The after effects of this moratorium and the impact that we are going to see on the balance sheets is going to play itself out, says the Co-Founder of AQF Advisors
Last week it appeared that banks had stabilised. But now it looks like it is back to square one. After five-seven days of good gains, banks are getting bashed up again.
I am afraid that is going to be a trend that we will continue to see in the market for some time. At one level, whenever the market moves up a lot, people start looking for sectors where they feel that they will get value but do not forget that the entire banking and financial sector yet has a long way to go. The after effects of this moratorium and the impact that we are going to see on the balance sheets is going to play itself out. The economy is at a far slower growth rate and there is no credit growth. Banks will see intermittent nervousness whenever some sort of broader nervousness creeps into the market. They will be the favourite places which investors will look to sell out of.
Why did the banks get hammered yesterday?
With the kind of rise that we have had, we will see these kinds of profit booking. But my own view also is that one of the factors that is probably playing itself out is that come tomorrow, you are going to have new margin norms that are coming into play for brokers where clients will have to pledge shares or they will have to put margin upfront.
Now if you match that with the NSE data, the share of retail of so called non-corporates, non-FIIs, non-DIIs has actually gone up from 47% in the trading volumes to 54% which is in line with the fact that there has been so much of retail interest that has entered the market in the last five months in the current year. There is a possibility that this new norm could be causing a little bit of selloff of pressure because now you have to actually put margins upfront and there could be readjustments taking place and that could be one of the reasons for the sell off yesterday.
Are we in a phase where the margin requirements or the new margin laws are going to change things and could push back mid and smallcap stocks decisively?
I do see some sort of correction happening. Now to what extent is that correction going to be there it is very difficult to call because I am just trying to tie in two ends that a) the fact that retail participation has gone up; b) midcaps have gone up and generally speaking we find that the retail participation happens a lot in the mid and the smaller cap names. With this margin compression, it will take some time for investors to start readjusting the way they work and even brokerages are trying their level best. They have been sending out mailers to people to create a more seamless mechanism where the client can put pledges for shares and then unpledge them and so on and so forth.
But against that, do not forget that I do not really expect a sizable correction to take place for the simple reason that you are sitting on put on the markets where at lower levels you are going to find interest coming in from the FIIs and the DIIs. I do not see the markets correcting a lot but they could have these intermittent corrections and some of them could mean that the cuts could be like what we saw yesterday in some of the pharma or the chemical names because that is where people have made a lot of money and that is where they are seeing the maximum pressure.
Even the pockets that have been running up quite consistently like pharma and IT and some of the other broader market trends all got a rub-off effect yesterday.
According to me, this is more of a technical selloff related to the new margin norms coming into play possibly. Also do not forget that because the selloff is happening in spaces and sectors like the midcaps which have seen very deep cuts, those traditional areas have seen retail participation at the highest.
Also some of these midcaps have seen a tremendous run-up. People are trying to sell somewhere to raise some margin. They are looking at where they are sitting on big profits and hence you are seeing the big difference between the Nifty and the midcap index.
As we rollover from Q2 to Q3, do you think this market for this year is pretty much near its peak, plus minus 500-600 points on the Nifty and we are not in for a strong acceleration till December?
Pretty much so. From a fundamental perspective, the market is probably close to its peak, like you rightly said 500-600 points here. Given the fact that most corporates are now only talking about closing stages of 2022 coming back to where they were from a run rate perspective. Given all that, within the market, there will be pockets which will probably be much higher from where they are. With liquidity being so loose, that could upset the calculations. But yes, from a pure fundamental perspective, we are pretty much there and we will probably trade in a range for some time.
What is your view on ITC?
My view is that ITC has been run all these years like a closed club. It generates and sits on huge amounts of cash. It had invested in businesses which have not given returns anywhere close to what the cigarette business does. Its FMCG business is large from a perspective but look at the kind of money that it makes on it. The hotel business again is capital intensive, does not give anywhere close to the ROA. So you have a business where there is a large cash generating business on which your return on equity and return on capital can be huge but you do not distribute that cash. That cash is deployed in businesses which have so far not given even remotely close to earning the cost of capital. It is sitting on huge amounts of cash and so I think it has been a very shareholder unfriendly company and precisely for those reasons, it does not get valued.
Of course, the cigarette business is a favourite whipping boy. Every time, the government wants to garner some revenues, it raises taxes on cigarettes. So it continues to disappoint. From a valuation perspective, it is attractive and it has got a business with a moat but the management just does not do enough to unlock value for shareholders.
N Chandra has vowed to reduce debt in Tata Motors to near zero in the next three years. Can he manage to pull it off?
I would like to give him the benefit of doubt because he is an efficient manager. He has been doing the right things as far as the group is concerned with a lot less fanfare than his predecessors and he is a more operational, hands-on chairman. There are enough areas within this group for it to get more efficient and more so for Tata Motors which is an extremely strong engineering based company. But it has just expanded capital in businesses which have not given returns. To be honest, all the Indian companies who have become international and have acquired businesses overseas, have ended up with their valuations over a period of time trending downwards.
They have trended more and more and more towards the international business valuation which are far lower PE because India-focussed businesses tend to create a higher PE as the growth rates in India have historically been far stronger.
Internationally what happens is that you have one geography doing well, one not doing well and so growth rates tend to be far more subdued. I think Tata Motors really suffers from that and so do a lot of other Tata businesses which are international. They trade at substantial discounts and doing some of the steps probably to unlock some of these parameters. is the right way for them to work.