Buy beaten down mid-, smallcap stocks: Kotak Sec

R Venkat Subramanian of Kotak Securities said from a long-term point of view it’s time to buy on a bottom-up basis and not at index level. "Start looking at stocks from a long–term point of view and don’t worry about newsflow. In terms of price action, the midcap and smallcap side of the market is decimated, there is huge value there. Whereas, the largecap stocks are not particularly cheap given the current economic outlook and the price at which they trading.”

Here is a verbatim transcript of the exclusive interview with R Venkat Subramanian on CNBC-TV18.

Q: What do you think this leg of the pullback is over or do you think it’s just a mild pullback retracement after which we will form a higher range?
A: The pullback was quite good when it lasted. But yesterday’s action was a little disappointing; it didn’t look like a pullback on the rally, it almost looked like a fresh wave of selling. But in terms of price action, there are two sets of market here; the midcap, smallcap side of the market has been completely decimated and there is a huge value there.

Whereas the largecap stocks - you cannot call them particularly very cheap, given the current economic outlook and the price multiples that they are trading at. So maybe there is some scope for some more liquidation at the largecap level, but at the midcap, smallcap level the market has become ridiculously cheap.

The question that investors have to start asking now is – can we look forward to a 6-7% GDP (Gross Domestic Product) growth at least in the next one-two year? Can we expect once the dust settles down to access to international capital? Can we expect the policy action and the government to be proactive and growth oriented? The answer to all these questions will be – Yes we can. So from a longer-term investor point of view this is time to be a buying particularly on a bottom up basis not at an index level even institutional investors looking at this country would start becoming more positive.

So its time to be little substitute; some amount of hope for despair and start looking at talks from a slightly longer-term point of view and not worry about the news flow. The news flow will continue to be negative; we are not going to get a relief from there. If you are buying today and looking for news flow to support it in the next one-two days or two weeks then you are going to be disappointed. From a trading point of view, the market will remind one – it’s easy to make money by selling and buying than by buying and selling. But that’s the trading side of it. From the investment side you are getting to a very attractive levels for the mid and smallcap segment of the market.

Q: What about some of the defensives, would you be comfortable buying FMCG or pharma right now because they have still got a bit of a valuation premium going?
A: No, at this stage the market and when the broader market is completely bombed out and as an investor if you have any amount of risk appetite you should be buying things which can do well as the market improves. This is not the time to hide behind the stocks, which will not fall. If you had done that in the market 15,000 or 20,000 then it would have been god. But at this stage, I would be little more aggressive in looking for stocks, which can go up than to look at stocks which will not go down. So I would avoid FMCG and even pharma for that matter.

Q: What do you do with the entire energy space not just Reliance, yesterday GAIL, RPL, Essar Oil all of them were under pressure and there were big delivery volumes on them as well?
A: We are coming after few years of significant upturn on the refining side and now margins are slowing down. Even for complex refineries like Reliance Petroleum and Reliance the mix of the margin between transportation fuel and other side has turned against them. So when any of these big trends turns down, the market always tries to see where it’s going to bottom out and not anticipate a bottom based on what has happened in the last one-two years. So to that extent till the refining margins stabilise, we can say this is the base minimum that you can work with. The earnings estimates are going to be all over the place. So, that’s not the space where you are going to get any joy in the near-term. I would still be cautious on stocks like Reliance and Reliance Petroleum and would sell them on rallies than look to buy them.

Q: Some of these infrastructure names which have put interesting rallies. Stocks like IVRCL, Hindustan Construction, Lanco etc. What’s your take on that space?
A: I am reasonably positive on that, more because of the prices than anything else. These stocks are trading at cheap valuations. If you believe that these projects and the orders they have on hand will be executed and they or their clients will have the funding to do that, they will, given the government stand on infrastructure etc. Take a case of IVRCL, it has a Rs 15,000 crore order book and even if they make 4-5% margin on it, its about Rs 750 crore and the market cap of the company is about Rs 1,500 crore now. So it’s got to a level where most of the risks are priced in and should the realty in the next 12-18 months turn out to be any better than what we are all trading now, this would look like a ridiculous valuations.

So some of the slightly midcap infrastructure names are definitely stocks you should be looking to buy on every dip and the kind of panic that we get once in a while, you get them really cheap. But the larger names - maybe you can argue that the valuations are still not that cheap particularly when you compare with the midcap names so maybe you want to be little cautious on them. But midcap infrastructures particularly the well run companies with large order books are definitely buy on dips.

Q: What do you do with Tata Motors? The rights issue went horribly wrong, extremely bad news coming with their sales, the shutdowns they are doing. What would you do with that stock?
A: Unfortunately the company is in set of circumstances that are not going to change quickly. It’s something that you have to look beyond the regular auto cycle to look for any upturn in Tata Motors; they have huge strategic decisions that they have made which are going to make it difficult for that company to enjoy any kind of serious profitability in the next two-three years. The acquisition as well as the small car project, both of that is going to weigh down on that company and now we have the downturn because of the domestic economic conditions. I think that’s a stock which from investor’s point of view is a complete avoid. You will get you chance to buy that when things bottom out. But it’s too early to think about investing in Tata Motors. I think it’s sometime away.

Disclaimer: It is safe to assume that I & my clients may have an investment interest in the stocks/sectors that have been spoken about.

Source: Moneycontrol