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market | IST

Muhurat Trading: Market veteran Ramesh Damani remains bullish on PSU space, telecom sector — read the full transcript

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Ramesh Damani member at BSE, shared his expectations from Samvat 2076 on the occasion of Muhurat trading in an interview with CNBC-TV18. 

Stock market veteran and BSE member Ramesh Damani remains bullish on the public sector undertaking space and the telecom sector.
In an exclusive interview with CNBC-TV18,Damani shared his expectations from Samvat 2076 on the occasion of Muhurat trading
"A lot of analysts over this Diwali period have turned bullish on the public sector stocks. If you really believe in the Modi government and you believe there will be better corporate governance, then you will be bullish on the government companies," he pointed out.
Speaking about Samvat 2076 Damani said It was very important to remain optimistic. "We have had a good year last year, it was up 10 percent, but a lot of retail investors felt the pain because their portfolio was under water, the small and midcaps were under a lot of pressure but for the first time in the last 2-3 years, I am noticing that the market is fighting back. Bad news doesn't mean that the stocks keep going down, they fight back and bounce back. A lot of stocks even in the small and midcap areas have moved higher. So, I would like to think that perhaps the worst is over and this Samvat would bring us much greater and gladder tidings," he noted.
"The fact that the government is willing to privatise these (PSU) companies, all players now believe that BPCL will be privatised by March 2020, that suggests there is a whole exercise in value unlocking that is taking place. Once that one domino of BPCL falls, a whole host of other dominos can fall in the public sector space. So, sectors that offer value would be the privatisation candidates, the other would be the candidates that are not immediate privatisation candidates but still look very attractive on an earnings basis, on a yield basis — the defence stocks, the railway stocks, they look fairly attractive to me," he stated.
Damani is upbeat about the telecom sector too. "I think there is so much bad news but you have to remember that there are only 2.1 players left in the market. So, you want to look at the sector, in a country like India you will have two players who will survive and if there are only two players, they will have some pricing power. So, the worst seems to be behind the telecom sector now," he opined.
Edited excerpts from the interview:
How does it feel? One year down the line, IL&FS is behind us. Does it feel like Samvat 2076 can be better than Samvat 2075?
It is very important that we remain optimistic. We have had a good year. Last year it was up 10 percent but a lot of retail investors felt the pain because their portfolio was under water, the small and midcaps were under a lot of pressure but for the first time in the last 2-3 years, I am noticing that the market is fighting back. Bad news doesn’t mean that the stocks keep going down, they fight back and bounce back. A lot of stocks even in the small and midcap areas have moved higher. So, I would like to think that perhaps the worst is over and this Samvat would bring us much greater and gladder tidings.
Give us some thoughts on what would be the areas of strength for this market. It has been very narrow, 5 or 6 stocks have led the market and as you said this year should be better. What do you think would be the key areas of strength for the market? 
I would suggest you two areas. I think a lot of analysts over this Diwali period have turned bullish on the public sector stocks. If you really believe in the Modi government and you believe there will be better corporate governance, then you will be bullish on the government companies. The fact that the government is willing to privatise these companies, all players now believe that BPCL will be privatised by March 2020, that suggests there is a whole exercise in value unlocking that is taking place. Once that one domino of BPCL falls, a whole host of other dominos can fall in the public sector space. So, sectors that offer value would be the privatisation candidates, the other would be the candidates that are not immediate privatisation candidates but still look very attractive on an earnings basis, on a yield basis – the defence stocks, the railway stocks, they look fairly attractive to me.
The second sector I would look at is the telecom sector. I think there is so much bad news but you have to remember that there are only 2.1 players left in the market. So, you want to look at the sector, in a country like India you will have two players who will survive and if there are only two players, they will have some pricing power. So, the worst seems to be behind the telecom sector now. So I would say that there may be a plethora of opportunities in small and midcaps and investors should look at them also. They should also look at these 2 sectors because this Samvat would be a lot of value unlocking in these 2 sectors.
You started by saying that the worst is perhaps over for the economy and for the market; but do you reckon the worst is over for earnings as well because that is the sense we are getting if you look at a lot of the largecap names whether it’s HUL, ICICI Bank or Tata Motors, at least seems like there is a bottom in place but you correct me if I am wrong?
