Overall revival must to put an end to 5 bad years: IIFL

Mumbai | May 24 2017 11 : 30 IST | Moneycontrol

According to Nirmal Jain of IIFL, even though the market has touched an all-time high, domestic institutional investors are yet to benefit. Going ahead, market should witness overall revival, he adds.

The BSE Sensex touched its all-time high on Friday on the back of heavy foreign flows prompted by positive earnings and a delay in taper by the US Federal Reserve. Speaking to CNBC-TV18 on expectations going ahead, Nirmal Jain, chairman, IIFL says that sharp rally in market is only because of foreign flows and if market has to sustain this rally, it should gain across all spectrums including midcaps, smallcaps and mutual funds and not just the benchmark indices. He is, however, optimistic that after five bad years for the stock market, this year it should see a much broader revival.

With regards to specific sectors, Jain says a bulk of portfolio can still be held in pharma and IT though one can also look into a couple of agrochemicals on the back of good monsoons. He also suggests investing in slightly higher risk sectors like auto and cement as they may rally as soon as the sentiment turns around keeping the 2014 elections in focus.

Among IT stocks, Jain recommends buying Infotech Enterprises, HCL Technologies and among pharma he is bullish on Ipca Laboratories, Torrent Pharma and Dr Reddys Laboratories. He believes Bayer (India) and PI Industries are good bets among agrochemicals. Also, Jain advises to keep ITC in your portfolio.

Below is the verbatim transcript of Nirmal Jain’s interview on CNBC-TV18

Do you think market will move higher from here on and would it still make for a tactical rally, a trading market or do you think something might have changed?

Markets should move for higher levels from here for sure. At this point in time, there is a lot of optimism on political front, things will sort out. We had sort of poor governance in last so many years and we will look forward to whichever government comes to power, who will have more stability and more clarity of direction. We may be euphoric because market is at all-time high but we shouldn’t forget that it has become all-time high after five years and so, it underperformed all the asset classes and also there is a bipolar disorder in the market because if you take 15 stocks out of Sensex, that are owned by foreign institutional investors (FIIs) then the Sensex would be something like 43,000, if you take those 15 stocks to constitute Sensex. If you look at midcap, it is still 40 percent off its all-time high and if you look at smallcaps it is almost 50-60 percent off. Only FIIs had been driving the market, mutual funds and local institutional investors are not getting any new money, retail investors have been decimated, high networth individuals (HNIs) are more or less out of the market. So, if market rally has to sustain then it should get the breadth and the depth, so it is not only visible in the indices of Sensex or Nifty but it has to be visible all across. I am quite optimistic that after five bad years for the stock market, this year we should see a much broader revival.

How do you approach, do you say let the macro resolve itself, let the reset happen when it will, I do not want to miss all the laughs along the way, participate but with an eye on what is going on around you?

I would say so because it is difficult to forecast when this will happen, five years ago when the crisis happened, the root cause was easy money and funnily the remedy they found is also easy money and it worked. So, if you try to be sane in an insane world, you may yourself become an insane. Rather than finding the point at which the entire thing will blowup or will culminate into crisis, we have to take one day at a time or maybe few months at a time and just move on. The day of reckoning may not happen in 2014 or may not happen in 2015; it will happen one day but if it happens in 2018 or 2020, you do not want to miss all the laughs along the way, it doesn’t work like that.

What do you think, time to change around the portfolio composition a bit or stay with the tried and tested blue chips that have been outperforming?

Bulk of your portfolio can still be in pharma and IT but you can also take some exposure to rural theme like agrochemical, monsoon has been very good, seeds, tractors. Also, one should look for an opportunity to get into auto and cement sectors because whenever the sentiment turns around, which I am very optimistic - the elections may happen in March or somewhere between March and May, so time is not too far and so, these are the sectors that can be the first ones to rally and beta is higher here so there will be over ownership in stocks of pharma, IT and FMCG and so, the fund houses will try and diversify their portfolio. For a long time we have been saying that pharma, FMCG and IT are the sectors that your equity portfolio should be but now the time has come to diversify a bit and say at least 30-40 percent of your equity portfolio should be in these slightly higher risk sector, the way they are perceived today.

Some names aside of the expensive ones, you said IT, pharma still, what would you buy there which is reasonable?

In IT, stocks like Infotech Enterprises, HCL Technologies there are so many of them. In pharma you can look at Ipca Laboratories, Torrent Pharma, quite a few companies there as well, Dr Reddys Laboratories. Dr Reddys may be slightly expensive but not as expensive as Sun Pharma.

Now that you speak about hung Parliaments, do you think market has begun pricing in an national-democratic alliance (NDA) victory to a certain extent or is there a room for surprise in the verdict?

Market has started factoring in that there will be a stable government and things will change after elections. So if there is a good surprise, obviously market will react negatively. Two major events that we can foresee in news are one, the tapering of QE because there is event risk. Whenever that event happens for one-two weeks, the bottom of markets may fall depending on how tapering happens. If it doesn’t happen its good, let the party continue for whatever reason it is.

Do you think market sees these months in advance that a taper will happen in April, do you think it will still fall if the taper happens or is the bigger risk that taper is not happening for some reason which the market then starts freighting over on why is it not happening?

There is no consensus that taper will happen in April. If everybody had a consensus then market will factor in whenever you have more or less a broad majority of consensus view. Today, maybe there is 50 percent chance of taper to happen in April, 50 percent chance that taper may not happen in April. Therefore, market has not factored in the entire event fully and earlier also when market was expecting tapering, it didn’t happen. The moment it happens, people react to it. If at all taper has to happen, it will happen in March-April, the time when election is also happening. So market may be volatile, one even may negate the other one, it is all very difficult to figure out if you want to invest in equity, you have to take a longer-term view. It is a pity that young India is not investing in equity but we are talking about 30-40 percent allocation. If you look at household assets in India, just 3-4 percent are in equity. If we do a survey of the past five years, how many people had made money in markets? There may be very savvy people like Ramesh Damani, but there will be one in a million or one in ten thousand even if you want to be optimist. A typical household who is fighting inflation on one hand, if his capital goes down, however much you preach him to wait, he cannot. He books his losses and gets out of the market. This is what we are seeing in mutual fund that the redemption now is 6,000-6,200 levels and the pity is that in last five years, our incremental domestic savings are just USD 1.5 trillion and not even Rs 1 has come to equity. This is a country where we need capital formation, we need new investment, new jobs, there is something for the government and policy makers to look at, it is a debate which is different and can be a much longer debate on this but these are the things which bring part of the market pity but the reality is that a typical investor or a household has to balance his risk.

Any thoughts on agrochemicals?

Agrochemical is a small sector.

Can you give us a couple of names for good business?

Bayer (India), PI Industries  are the companies that are good. I do not know much about United Phosphorous so I do not want to comment on that but maybe company like PI Industries and Bayer would be better bets. On FMCG, I have a different opinion. I started my career with FMCG company and worked there for five years. They are companies that are generating 40 percent return on capital employed. What happens that even at 30-40 PE multiple, they maintain the PE multiple and the appreciation that you get is almost equivalent to earnings growth which can be 20-25 percent which is not bad. So, do not discard FMCG from the portfolio yet, of course pharma and IT would deserve more weight but still FMCG should be part of core holdi

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