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  • G.Chokkalingam - Founder & Managing Director, Equinomics Research & Advisory


    Founder & Managing Director, Equinomics Research & Advisory

    DATE: July 29, 2015, 12:00 PM

    SUBJECT: Will P-note and China woes drag markets lower?




    Hello and welcome to the webchat with G.Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory

  • P


    Can we fit these factors(P-Notes & China woes) into a model and predict the percentage fall due to these factors?


    with my learning in economics over last 33 years, i dont use history or structured models to guide me esp in the domestic stock mkts. history is only a source of learning, not a guiding force for the cycles in equites & economies. similarly the models. in 1992 i lost a lot of money in Bindal Agro as i got excited with econometric model based recommendation. i would always use simple statistical tools like correlation - we are least correlated with Chinese mkts. when it rose 150% we rose only 3.8%. when it cracked about 30%, we rose 5%. only post-lehman crisis, we were correlated with Chinese mkt as the entire global equities fell. i firmly believe that it is a problem of chienese imnvestors. Chinese govt will not easily allow their mkt to collapse. It has close to $4 trillion of forex reserves. this is best positioned to tackel both economic and mkt woves. on P-Notes - i kept on saying consistently during the GAAR issue that it will not be impelemneted in India at lest for 5 years. same way - nothing big change will happen on P Notes. whetehr we like it or not, today FII flows decide not only the mkt moves, but also INR echange rate and thereby fate of external debt taken by corporate and govt. today there are over Rs.2 lak crore expsoure thro p notes. it would be foolish on the part of govet to think of allowing p notes to vanish overnight. they may take up only a gradual route to fix the problem. it will take at least another 10 years for us to think of not to worry about the FIIs or disturb their flows. we will keep compromising in the interest of our economy. otherwise it will be disaster.

  • S


    1. The valuation gap between private and public sector banks are widening. Even if PSU banks trade at 1 time book value, it will come around approximately 100% appreciation. With this concept,Is it prudent to accumulate the PSU banks which are trading below their book value or do you want me to stay away from PSU banks and to look for private banks for long term investment(3-5 years)? 2.What is the outlook for textile and industrial chemical sector with respect to falling crude oil prices? 3. TATA Motors is trading at attractive valuations due to China factor. Can we accumulate it for long term(3-5 years) considering the auto and defense sector revival in India?


    On banking valuation The gap between quality of balance sheets of PSU banks vs private banks are also widening. While large private banks like Axis bank still maintains Net NPA at less than 0.5%, for example, the PSU bank like Punjab National Bank has Net NPA of over 4%. I always look at ratio of outstanding Net NPA to net profits – I believe this gives a lot of comfort to choose a banking stock. For example, the outstanding Net NPA of Axis is 0.7x its latest quarterly net profit. Whereas PNB has its Net NPA at Rs.15,393 crore which is 21 times its June quarter net profit of Rs.720 crore! This kind of divergence was there even 2 years back. Hence, I stayed away from most of the PSU banks for the last 2 years. This anomaly in the quality of assets explains the reasons for some of the large private banks trading at over 3 to 5 times adjusted book value while the PSU banks, on an average trade at about 20% discount to adjusted book value. However, I still find opportunities in some select PSU banking stocks. Today the perceptions in the markets play a dominating role than the fundamentals in the short term. This explains the dichotomy between the valuations of companies which still maintain some growth (example MNC stocks) and PSU banks. Since market finds it difficult to trace many sectors which continue to promise growth, they pay as much as 120 PE to some of MNC stocks which are able to grow profits only by 15% to 20%. Whereas some of the PSU stocks are cracked in a big way – I would suggest banks like Syndicate Bank – the criteria to choose would be: - Continued business growth: Syndicate Bank is still growing its credit by about 15% yoy while banks like PNB grows credit in line with industry growth of around 9.6%; - Net NPA around 2% - while syndicate bank has net NPA of 2.36% while PNB has over 4%. So investors, I believe should focus on PSU banks which are able to credit at double digit, maintains dividend yield of more than 3%, and also Net NPA around 2%. On textile I am highly optimistic on the textile sector in the 1 to 3 year perspective. While INR has weakened a lot (over 40%) in the last 7 years , Chinese currency stayed firm. It is reported that China’s labour cost also moved up significantly over the last 3 years. These developments should augur well for the textile stocks. However, I would suggest accumulate only on correction some quality stocks – while stocks like Kitex have already become multi-bagger, scrips like Sutlex and RSWM have moved up 80% to 90% in the last 6 months alone. On Tata Motor Contrary to the market expectations, I am not that bullish on the defensive sector – the fiscal condition is still under stress. In the medium term, I don’t see any steep jump in defense outlays. For Tata Motors, what matters is the performance by JLR which accounts for over 80% of total revenues. Unless JLR turns into significant growth path, it would be difficult to make money in it. While Euro is struggling to grow beyond 1%, there are lot of reports of China’s vehicle sales getting impacted by economy slowdown and recent crash in stock market. Yesterday also Ford Motor has revised downward vehicle sales forecast for China. I would wait for June results, assess its margins from JLR and then only suggest reentering. Even if one has to pay 5% premium post results, it is worth waiting

