Investors Should Hold On To Their Stocks

DSP Merill Lynch one of the most aggressive players in the mergers and acquisition game offers a range of financial services. The company has been instrumental in deals like M&A deal of Hindalco-Indal acquisition and ICICI Bank ADR. It is currently involved in Zee Telefilms ADR offering. Shitin Desai vice-chairman and managing director, DSP Merrill Lynch spoke to Rajiv on the market volatility and his sectoral viewpoint.

Q: What is your observation on the current market scenario?

A: The markets have seen extremely volatility in the last two months. Besides impacting a lot of funds the ordinary investors have been effected badly. This also raises a question whether our markets are still ripe enough for pure sector funds, because managing such funds will be difficult whatever may be the volatility either upside or downside.

 

I would still advise investors to hold on to their stocks considering the medium term potential whether they have invested in good IPOs or in the secondary markets. I still consider the bull run is here to stay as investors can still make good money in value stocks over the medium term.

Q: What is the state of IPO's in the midst of volatility?

A: For an IPO, typically the time lag between pricing and trading is nearly six months. By such time the market situation may be much different. As such we need to have a market stabilisation method.

In India, the greenshoe option is not really understood by most people. Greenshoe gives the potential of oversubscription this overallocation of funds that can be used for market stabilisation. For instance, if an issue is quoted at below issue price, you would have allocated say 15 per cent as green shoe option while your issue is only say 100. So when it opens for trading and people come to dump, you keep buying the stock at a certain level which works as a market stabilisation mechanism. In the current volatile market you have flippers and for whatever reason there are no buyers, the stock price starts sliding. This leads to a snowballing effect over genuine IPO issues.

Q: Do you consider software valuations to be realistic at these levels?

A: The old and new economy valuations are being rationalised as people realise that IT cannot grow within itself. At the end of it, we need good products and service on which technology survies. Slowly that sort of realisation is now coming into the market place and that's why you have the correction in software stocks.

On the other hand growth rates of 50 per cent across the board by IT companies instills confidence. I still believe on the growth story of a number of quality companies in the medium term which make them attractive. Assuming even in the US, demand from dot coms for software requirements cool off the demand from non-dot com companies for software is phenomenal. Or I would rather say huge and is growing through outsourcing. So merely relating our valuations with volatility on the Nasdaq does not make much sense. As our software companies have shown growth through qualitative revenue models.

Q: Software stocks had hit new highs. Do they make good buys even at those levels?

A: I don't see any reason to be bearish. Valuations depend on growth rates, and so long they sustain the 50-100 per cent growth rates, valuations will remain attractive. Say the software stocks reach new highs again and the companies bottomline have grown over that period of time and assuming no fresh capital is being issued so you will see that the considering the potential of future growth the valuations at that levels will still remain attractive. So for the medium term investors can hold on to the stocks though they have fallen from their recent highs.

Q: What about pharma and fast moving consumer goods (FMCG) stocks?

A: The pharma sector would be interesting in times to come provided they are able to capitalise on the knowledge base. Down the road, I see a lot of research really shifting to India. If I were to take the case of the infotech sector, a lot of companies began initially with body-shopping and substantially moved up the value chain.

We could see a similar phenomenon happening in pharmaceutical research. To begin with you may be into body shopping, supplying brain power and in the process we will see new things shaping up over a period of time.

Today we have few Indian companies in R&D, tomorrow we may have specific companies focusing exclusively on R&D. Today R&D is only a department as was IT earlier. Now IT is entirely outsourced. So we could see exciting development in the pharmaceutical segment.

In FMCG, with strong positioning, great brands, extensive distribution networks, we see consumer demands and expectations going up with upgradation in living lifestyles so demand will be strong. For someone to make or break these companies will not be an easy task, it will take a lot of money. May be only a multinational may have such deep pockets to pump in a lot of money. So for a new entrant to build brands and convincing consumers to change old habits will be a difficult task. I still prefer FMCG for maintaining a balanced portfolio.

Q: Are old economy stocks attractive?

A: The trigger for old economy could be both mergers and acquisitions besides attractive valuations. Cement is one such sector which has seen much consolidation. I prefer this sector. Besides HPCL and BPCL are attractive valuations. Whenever, it comes to balancing the portfolio, good picks from the old economy will be a choice. I am quite bullish on the old economy stocks, though the monsoon this year is a cause for concern after 12 good years in the past. But I don't think the impact would be that negative, assuming that we are better off today compared to the conditions that existed ten years ago.