Though midcap and smallcap stocks are being brutally beaten up on the bourses, Deven Choksey of KR Choksey Securities still feels that there is steam left.
In an interview to CNBC-TV18, Choksey said, "Some of these companies are genuine and I would rather go out and select some of the companies on merit basis."
He suggests buying stocks like IDBI Bank,ICICI Bank and IRB Infra .
"We believe that most of these banks have also got their advance financial solutions (AFS) portfolio mark at 8% so mark to market also is not going to affect them beyond a point. From all this point of view and valuations along with we believe that some of these banks would be definitely good choice though we don't have many selections among the smaller size PSU banks.," he explained.
Here is the verbatim transcript of his comments on CNBC-TV18.
Q: What have you made of the fairly significant falls that we have seen in midcaps and smallcaps this week? Are you tempted to buy or do you think there could be more purging in that space?
A: I think midcaps and smallcaps certainly selectively demands some amount of buying for sure. The issue which has happened is slightly a structural in my viewpoint. What we are seeing is this kind of carnage happening in midcap, smallcaps is largely the fallout of the kind of offloading of stocks by some of the lenders of the promoters who had borrowed this money from them for their use in company or otherwise and that is where the larger amount of fallout is taking place. Why this fallout took place? I think one needs to understand that aspect of it.
The point is that midcaps and smallcaps have never been attracting higher amount of liquidity so the lender would always remain uncomfortable and in a market like this where the enquiries and enquiries would start one after another probably they would not feel comfortable, they would dump the stock so ultimately it triggers higher amount of sale.
What is essentially required at the regulatory level probably is that create a separate exchange for midcap and smallcaps, allow market making within that and probably these issues can get settled but that's a broader issue. In my view some of the names which are getting involved at this point – its not very easy to quantify them saying that they all have been involved in doing some malpractices.
In my view some of these companies are genuine and I would rather go out and select some of the companies on merit basis and buy them of course from the list within I don't have many to talk on anyway but some of the midcap companies because of this particular reason which have come down, they does demand the kind of buying opportunity at current levels.
Q: There has been a correction in the overall market and PSU banks have corrected quite a bit. That's a space that you have liked for a while. What stocks would you be comfortable with at these levels?
A: I think some of the PSU banks are definitely doing well and are likely to do well in current scenario. Fortunately they are not as expensive as State Bank of India kind of bank is trading at 2-2.2 times forward price to book value basis and some of the other banks like IDBI Bank which is trading at less than 1.5 times price to book value basis even if you factor into account the kind of possibility of rise in the interest rate, possibility of some amount of shrinkage into the NIMs of the banks going forward.
But let us also understand that with the higher amount of infrastructure activity continuing and some of these banks participating into it they do get higher amount of fee based income as well in this particular space and that is where we feel more comfortable about likes of IDBI Bank and for that matter even ICICI within the private sector for investment in our portfolio. We believe that most of these banks have also got their advance financial solutions (AFS) portfolio mark at 8% so mark to market also is not going to affect them beyond a point.
From all this point of view and valuations along with we believe that some of these banks would be definitely good choice though we don't have many selections among the smaller size PSU banks.
Q: What about the overall texture of the market, how much more do you think we could correct? Do you think the levels of 5,300-5,400 could be tested as soon as December?
A: I don't know. I think index levels probably expecting, that kind of a sharp correction, may not materialise because if you look at the fabric of the market the likes of ONGC which is coming out with the FPO probably with those kind of tricks that they want to play along with the FPO, likes of for that matter Reliance which is unlikely to fall given the kind of USD 90 per bbl crude oil prices and likes of Infosys which would remain in safe haven for most of the people to park their funds.
So if they end up supporting the market then possibly you may not see a large cut into the indices. What is more worrisome is the large cut happening in some of these stocks which are going down very significantly and that includes some of the banking names also, that is little bit more worrisome. I do not see market falling that sharply and probably I would believe that 5,750-5,800 kind of levels definitely support the market.
Today at least I believe that the market should have some amount of bounce back effect from yesterday and day before yesterday's fall. I don't think there is too much of a fall. I think one can expect on the situation.
Q: Many of the stocks from the infrastructure basket saw a significant amount of correction; the likes of HCC, GMR Infra even IRB Infra that's been tainted to some extent. Is there anything from that space that looks attractive from a medium-term perspective?
A: Yes, to be counting on safer side we like companies like IRB, ITNL which is IL&FS Infrastructure who are basically engaged into road model and the collection of toll as well as BoT projects.
I think both these companies are very well set as far as their execution spree is concerned probably they are also not as much troubled by many of other infrastructure companies like HCC are concerned on the environmental clearance etc though they may have the tendency of delaying the projects because of non-clearance come in but road sector is not finding as much kind of a resistance coming from any corner.
So from that point of view IRB and ITNL kind of a company could be a better choice to have in the portfolio and would these companies are available too at reasonably attractive valuations so from that point of view one can certainly look at both of them adding into the portfolio.
Q: How do you see the rest of the December series panning out? Do you think we will still hold a tight range of 5,800 to 6,100 and not see a big December in that sense?
