SBI and Nippon pharma funds a better bet for playing pharma basket: Sanjiv Bhasin

A large part of the steel rally has played out on the back of weak dollar and growing consumption from India on the export side, says the Director, IIFL Securities.

It is a policy day and markets have otherwise been on an even keel. What are you watching out for today?
Markets are climbing the walls of worry and euphoria has set in after two-three days of decline but this is a time for caution because globally you cannot have all asset classes hitting new highs. Bond yields are at lows and there’s euphoria in the metals and stock market. One of them will give in August, we will see what.

I would expect RBI to maintain status quo today with more relaxation on the reverse repo but the major point will be what will be the impact on that one-time restructuring or the moratorium extension. It will be a glass half full half empty situation. Markets are building in some sort of a relief package. Bank Nifty, which has underperformed, is expected to maintain status quo and till we get more clarity on credit expansion, bank stocks are going to slightly underperform the relative index.

Would you still take a chance and get into a steel pocket of the market which otherwise is fairly volatile?
Let me take you two months back. We stuck our neck out and we said metals will be the best proxy to a weak dollar. So Rs 165 on Hindustan Zinc, Rs 295 on Tata Steel and Rs 100 on Jindal Steel and our clients have been laughing their way to the bank. This is not the time for aggression. We think the dollar is extremely oversold and can rally another 5-7%, but I would be booking profit. A large part of the steel rally has played out on the back of weak dollar and growing consumption from India on the export side. If I could stick my neck out, I would still say SAIL can be a bit of an outperformer, but they are pricing in all the good news.

Why are banks raising so much of capital if the moratorium picture is getting better? If banks are ready to dilute their return ratios in the medium and short term, that means they know something about the credit book which we do not know?
It could be a glass half full or half empty. We know there will be mark to market losses for sometime because of the moratorium and weak credit growth and rising NPAs, but on the other hand, a world of liquidity is flowing. The people who want to commit capital are forcing good banks to raise capital. Bond yields are hitting 0.5 in the US, the lowest ever and secondly they are looking for three months and beyond. The next two months can be tight but in October, there will be the festival season, we have seen robust auto sales and pockets of industrial activity are doing well.

The retail focus is starting to shift back and that is why this flow of money is layering most of the banks to raise capital at a time when yields are at the lowest. They are buffering their stocks in case of the need for some provisioning. But if growth starts to pick up, then the cost of money can rise. So, it is the global liquidity which is forcing banks to raise capital and they are doing it on a happy note.

On the flip side, if you are raising capital when you are not lending it will also have an impact on your spreads and return ratios.The long-term investors would be bothered.
Like I said it is not in the near term. The rear view mirror will always show us the next three months, but look at three months and beyond. Most people are talking of capacity utilisation, the steel sector is a mirror of that. In three months and beyond, there will be a proverbial rise in rates. This easy rate cutting will start to see expansion on the upside and that is the time you will start to see credit expanding.

You know it is a glass half full half empty. You will look at the negative side of the return of equity contracting because of the rise in capital but I would take that as a positive. The banks are buffering up their liquidity when they foresee that the next 6, 9, 12 months can see a lot of surge in credit expansion both on the industrial side where some pockets are doing very well and on the retail side, there is a lot of pent up demand.

Should one try and take advantage of the movement in gold and buy into gold financiers on dips ?
Muthoot has been one of the darlings of the market, it has shone like gold and there will be profit booking every time it tries to hit that Rs 1,300 plus level. But Federal Bank is my dark horse. It is the best play on gold, it is the best play on CASA deposits and it is the best way on Mr Shyam Srinivasan continuing.

This midcap bank is going to double in the next one year. I have got a target of Rs 100 by next Diwali and unquestionably any decline closer to Rs 50, even now, is a buying opportunity. By the way, they are the largest gold lenders in the banking circle. It is telling you that business is only going to see upside and they came out with record NPA lows. This bank is poised to stretch itself on all counts, on the verticals in the businesses and on the growth in CASA ratio which it has been a strong proponent of.

They have indicated that they are in no mood to raise capital as their tier-2, tier-3 requirements are full. This is going to be a standout stock for next Diwali by doubling from here.

If we look at the track record of how the Federal Bank has delivered and use it for benchmarking purposes as the industry average, they have disappointed.
Correct. So there is always going to be pessimism on the track records but look at the future; this pessimism is overdone. There will be a proverbial pain in whatever you pick. You cannot go by past data on performance of the future. Who thought that Muthoot will go to Rs 1,300 and who thought that metals will shine? From an abysmal low of Rs 200m Tata Steel is close to Rs 400. So keep the market going, the market is telling you it is not in that old school thought of valuing a business on the basis of the past, it is the present and the future which we are looking at.

There are a whole host of changes prevalent in the management of Federal Bank over their style of functioning. In the last one year, their gold traction business has been a star outperformer and I see no letting up on that.

Federal Bank gets a lot of money from NRIs from Dubai and that channel which used to shore up their CASA, is going to start drying up, given the way job losses are happening.
That is what has been happening from the last four months. All the economists have been predicting doomsday and it is the Robin Hood traders and the smart money which has bought this every dip. You could not go above 10,500 and now you refuse to fall below 10,900. You have to digest the news, all the news flow or the grapevine on Dubai, No money is misplaced. They have a very strong franchise on the other businesses and their imprint on the MSME/retail lending is only getting stronger.

So take it with a pinch of salt but at Rs 50, you are getting it at a steal value and we will be proven correct, maybe at the end of the year and maybe by next Diwali when you make a lot of money in this.

We are continuing to see a move across several of the pharma names, but which ones do you prefer?
Pharma has been a breathtaking sector. After two, two and a half years of underperformance, the last four months have seen it as the best performing sector. I continue to think Cipla, Dr Lal Path Lab, Ipca Laboratories and Dr Reddy’s -- these four stocks can be outperformers. Sun on declines again can be added or a Lupin.

For two years I have been recommending to clients SBI Healthcare Opportunities or the Nippon Pharma Fund. Having a mixed bag of 8-10 stocks makes more sense rather than trying to time individual names which could be a proxy to profit booking.

I would strongly advise to go for a pharma fund; SBI and Nippon have very good pedigrees and very good track records. They can continue to outperform the pharma stocks as a basket.