  • S


    Hello Sir, P-notes concern and China woes dragged markets lower resulting in a market sell off on Monday. Can US Federal reserve interest rate hike in September can see the downside of Nifty in next month? what would be the right time to invest in blue chip & Midcap companies? Please Advice


    i dont think the domestic mkt will crack in a big way for the FED rate hike - mkts across the world already discounted that event. also remember when FED actually withdrew QE3 mkts of emerging world rose substantially. after all US economy reversing monetary easing is an indication of improvement in its economy which is good for the emerging world. it is difficult to find valuation comfort in most stocks including large caps. in fact, since very few sectors are growing bluechips are trading at huge valuation. i would suggest focus on quality midcap stocks with comfort on mgt quality, valuation and balance sheets

  • P


    When p-notes concern was raised, market started correcting immediately and FIIs turned net sellers. This same happened with MAT issue also and money started to move out of India. Due to DII buying, 8,000 was held on the Nifty. But how long DII or HNI can buy at the dip? Market always reflects the FIIs side, if they are sellers, the market is in RED, if they buy, it shifts in GREEN. Amid issues such as no investment climate,Land Acquisition Bill, GST etc, will the FIIs invest money in India? Are there are more issues along with P-notes and China woes? Will FIIs remain confident on India if government is not moving in favor to the economy? At the same time, RBI governor is not in favor of interest rate reduction amid conflicts between finance ministry and Governor. How will FIIs invest further money? Even if they invest, they would only invest in Largecaps and Midcaps, would that be enough? Will the broader market be able to gain? In this quarterly result season, lot of new NPA are getting reported both from Private and PSU banks. How the banking system will improve and with all these problems, how can we be sure that FIIs will pour more money to India?


    It is unfortunate truth that the FIIs hold a major say in this mkt- yes their selling will crack the mkt. the same fact gives some comfort. in my view, they are trapped ion this domestic equity mkt. they cannt sell even $10 bn out of around $300 bn of equities they hold. mkt will fall like a pack of cards. so our stress would be limited only to maximum around $3 to $5 bn. mkt giving too much importance to further reforms in my view is not right. most reforms are already implemented. yes GST & land bill are crucial. but if one expects that they will be implemented immediately, tehn taht view is wrong. i expect GST to be impelemnted only in 2016 or 2017. BJP needs to go throu electctions in states where it holds power now to get the majority in Rajya Sabha. I believe the RBI is wrong to worry about inflation. we are the only one in the island of inflation worry in the world. entire world is worried whether the global economy is slipping into recession. for the first time in recent years, we see not only oil and metals, even agri crop prices are at 6 year low. so RBI will be forced to cut down the rates significantly in next 6 months. robust excise duty collections. robust FDI inflows, lot of comfort on fiscal balance, inflation, CAD, and PSU capex plans will certainly reverse the stagnation in industrial economy. These signs will be visible by dec 2015 end. FIIs will follow that trend. Let us not forget the fact that almost all international institutions have predicted that India would be fastest growing major economy in the world in the next 2 years. Also govt trhust on outlays visisble from significant improvement in paln expenditutres in the furst quarter. so i remain optimistc. Sensex will cross 30,000 by end of dec 2015 and will be near 35,000 by dec 2016 end. those who invest in select PSU banks based on NPA, dividend yield, credit rgowth will make significant wealth in next 12 months

  • R


    Meltdown of Chinese equities has resulted in a slump in Global commodity prices impacting the metal pack of India. Will the downtrend in the metal stocks likely to continue in the near future? Should investors hold or sell at current valuations?


    meltdown in metal may continue for another 6 months - i would still sell on stocks of steel, aluminium while retaining zinc stocks. Zinc alone managed to see least impact in relative terms among metals. in portfolio, metal stocks should be less than 6% to 7%, i believe.

