Underweight on BFSI, overweight on IT, pharma: Manish Sonthalia

What is your sense? Is the worst behind us? Is it time to accumulate or we are nowhere close to bottom? We are clearly nowhere near the peaking out of corona in the US and if the US does not peak out in terms of the disease, it is going to keep global financial markets very nervous?
I think 7,683 on Nifty that we saw the other day, we have seen the bottom. Of course, in the US, the number of cases is still increasing. I think it is not going to be a V-shaped recovery; it is now going to be a U-shaped recovery and broadly, by December this sort of a time frame will lapse. Between now and let us say December, we should be north of 10,000 on the Nifty. That is what I think. Yes, the US cases are increasing and we will not see a V-shaped recovery but definitely we are in for a U-shaped recovery going forward.

I would like to draw your attention to something which a lot of fund managers have really taken a lot of pride in. They bought Bajaj Finance and some of these A-quality stocks are also down 50%, especially good NBFC franchises. Do you think this is the selling which is bringing some of the stocks down or there is now a serious fear of retail delinquency which could kick in?
There is a risk of retail delinquencies kicking in and more so if there are job losses. If this whole thing gets extended beyond 21 days to two to three months, then obviously we will have the retail non-performing loans (NPL) cycle kick in.

What we are hearing is that delinquencies on consumer loans coming out of China is hitting a rate of 20%. That is a serious number. It is not the 5% which are not in a position to pay in whatever situation; it is not the 80% which are in a situation to always pay. It is the 15% which are the fence sitters which will create the problem. Plus you know you do not have RBI forbearance on NBFCs. That is an issue that needs to be resolved on an urgent basis because the forbearance has only come for banks and NBFCs really do not have the forbearance as of now.

Securitisation issues are yet to be sorted out and the liability franchise for Bajaj Finance is more or less like 15-17% public deposits; the rest is all wholesale funded. So from that point of view, we have a problem with this name and when you have the likes of let us say an HDFC Bank in the banking sector available at very reasonable valuations, you will have a valuation correction in the case of Bajaj Finance. The growth for FY21 is also going to come off significantly. If we see something like a 5% to 10% growth, we should be good. I think these valuations cannot be supportive for a 5% to 10% sort of a growth.

How have you changed your portfolio composition because the portfolio which you run is pretty much tilted to consumer names and retail-dominated franchises. Have you made some big alterations in your portfolios?
For some time, we have a trimming position in Bajaj Finance and we have been adding ICICI Bank to our portfolio. That is the only major change that I have done. Going forward, there is a case of either equal weighting or underweighting the BFSI sector as a whole and overweighting the consumer staples IT and pharma. So this is one of the monitorables going forward. As and when this whole lockdown gets lifted up, at that point in time there is a case that we will make some changes moving the portfolio towards more IT, pharma and consumer staples and lessening weight on the BFSI space as a whole. Within the consumer, I would also include auto because on the valuations front, we are pricing most of the negatives.

Just looking at what the market is up to right now. We are back at 8,477. The breadth has turned negative. Do you believe that whenever the market does recover, it will be the essentials which would take lead or do you think because of the supply chain disarray that we are in, it will be a long time that even essentials make a comeback because their profitability is going to get massively dented at this time?
Let us come to reality. Today’s situation is better than yesterday’s and yesterday’s situation was better than the day before yesterday’s situation. The first two days of the lockdown was a complete shut off and that impacted the logistic transport of goods from one place to the other. Over these seven-eight days of lockdown that we have seen, what has happened is that non-essential goods are also allowed to be moved from one place to the other and inherently within the supply chain, you have a stock of two and a half to three months; so those are getting replenished.

In the interim, slowly and steadily we are seeing certain embargos which were there outright when the lockdown started and that situation will only get back to normal.

I am also given to believe that travel portals are starting to accept booking reservations on railways and airlines post 14 April; so again, the indications on this front is that in all probability we are going to see a lift up of the curfew and that would help alleviate matters. Idea is to remain in sectors where the demand is relatively inelastic and there is some degree of profit visibility going into FY21 because in most of the sectors, you are going to see a degrowth in profits. So wherever there is some sort of visibility in profits, those sectors would tend to do slightly better in spite of the fact that they are at rich valuations; I think the valuations will only get richer from there.

Is it a given that when the market does see a recovery, it will be the largecaps leading it or do you think it is going to be more broad-based?
I do not think there is anything to choose between largecaps and midcaps and at this given point in time, investors would do well if they just stick to the space where they have been. In fact, if they have to top up, they should include in that space only because the valuations are more conducive in the case of microcaps, smallcaps, midcaps and largecaps, in that order.

So obviously the mind tells you that there is more comfort when you move to the largecap space from the midcap and the small cap space but the carnage has made opportunity available to all the sectors and one would be doing fine if they just stick to the space where they have been or move one level down from those levels because there the valuations are even more conducive.

