companies on the back of an uncertain global environment. He expects rupee to trade in the range of 64/65 against the dollar in near future.

Below is the transcript of Sanjay Dutt’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Does it look like things are falling into shape in the economy that we could see an earnings turn around soon?

A: Contrary to the view that I have had for the last few months and which I have shared with you periodically where I was expecting the markets to come off quite rapidly and they did so, they came down to 8,200-8,300 level. We have had a reasonably good correction; weak hands have been washed out and what I like about the market right now is that people are mostly positioned flat or negative at this point of time. 

No one is expecting the markets to run up or no one is expecting something miraculous to happen in near future. At the same time people are missing a lot of positive things that have happened in the last month or two primarily which I find on the macro side and that is got to do with the way the coal auctions went smoothly, the kind of money the government gets in, the 3G auctions. Those are huge events in a countries history where the kind of money that you get in and that benefits your deficit that would ultimately percolate down to the economy.

Yes, earnings are fuzzy right now; we don’t know what future holds in the next quarter or two but one would see an uptake soon. I am relatively positive now and risk reward is favourable for long investor.

Latha: Typically how do you play rate cuts scenarios? The first of them have come from State Bank of India ( SBI ), ICICI Bank  and HDFC Bank  what does that mean for an investor? 

A: We don’t read too much into what SBI, HDFC and ICICI did last evening but definitely it is a positive no doubt about it and there is a clear signal which the Reserve Bank of India (RBI) governor also in fact did some hard speak when he mentioned about why the transmission is not happening. But I don’t think too much needs to be read into that 15 basis points because money is available for corporate who have good things going, who have good plans going and money is available at reasonable cost.

We do have a problem with a large number of corporate regarding the balance sheets. Some of them sitting on some real problem assets but those are the only areas where struggle is. Yes, it is substantially large area so to cut a long story short, I think I read this step by ICICI, HDFC etc quite positive without affecting the margins, they have done and they have signaled in fact. More than anything else they have signaled positive interest rate scenario ahead and that is going to have a good impact, no doubt.

Sonia: You did mention that the risk reward is positive for the longer-term investor so what does an investor buy now or accumulate?

A: Inward looking companies mostly inward looking sectors, because the investment cycle is going to revive quite aggressively in the months ahead. Banks look good to me they have corrected quite good particularly the second tier public sector banks. Engineering companies, capital goods companies and quite a bit of second-rung companies and sectors, we tend to get too much focused on the Larsen & Toubro  (L&T), Bharat Heavy Electricals ( BHEL ) when we talk about the revival of the capex cycle or whatever the infrastructure.

The second-rung companies are going to be the biggest beneficiaries of all these spending in the revival and the investment cycle that we will see over the next few months. So that is where we need to really sift out companies with good balance sheets and companies where the order flows and liquidity will start to now come in.

Latha: When you say domestically oriented companies, will the first ones be things like auto companies, consumer companies; will there be capital goods companies? How would your incremental mix of stocks look like?

A: My incremental buys would be or I would be positioned towards capital goods, engineering, select tier-II infra those are the companies that I would be biased towards followed by ones you mentioned. So this means that my priority would be infra, banks, capital goods and engineering companies. Focus manufacturing companies whose off-take primarily is domestics because the situation across the world is still is not clear particularly Europe is very uncertain.

I wouldn’t really bang towards on export oriented companies at this point of time. Diagnosing a little bit I need to just mention one thing that is in the equation which hasn’t played out according to what I think will play out and as I had thought has to play out is the rupee- dollar. because I am reasonably sure at this point of time based on whatever variables I look at as well as government action, government policy that we would be trading 64-65/ dollar in the next few months.

That is one equation which probably might impact equity markets for a short while before they tend to adjust. It particularly impact companies which have good amount of dollar denominator debt and repeatedly if you observe noises and signals from Reserve Bank have been going out to the corporate and to all companies that be careful of your unhedged positions, be careful of rupee-dollar etc. So that is a clear message which people needs to get right now that there is going to be some action in the forex equation.

Q: Speaking about domestic story what is the stand you have on financials itself? There was a talk yesterday also of improving the quality of compensation to board directors and extending that to PSU bank directors as well. You have been in the past also positive on PSU banks at the moment are they buy? 

A: Definitely, in the financials I would be overweight PSU banks, select PSU banks like Bank of Baroda  (BoB) etc. So definitely these steps what the RBI Governor announced yesterday are very important and very critical, much overdue. Even North Block has been pretty clear on these issues that till we don’t have good quality managements in the PSUs we can’t keep always blaming the managers in team and the senior management

Latha: Any thoughts on Coal India ?

A: There is no doubt, that must have in every portfolio because resources stocks are definitely going to outperform and they do in a way act some kind of a defensive also when the markets are volatile or fall lot. Barring of course my general aversion to PSU stocks and because of government interference in decision making issues but Coal India is on the right track particularly now when government is consciously and very aggressively sorting out the availability of fuel inputs across sectors. So the focus on Coal India would remain and government would keep clearing up all the bottlenecks. He was clearly mentioning that the ministry is very proactive in sorting out issues. So Coal India definitely must have in a portfolio.

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