  • A


    What is your take on state-owned oil marketing companies for the current fiscal in the wake of declining global crude oil prices? which would be your top pick at current levels?


    for the first time i believe that oil has lost its volatility on both sides - now i believe that the structural change is happening on oil front. apart from shale oil and gas, what is happening now is that oil density (ie unit of oil required for producing additional unit of GDP) of development is shrinking. for example in china it is down by 50% in last decade. looks like oil price will remain subdued for next 2 years at least. on the other hand India's vehicle population bound to keep rising. so OMCs should do well for the next 2 years at least without any fluctuations once again in their performance. suggest HPCL, follwed by BPCL. I personally do not own any stocks mentioned here directly or indirectly through any firnds, relatives or proxies. However, we hold a few stocks mentioned here for our clients. Thank you all

  • B


    The P-note controversy / ambiguity regarding P-notes at a time when the government's reform agenda is stuck. How long will the domestic and global factors continue to keep markets range-bound? There are reports that suggest Chinese markets can correct up to 3,200 levels. What's your opinion?


    firmly believe that domestic mkt will resume its structural bull run from october. Sep quarter will start showing improvements industrial economy which will comfort the foreign investors to bring back money into domestic mkt. not many worried when Chinese mkt moved up 150% while our mkt was up only 4%. but now majority are worried about impact of Chiense mkt. Chinese mkt may fall another 15% to 3200, that would be still 42% yoy gain for them. but my personal take is that it may not fall more than 10% from here. let us recall fact that before this solid rally, the chinese mkt was highly under valued as compared to mkt like india's. After this 73% yoy rise, Shanghai index is still trading at around 13.5x - similar is Sensex valuation for FY16. Yes China faces severe slowdown - but not many realized the fact that it is also due to arithmetic beauty playing out like what we saw in ou own IT sector. today on $ 9 trilion GDP, even 6.5% growth will get them $540 bn of incremental GDP per annum which will be higher than what US can generate addiionally every year. the world will soon realize this and accept 6% to 7% range as the reality for China. I see in 2 to 3 months, domestic mkt will forget Chiense equity problem . These days not many are worried about "Greece crisis". Similalry the investors' mind which is hijacked by chiense mkt crash will soon forgotten. only issue which can casue global crash is any possibility of US failing to pull up its economy to 2.5%+ growth. If US fails to grow beyond 1%,, then we all need to hoard cash at home and forget equities and real estate. Anything below 6% from China will also be equally a grave concern

  • A


    How do you see IDFC as an investment idea for 5 year period given IDFC has been starting the IDFC bank?


    till 3 years ago, even word of applying for bank license sued to take the stocks of relevant companies. now even approval for banking license has failed to reward IDFC- that shows the state of banking industry today. only most efficient banks are able to grow business in double digits. foray into banking industry is not ideal time from the perspective of stock mkt valuations. however, i believe that this could be idea stock to invest at current price for the next 1 year. firmly believe that the banking sector would come out of crisis in a year's time. even at 10% yoy growth, banking industry with a credit base of Rs.65 lakh crore will make a big story for the effient players. by dec 16 end, i see a substantial rerating possibility for valuation of banking sector and IDFC would be there to enjoy the same

  • B


    Thanks for your Feedback across the Board . Here is my question how about the Auto for the next three months ? Specifically stocks like Hero and Tata Motors


    negative on both for 3 months - in 2w space, both hero and bajaj are struggling to manage competition with Honda which is aggressively expanding capacity. honda is not listed, so it can keep operating on low margin and maximize mkt share. it already captured 24% share. at whose cost? from domestic players. however, for next 1 year, i believe hero can come up as i bet positively on their export front. TML, see growth and margin for JLR in june qtr. if they dont apply pressure, then buy it even if you have to 10% higher. but i doubt whether it escape any significant pressure in june qtr. my take is that it will surprise the mkt negatively and most would downgrade after this result


    Thank you, Mr Chokkalingam for your time and advice. Any disclosures?


    I personally do not own any stocks mentioned here directly or indirectly through any firnds, relatives or proxies. However, we hold a few stocks mentioned here for our clients. Thank you all

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