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BJP Loss In UP Could Set The Cat Amongst The Pigeons: Ajay Srivastava

A BJP loss in the UP elections can be disastrous, says Ajay Srivastava of Dimensions Consulting.



Bharatiya Janata Party (BJP) members and supporters carry India national flags during a BJP motorcycle rally near Aligarh, Uttar Pradesh. (Photographer: Prashanth Vishwanathan/Bloomberg)
Bharatiya Janata Party (BJP) members and supporters carry India national flags during a BJP motorcycle rally near Aligarh, Uttar Pradesh. (Photographer: Prashanth Vishwanathan/Bloomberg)

A defeat for the Bharatiya Janata Party (BJP) in the Uttar Pradesh elections would be disastrous for Indian equities. That’s the word from Ajay Srivastava, chief executive officer of Dimensions Consulting.

He said the market is expecting the BJP to get the requisite numbers in UP, with the support of the Mayawati-led Bahujan Samaj Party. “If that doesn’t happen then there will be — let’s put this way: the cat will be [set] among the pigeons,” he told BloombergQuint in an interview.

Here are edited excerpts from that conversation.

Relief Rally?

The Nifty is holding the upper end of the range it has found itself in for the last couple of weeks. There is a sense that the worst of the demonetisation impact hasn’t really come about. Do you think we are currently seeing some sort of relief rally?

There is no worst case scenario; it is very simple. In this country, people have no other ways to make money. Even businessmen have decided to put money in the stock market and not in businesses. So when you say results… sales turnover by and large has been flat for everybody. The profit is up because corporates have cut costs. If you look at Dabur or HUL, I think they have cut their advertising expenses. If you look at Siemens, sales are flat but the profit is up 40 percent.

By and large there is nothing to be done – it is just liquidity flows which are hitting the market day in and day out. People are getting more and more desperate in terms of how do you make money in a country like India when real estate is not giving you returns. There used to be this huge inter-corporate deposit (ICD) market. It is dead because nobody is borrowing money. A big part of the high networth individual (HNI) money used to be in ICD market, which is no more there at the moment. It has been pumped into the equity market – portfolio management services, mutual funds or direct equity etc.

When you have such buoyant liquidity flows, it is quite natural that people are going to buy the same companies. The number of companies are limited. More importantly, if you look at the shareholding patterns, individual ownership is dropping every quarter. MFs are sitting with shares and not selling because they are getting more liquidity. So if you look at liquid shares in the market, those are actually compressing day after day. This is why small buying comes in, the share price gyrates quite substantially. That is one side of the story.

There are few cases however, where we are seeing a turnaround. So you the recent result of Café Coffee Day, for instance. After 10 years, they have finally turned their results around. So there was some buying there. There was some opportunity buying happening in some industrial stocks hoping interest rate reduction will come through and give them some benefit.

I think by and large it is only liquidity, liquidity and more liquidity. The flipside of that is nobody wants to put money in the real business. Now, when will that take a toll? We will have to wait and watch.

Market Overvalued?

So you think the market is inflated at current levels?

I don’t think anybody in the market can argue that the valuations have run ahead of fundamentals. We as market men always construct an argument to explain a situation. The new construction of argument is that the opportunity rate of return on capital which used to be 18-20 percent minimum in the equity market may be until two years’ back, people are now happy to make 12-14 percent gains.

‘Rupee May Depreciate’

What is your call on the rupee right now?

We believe the rupee will depreciate. Any economic recovery has two consequences. First, our imports will shoot up dramatically. We buy technology, machinery and we import oil. All three will happen at the same time and since the three income pillars –NRI remittances, pharma and IT – are struggling, whenever the equilibrium shifts, you will see the rupee going down.

Today there are no imports. Oil is also steady; if you look at Indian Oil results, the volumes are flat and nobody is importing machinery by and large.

RBI’s Status Quo Policy ‘Sensible’

What did you make of the RBI’s status quo policy?

We had called a status quo policy in our morning notes to clients. I think that is sensible because one doesn’t know what happens to this whole demonetisation exercise once it is over and the economy gets remonetised. Will people revert back to hording cash and avoiding paying taxes? It is not very clear. Therefore the banks also don’t know how much money will be left with them.

Secondly, the thing that shocked all of us was core inflation, excluding the rise in vegetable prices. I think the RBI is worried that should the economy turnaround, inflation, led by wages, is going to move very drastically.

Look what’s happened to the minimum wage inflation in this country. The minimum wage has gone up by 30 percent in the last 12 months. So when the minimum wage goes up by 30 percent, everybody else’s wages also go up – may be not at the same level but in some order, at least till the top level. We are a unique country where inflation is trending lower despite so much unemployment by government dictat of a higher wage rate. That is what spooking the RBI.

Room To Cut Rates?

So, do you expect the RBI to maintain its status quo or there could be a rate cut in the next policy?

I think a rate cut is out of the picture for the next six months. When RBI changes its commentary it lasts at least for a period of 12-18 months. My guess is that they are seeing signs in the banking system that we are not able to see. One of the signs is that the banks need more and more interest income to keep the balance sheet afloat. That means the central bank is seeing more stress in the system as time goes by and it is saying: if you cut the rate so dramatically, what will be left for margins and earnings to sustain the NPA in the portfolio?

Downside For Equities?

It seems rather gloomy when you put it that way.

It is not gloomy. Please understand nobody is “gloomy” because the stock market is doing well. People in the money business are doing well since money is moving to the equity market. So there is a segment of the market, which has not been affected badly with whatever has been going on.

But there are a few worry points for me. First, how long can this government continue in this manner with unemployment zooming. Nobody believes in the 5 percent rate. 5 percent is America today after so many billions and trillions of dollars, so nobody believes that government’s claim. Second, what will happen to the political dynamics if the government loses the Uttar Pradesh elections.

UP Elections: A Key Trigger?

How big a trigger do you expects the UP elections to be for the market? What would a BJP win or a defeat mean for equities at this stage?

If BJP does not win by a good majority, that will be a problem. A BJP loss in UP is going to be disastrous. The market is anticipating a BJP government in UP to squeeze through not because of brute majority but by some support from BSP. If that doesn’t happen then there will be — let’s put this way: the cat will be among the pigeons.

So it is not gloomy. I think they (NDA government) need to get their act together. What needs to happen is that people need to find ways to make money by investing into businesses and not just by investing in stock markets; that’s the bottomline.

Investment Strategy

So what would you advise to investors be given all that we discussed?

First, please book profits and churn your portfolio because for every stock – except a few like Maruti etc – there is a selloff date. Book your profits and if somebody else makes money in that stock after that then good luck to that person. You should move on to something else, some other story. There is no dearth of good stories coming up every day.

Of course, PSU band of stocks is a great new theory in the market. They should do reasonably well in the next 2-3 years till this government is in power. We believe this government is going to sell a lot of PSUs in the last 12 months of their existence. You saw what happened to BEML, it is already up 40 percent post the announcement. Lot of these PSUs, including BHEL, Engineers India Ltd., may come up for grabs over time. So build a portfolio and keep it because it will happen.

Same for oil companies’ integration. Our view is that they are going to sell a sizable chunk of equity in oil companies. The purpose of it is not just business integration but also to get investors in. The reason big funds don’t come into companies is because liquidity is not so good and then the government might prefer one company to the other if you are equity holding. So you put them in one pot together, then all government polices become uniform for the oil sector.