We are in a classic ‘no direction’ market; can’t go fully bullish or bearish: Amit Khurana

“Our base case for CY23 is a scenario where there will be concerns about recession and the markets will keep reacting to those concerns and we will also have inflation which should be probably far more supportive and as the narrative builds up, one will look out for bottoms up stories, hopefully to start generating some alpha in the second half of CY23,” says Amit Khurana, Head of Equities, Dolat Capital

Participants are clearly buying fear from Covid resurgence once again. The dip today got immediately bought into?
Yes, that has been the case with the market for the last so many days. There are those bouts of selling which immediately get absorbed but there are concerns which keep on emanating and preventing the market from going fully bullish. We are in a classic no direction market. It does not let you go fully bullish, it does not let you go fully bearish and I guess we may have to spend a few more weeks in that zone before we get some clarity on which way we will take a more directional and decisive view.

It is like one of those old time Ajit jokes right you cannot be bullish, you cannot be bearish at the same time. So what does one do?
Bottoms up for the first half of CY23 is what we have called in our latest strategy note. We have built three likely scenarios as we see them evolving. The first scenario which we have likely gone through was a recession with rising inflation which was the narrative for the second and third quarters. The good part is we seem to have got out of it and constructively so.

The second scenario is right now the market narrative. The highest probability being attached is a recession with inflation much under control and the rate hike cycle more or less at the last leg.

The third scenario which is probably the most bullish and that is not our base case. The case is that we have a very shallow recession or a muted growth and inflation continues to be under control and earnings get a leg up, which is a classic goldilocks scenario.

Our base case for CY23 is calling for the second scenario which is where you will have concerns about recession and the markets will keep reacting to those concerns and we will also have inflation which should be probably far more supportive and as the narrative builds up one will look out for bottoms up stories, hopefully to start generating some alpha in the second half of CY23.

Let us look at some of those bottoms up strategies because recently you came out with a note on the pharma sector talking about how cherry picking is something that will generate alpha. Your top picks include names like Cipla, JB Chemicals, Ajanta Pharma etc. What makes you bullish on Cipla?
There are specific factors working in favour of the sector at large and also specific companies. Since you mentioned Cipla, obviously it has a very well balanced portfolio which is generating reasonable levels of margins. The headwinds on the margins have dissipated quite a bit and the pipeline seems pretty strong.

In fact, it probably was the strongest amongst all the domestic companies. Then, the US piece which we believe will have a very strong growth FY24 and FY25 onwards based on product launches. A very good execution team is in place and we believe that this is one of the best performers to back up with.

The other names are included on very strong portfolio visibility. JB in particular, which we like, is technically a smallcap now but usually it is classified as a midcap. Again a very dominant market share gives them the base business visibility as well as the capex that they are doing to increase capacities in select product areas which we believe can drive growth over the medium term. So pharma has been our favourite and as a defensive also, we like it.

We believe that growth will be the key driver for valuations in FY24 and FY25 onwards.

How would you classify banks? PSU banks are cheap and are growingl private banks are growing but expensive. But there is so much rerating in mid and small tier PSU banks that it is quite amazing. What is the best way to approach banks now?
This cycle is going to be pretty constructive for banks and this is after almost a decade that we see those kinds of strengths of asset quality on the credit appetite, which we believe will perk up even further from here onwards.

We are at the early stages of a credit cycle uptick. Corporate balance sheets are pretty strong and therefore we maintain that banks will be structurally overweight in this entire uptrend. The recent consolidation is more of a time decay as I see it and the largecap banks are doing pretty well and that follows through with some of the midsize and smaller banks including PSUs.

We will prefer playing it through large banks and selectively through the midsize private banks and the overall portfolio stance will be overweight and accumulation. I would also not be surprised if over a period of time, NBFCs also start benefiting from higher rate cycles. The credit quality is holding on pretty well and should hold on at least for the next four to six quarters. So financials at large and banks in particular remain an overweight theme for us.