Brace for major sell-off in FMCG, expensive market
Mon, Jul 29, 2013
Source : CNBC-TV18

Sanjay Sinha, founder, Citrus Advisors cautions that the fast moving consumer goods (FMCG) stocks are likely to see a major sell-off, which will take the market to a reasonable levels. He further added that that market may become more expensive before correction. Meanwhile, Sinha said that IT has been one sector that saw a late rally, but is now seeing a buying due to strong rally in its stock prices.

Below is the verbatim transcript of Sanjay Sinha's interview on CNBC-TV18 on July 29, 2013.

You can watch the video by clicking here

Q: It looks like a fairly tepid earnings season and tomorrow we have communication from the Reserve Bank of India (RBI). What is the backdrop for equity looking like now?

A: We have the market capitulating at both ends. Capitulation in the conventional sense is understood when people start selling mindlessly. You have one end of the market which is made up of the interest rate sensitives, particularly the infrastructure and the banking stocks where we now see the beginning of capitulation.

Capitulation also happens on the other end when irrational exuberance either prevents you from selling or makes you buy mindlessly. So, we have on the other spectrum sectors that are made up of the fast moving consumer goods (FMCG) and some of the private sector banks where either the investors are not selling or they are buying even at the current levels.

The nominal level of the market that you see through the Sensex or the Nifty levels is not really telling the full story that we have a bipolar market which is capitulating both with a lot of people selling at one end and at the other end we have people who are either buying mindlessly or are not selling at all.

Q: What happens to the mindless buying side of FMCGs? Do you think there is a lot of risk involved there at current valuations? Do you see prices coming off in those names where people are not selling yet, in consumers and maybe some private banks?

A: That is a likely possibility. We have seen that unfold in the market on many previous occasions. The starkest example of that has been in 2001 when people sold when they thought the IT stocks were overheated and yet had to come back and buy the same stocks at twice the valuation levels. Then at the peak out of the market that happened in 2001 they burned their fingers.

In one of the most marquee FMCG stocks you had a large mass of retail investors who actually sold when they tendered their stocks in the open offer and after they have tendered in the open offer the stock has gone up by more than 20 percent. So that creates a feeling of deprivation and you will see the same people coming back and buying the stocks of the sector at valuations higher than the levels at which they had sold. This may continue for a few months also for all you know before we see the actual sell out in these sectors and that is where people will lose a lot of money.

Q: When that happens, do you expect buying to emerge in bombed out sectors like infrastructure, public sector banking? Do you think fundamentals will not let people load up on those stocks even then?

A: In the current climate where there is a lot of pessimism largely from the lack of initiative from the government, if the sell out actually happens in a background when there is no front footed policy or economic activity from the government sector you may actually see people not even buying infrastructure even though they maybe available at two-three times price-earning (PE) ratio.

If this happens, you will see the nominal level of the market correct significantly, because then you will have a large segment of the market that would be trading at a very low valuations and you will see the other spectrum of the market which will be correcting from 30-40 time PE ratios to more rational levels. This will bring the market to a level where the PE ratios of the market overall could be at 10 times or so where natural fundamental buying will emerge purely driven by the attractiveness of the valuations.

Q: The combination of events which will finally get some serious long-term money into the market and is not entering because valuations are still not completely bargain basement in many parts, do you think this buying opportunity is going to present itself in the next three-six months?

A: It maybe a possibility. We will see the market becoming a little more expensive from where it is standing today and this might actually take the market to levels which maybe closer to the previous high or beyond that.

If we do not have the liquidity coming back into the market, we will then see the beginning of a crack appearing in the market and that will not be something which will unfold in just a few weeks, it will take a few months to totally unfold.

Towards the later part of the calendar year, we will actually see long-term fundamental buying emerging and that may propel India into that secular bull run that we have all been waiting for.

Q: What could be the trigger for this cleansing process? What makes you optimistic that the market has one last leg before that cleansing process ensues?

A: There is still a lot of reluctance to sell expensive sectors and the recent price surge in some of the stocks is making people even more wary of buying. If new money has to chase equity, it is reluctant to go to the interest rate sensitives, because that is where your long-term value unlocking potentials lie.

More fashionable sectors that were expensive a year back, expensive six months back, continue to be expensive, but continue to attract investments. Therefore, continued buying in this sector might keep the market going up.

Secondly, there has been a sector which was a late starter in the rally, the IT which has seen fairly strong rally by the stock prices but the view is now changing more in favour of the sector. Hence, more buying in the IT, less selling in FMCG and some of the stray performers from the infrastructure or the real sectors may take the nominal level of the index somewhere closer to its previous high.

Q: What happens if there is some global problem now because of which some money goes out from the equity market in India like last month? Could that put pressure on some of the highly owned names? Do you think these names are still immune from those kind of pressures?

A: There will be some impact, but not to the extent that will cause a crack the way we would expect. In the last two months, they have not been very kind to the Indian markets. We have seen the rupee depreciate sharply.

We have seen money go out from the Indian markets, but has gone out more from the debt market than from the equity. So, I am not so worried that money flying out from the equity markets would be a reason for the correction in these stocks. You will see some amount of expectations beginning to build up in the equity markets and this may come for various reasons. Maybe the announcement of elections could get pre-poned.

As of now, there seems to be a given situation that elections will happen only in May 2014. If that gets pre-poned, the results are something that surprises the market and you may see some of this shift then happening from the more expensive sectors to the more under-owned, cheaper and more attractive sectors, because they will be a play on a more optimistic outlook on the economy.

As of now, if you are going to be in equity, look for shelter in the defensives. There is no optimism that you will have on the economic front and that is why you have a big sell-off on these infrastructure and the interest rate sensitives.

Q: What about frontline IT that you alluded to? Do you see the possibility of more expansion in valuations there before it tires out?

A: Yes, I think that is a possibility. There could be a replay of whatever happened to FMCG and pharma in the case of IT. It was a darling of the market for quite a few years before it lost its charm, thanks to lacklustre performance from Infosys Technologies .

People have now begun to warm up to the stocks in the sector. Markets are not very rational in terms of price discovery. You will first see the valuations go to the other extreme where they will be irrational before they correct. We have just about seen the beginning of valuations getting built up in the sector. So, there is some more steam left here.

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