'Bottom not formed yet, accumulate quality names in FMCG, consumer goods, cement'

We would avoid lapping up stocks of companies with a turnover of less than Rs 4,000 crore and those of highly leveraged firms, Kishan Gupta, Head of Research at CD Equisearch has said in an interview to Moneycontrol's Sunil Shankar Matkar.

At this juncture, Indian investors would be far better off investing in companies with established track record in FMCG, consumer goods and cement, Gupta added.

Edited excerpts from the interview:

Q. Global experts feel that the valuations have supressed after COVID-19-led steep correction. Does this indicate the intense selling pressure is over and the market has bottomed out? No one can predict the bottom or top, but what could be those indicators that can suggest the market is near bottom?

Kishan Gupta

Head of Research|CD Equisearch Pvt Ltd

A. It does not seem likely that the market has bottomed out. Although the benchmark indices have recuperated in last few days, it is too soon to pronounce that market has abandoned its glide path. Gauging the pernicious impact of COVID-19 on economic activities, consumer spending, and joblessness et al is well-nigh impossible at this stage, not least due to fast proliferation of the disease in most Western nations, particularly the US. Rising fatalities in US and some large European nations in last few weeks have alarmed policy makers.

Q. Pharma, the defensive sector, has been seeing lot of buying interest in last few sessions. Have you also started buying the sector or preferred staying away?

A. We would prefer selective buying of pharma stocks at this stage.

Q. Everyone suggests accumulating stocks which should have quality with respect to their fundamentals, etc. What is your advise to your clients at current levels? Also, what are those three key factors one should avoid now and steps one should follow in such times of volatility?

A. We would avoid lapping up stocks of companies with turnover less than Rs 4,000 crore and those of highly leveraged companies. Abandoning a couple of such metrics and merely relying on oft-promulgated cheap stock valuation — based on price earnings or price to book value — could prove faulty in the current situation when weaker companies would take much longer to revive if contagion spreads. At this juncture, Indian investors would be far better off investing in companies with established track record in FMCG, consumer goods and cement.

Q. As every stock looks attractive for buying, where do you see the maximum multibaggers among sectors and what is your pecking order in terms of sectors once the actual recovery starts?

A. Pharma, metals, cement and automobile.

Q. Do you feel the worst for the auto sector will end by 2020, given the measures taken and expected from the government for industries and corporates?

A. Yes, we reckon the worst would be behind the auto sector by then.

Q. Generally, when the valuations are suppressed, companies also come forward with share buyback offers. Already more than 10 companies announced buyback offers. Do you expect more companies to launch buyback offers now and what could be those companies? What are criteria’s to decide buybacks?

A. We do not expect buyback activity to intensify too much largely due to adverse tax treatment on buybacks. Some IT companies may announce buybacks. Often times the buyback amounts announced by most of these Indian companies are too small (relative to their market capitalizations) to make any sustainable dent on their stock prices.