No one really knows. It has been a very long dry, painful earning season but the market looks typically 6 months ahead. It’s forecasting something that perhaps we do not see right now in the earnings coming out this quarter. As you said, some of the movements from unorganised to organised sectors are doing very well but the rest of the market is languishing. The thing about capitalism that I like is that nothing goes to zero; the pendulum swings the one way and the pendulum swings the other way. So I think it has swung too far in terms of low corporate profitability, poor earnings growth. I think we are now ready to come back from the low base effect and show some positive surprises over the next few quarters. I do not look at aggregates as much as some of the other analysts do. I tend to look at individual stocks and when I meet the managements, they seem to suggest that the stocks are already cheap and they feel more confident over the next 6-9 months than they felt in the previous 6-9 months. I am always optimistic so I do remain optimistic.
You have always left us with something new that you spot on the horizon, anything that is looking interesting for you now? You gave us in the big stocks. Is there any specific area that is looking interesting? One remembers your United Spirits call. Likewise is there any stock that is looking extremely interesting to you?
Telecom would be a nice contrarian call. There are not many players left in this business. The small midcaps is not a thematic play that you buy a sector of the smallcap stocks; in fact you have to do bottom-up stock picking there. As regulations prohibit me from speaking on individual stocks, some of them are really at very attractive valuation and if they survive the next 1-2 years, these companies would give manifold return over the next 5-7 years. So on a case-by-case basis you need to look at companies in the paper sector, auto ancillaries where I am finding companies that are trading at cash value with very handsome dividend yields. Perhaps even it’s time to look at some of the media stocks again.
The thing that most people do not understand about the stock market is that you are trying to be the intrinsic value of a particular piece of business and the intrinsic value is so particularly high but the market value is so low. It pays to investors to be patient in these things. I read it somewhere that in an investor’s experience expenses always compound but the income doesn’t compound so long as you break it due to various reason. So successful investors particularly at this time of deep draft and deep pessimism in the market have to latch on to some great businesses and hope these businesses compound over longer periods of time, that they will compound over 6 or 12 months, I do not know but I am pretty sure that over a long period of time, which I would say 3-5 years, these businesses that today are available at cash value, available at high dividend yields, would probably return superior returns to investors. We always said that this is perhaps a good time to get in.
You should buy your raincoat not when it is raining, but when it’s not raining. So it’s that kind of time right now at Dalal Street; there is pessimism, people are looking away, mutual funds are facing some redemption pressure especially the smallcap and midcap sectors, there is a deep-deep pessimism about these sectors and in my opinion that is all rubbish. I think these businesses will survive and thrive over the next few years and other than large sectors, which are the public sector and the telecom stocks, I would look at a basket of these smallcap and midcaps without fear.
Which is what you did last time in the quick service restaurants (QSR) space when there was so much pessimism and you were very bullish and some of these stocks have now given handsome returns. Is that play still on?
I do remain optimistic on these stocks because India is a young country and as women work out of the houses, the staff at home becomes less, disposable incomes rise. It’s a great theme you can play on and it is somewhat more protected against technological change, not completely of course because now we all hear of all the vegetarian burgers coming in and automation. So it’s not completely protected, but for the next 3-5 years which is the investment horizon I am talking about, I think these businesses will do well and the couple of results that came out for two stellar QSR players, I think we are fairly optimistic in terms of same store sales growth in terms of the trajectory of earnings. Therefore, I would remain optimistic even at these levels on these stocks.
Do you think that the equity cult has come back in a big way? Are you seeing a lot more household savings move into the equity markets now?
Actually it has not come back. Unfortunately the last 2 years have been so painful for retail investors that whatever money they left they have put into the high quadrant earnings. So that is why you have a huge run-up in high quality, good corporate governance stocks. My feeling is that the investors are throwing the baby out with the bathwater because some of the companies have disappointed and some of the companies have defaulted. They are taking all the companies with unknown corporate governance and throwing them out with the bathwater. It’s a huge mistake that investors are making. Will they get back in market sometime? Almost certainly. The thing about capitalism is that pendulum swings both ways. You go from extreme pessimism to extreme optimism. I think somewhere we are on the extreme pessimism right now. So at some point markets will realise that there is a lot of value.
You cannot disrespect companies that pay dividends properly, pay you a good dividend yield and continue doing that business and you think they will survive, I do not think there is a technological threat to many businesses over next 3-5 years. So inevitably a boom will come and these companies will prosper because once the investor decides that the high quality quadrant is too expensive, they will tend to look at other sectors and say I am getting good PEs, good yields and good visibility. Let me put some money in there – that’s the call I am making.
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