What is your take on auto stocks? We have already seen the sector be beleaguered by a lot of other issues.Are you completely writing off autos? What is the sense that you are getting?
These are very good times to buy into autos. Of course, most of the negatives are there in the price. You have not seen these valuations come through for a very long period and from that point of view, if you were to take a slightly longer term horizon, then these valuations are very good and they should be included as a part of your buying list.

What exactly is your outlook on some of the oil marketing companies? We did see value buying emerge within the likes of HPCL, BPCL; but the energy space as a whole, how are you playing this sector?
Obviously marketing margins are still holding good but you have actually seen a demand destruction to the extent of 30-40-50% because of this lockdown. Now the moot point out here is to understand how long this lockdown is going to stay because it is going to be volumes into the profit and there is a substantial discount on the purchase of crude oil in the overseas market.

So from that point of view, you will have some protection on the gross refining margins. But of course, the correction has happened and on the valuations front, everything is fine. So on a pure dividend play as well as the valuations front, we continue to like the oil marketing companies and those who have more of a marketing mix in favour rather than the refining margins in favour would stand to benefit more.

Life has not changed for consumer companies like Dabur, Godrej, Britannia, HUL. Life has changed a lot for other sectors like aviation, travel and tourism. Should one stick to these basic things when you see around? Like consumption patterns have not changed; ao buy good old consumer staples and a little bit of discretionary stocks? Or should one hunt for deep value because a stock like HPCL, BPCL, Coal India, the ugly ducklings of the market, have been underperformers but they give you such an amazing dividend yield now that the margin of safety is suddenly very high?
The idea is to follow a barbell strategy. You will have the quality names come off and be available at a significant discount to what their intrinsic value is; that is maybe 65% of your portfolio and the rest 35% of the portfolio should be basically including the deep value names. And these would be including the likes of your oil marketing companies or some of the extremely beaten down PSU names where the long term story is quite good.

So I would like to believe, this sort of a strategy would be best suited in this sort of environment. You have some deep value plays and you also have some quality growth play available at a significant discount to what their intrinsic value is. Travel embargoes are going to stay for the next one year at least; so even if you have a lift off in the long term, you will continue to see people using masks and sanitizers and there will be restrictions on movement. So sectors like malls, restaurants, tourism will be very significantly impacted and the profit impact is going to last for a very long period, at least a year or so before things get normalised. So these sectors would be a complete avoid. But within the deep value availability that you have in the marketplace, PSUs as a whole would suit the best in terms of what the dividend yields as well as the quality and monopolistic situation in which many of these companies are. So a portion of the allocation of the portfolio can go into these segments.

Can you give me an example of what you define as quality and what has become cheap because of the market sentiment or the earnings disruption?
If you look at some of the financial names, intrinsic value is there. In fact, the biggest carnage has happened in the BFSI space. These are some of the names where allocations can increase; likes of let us say an ITC where you have 7-8% dividend yield and you have valuations now come down to maybe 13 times numbers where they have an FMCG play as well; so these would be some of the names. Or let us say an HPCL where you have three-four prices to earnings and maybe more than 10% dividend yield. These are some of the names that one cannot simply ignore at these prices.

Would you buy pure play insurance because the need for life insurance, health insurance and general insurance will only increase?
We are comfortable in the life insurance play per se because health insurance would have a component of increased premiums, which the government may or may not allow. Auto insurance, of course, is not going to live up to the mark because of the new vehicle registrations having come off a cliff and valuations not being there.

You have a direct play in the form of either a Bajaj Finserv or ICICI Lombard. ICICI Lombard at Rs 1,100 has come off but it is not there in terms of valuations. But the likes of Max Life or an HDFC Life, which are pure long-term life insurance play, are available at very reasonable valuation. So if you were to ignore FY21 and move to FY22 numbers, these are available at ridiculous valuation. I would look to include some of these names in my portfolio.

What is the sense that you are getting when it comes to the overall flows because March has borne the brunt of FIIs hitting the sell button. Do you reckon that it is still some more time before we actually see the overall flow stabilizing?
It all depends on how the domestic flows shape up and in that the SIP component is going to play a bigger part. Till the end of March, we have actually not seen too much of panic come on account of retail outflows per se but that might just change going into April. If we are in a prolonged slowdown mode, the retail may just pull the plug and offload into the markets. And of course, FII selling is not going to end in a hurry. So it all depends on how the flows are going to shape up and that is basically going to see whether the retail HNI population actually starts to panic and offload.

How are you looking at placing your bets within some of the metals counters because that too as a sector continues to remain utterly volatile and hit quite badly. Do you believe that there would continue to be a sense of caution when it comes to approaching metals?
I would want to avoid the cyclicals at all cost; the likes of the construction names or these commodities which are a lot dependent on how the global economy shapes up and how China shapes up. Of course, we are hearing that production has resumed in China and there is demand for the commodities which have come off a cliff but it is quite unpredictable. I would want to just keep out of this sector on account of indecisiveness and the uncertainty surrounding it.