A: Most likely. It's going to be around this week maybe 5,800-6,100 or 5,900-6,200. It's a subject, which we cannot predict, but more importantly what was expected out of this particular months and that's what something which one would look forward to is that the inflow starts coming back into the market. Now when you look at the broader perspective the inflows are unlikely to come back in hurry, more because the structural issue that the European levels are still not settled and as a result of this people are not predicting or not confident about dollar movement either and that is the reason for which that keeping tight on bringing that kind of a money to the market.
Of course the domestic sentiments got affected because of the recent past history but the fact is that people are still clear about it that India story continue and these are some of hurdles which one will have to face when the growth happens in this country. So the money is expected to come which is not yet seen coming in and that is where one is not feeling comfortable predicting the Nifty at this point of time.
Yes, I would bet on it that it would remain range bound between 5,900-6,200 levels. I think with the improvement in the liquidity certainly one can look forward to the higher levels.
Q: What about ONGC? It's been a one way upmove for ONGC since Rs 1,220 levels that it had touched and all the positive news leading to the FPO. You expect to see it surge the more from here?
A: Not having that much of confidence from this particular subject because the FPO is coming. So one is expecting the price to remain to supportive and at the same time whatever the tricks that they play around which is higher dividend etc which if at all it comes that could bring the sentiment up again for this kind of a stock but larger point of view if you look at it you still don't get the clarity on the subsidy front. You would increase the prices of petroleum products particularly petrol, diesel I am not too sure again.
If they do increase at current USD 90 to crude probably you may see some amount of subsidy reduction of around 3-4% for ONGC but that's about it, I think that is where one will have to play around. So I am not too sure whether the upstream companies or the downstream companies demand a clear cut buy in the portfolio.
I would think that one can trade on an opportunity like this and probably get out. I am not sure whether it can even cross Rs 1,400 levels also probably it will hover around such prices.
Q: You were talking about the largecaps which might support the market now. You think Reliance and Infosys might be relative defensives even if the Nifty corrects from here?
A: Precisely, Reliance participated as much as we can think about has not participated in this particular market in the last almost one year plus period now. I think to a greater extent this stock is fully discounted whatever the negatives that one want to call it at this price. From that point of view it should be supporting the market. Infosys of course is supporting the market for sure and people are looking at it Infosys as a defensive play and a at the same time in some corner the calculations are also going on it at some point of time you would be seeing some amount of announcement coming in on the acquisition front.
Now that could possibly indeed trigger the stock price. So people are accumulating this stock and I have been seeing this particular portfolio action happening with some of the local funds as well.
Q: If its time to accumulate now in the midcap index, from these two spaces sugar and fertilisers, any stocks that you are eyeing?
A: I am not too comfortable with fertiliser but sugar do tend to agree that there would be some amount of positives going forward not that India is suggesting that particular growth momentum but global economies of the world—Brazil and Pakistan related issues is supporting the export for the sugar and that is where you should be seeing higher amount of yield coming.
If I have to put it this way for most of the sugar companies as far the realisation and the profits are concerned, but if one wants to take a larger call on the sugar maybe slightly in the next quarter one may start accumulating some part of sugar stock because you could probably time the market a bit more better than buying it now but not very sure that I would accumulate big time into the sugar even at current levels.
Q: From the auto space do you think the run is done on many of the stocks like Tata Motors and Maruti?
A: I would believe that Tata Motors kind of a company would attract buying at lower levels simply because the stock is available at a valuation for Rs 130-135 earnings per share that one is expecting for this year. It is available at a valuation which is quite attractively currently so from that point of view any fall warrant a buy into this particular counter and larger consumption theme continues in this country.
So maybe for some time you may have some amount of correction taking place, I would call it adjustment taking place into this place also because the there is possibility that some amount of price increase that these companies will have to take into account in this particular quarter and next quarter as well.
That is probably raising some concern but beyond a point I don't think that the bank rate would be much to this particular space even if it is increased by 25 bps. I think it is a selective buy which one will have to employ and place like Tata Motors would definitely give that kind of an opportunity in a falling market.
Q: Disappointed with the market opening, after three bad days at least a bit of a morning pullback was expected even that has not materialised. Has sentiment turned or is it just that the market does not have adequate flows to support it?
A: I think the latter is true, of course sentiment is affected for the reasons that we all know but it is more of a flow which is not coming into the market as we discussed earlier and some of the names like SBI are basically dragging the market down and to an extent it is disappointing more because there is a speculation that the SBI may come out with an offer at about Rs 2,000 and that is where most of the players are saying that if they are coming out with an offer at Rs 2,000 then probably this stock cannot enjoy this price which is at around Rs 2,750 as well.
That is the reason for which the market is giving a negative downside to SBI and SBI along with it saw other banks are also coming down for reasons best known to the market on that front at least but in my view because of this kind of issues probably the market is seeing this fall maybe we will have to pass through this phase, maybe we will have to have this kind of a correction getting completed and some of the stock would give that opportunity at lower levels.
One need to have conviction on the fundamentals then one can buy some of these stocks and as you rightly said that it is not the time to go out and buy everything that on go probably accumulate at regular level and enjoy portfolio building in such space because subsequent quarters could give that kind of an opportunity on a bounce back as well where you can enjoy lower purchase and more profits thereafter.
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