NBFC sector might not be out of the woods: Amitabh Sonthalia, SKS Capital

There are some signs of bottoming out in mid and smallcap segments, said Amitabh Sonthalia of SKS Capital, who is holding on to a reasonably high cash level. In an interview to ET Now, Sonthalia said one may strictly avoid low quality names at the moment given the likely volatility in the next 3-6 months. Excerpts:

ET Now: Which cycle of the bull market do you think are we in? We have managed to defend ourselves a fair bit all of 2018. What were the top highlights for you that impacted the domestic equity market in the year?

Amitabh Sonthalia:
2018 has been a very difficult year for investors as most of the portfolios have underperformed the market. Even as the frontline indices have done well, they peaked out in the middle of the year. Most small and midcap indices had already peaked out in January. The small cap index is down about 40 per cent for the year and its chart pattern is somewhat similar to 2008. As they say history does not really repeat itself, but it certainly rhymes. In that sense, we have had a year which is reminiscent of 2008.

ET Now: While we can feel happy about the fact that the Nifty and Sensex are in the positive for the year, individual portfolios are very much bleeding. Do you believe that the broader market has also bottomed out or do you think that we are bound to see more pain for the broader end of the market while stepping into 2019?

Amitabh Sonthalia: Just like in 2008 where the bulk of the fall was seen October-November months, we saw similar chart pattern this year. We see some signs of bottoming out in small and midcap spaces, both technically and fundamentally. We are yet to see a period of consolidation in the next three to six months. It will coincide with elections in May. I expect the volatility to continue in the next three to six months. But bulk of the price risk is out of the system. I see a favourable risk-reward environment for investing in small and midcap stocks from a one-year perspective.

ET Now: In the year gone by, the market gave you enough opportunities. In 2017, valuation was a concern. But you could not complain of that in 2018, at least in some concentrated pockets. What is it that you have bought recently? What looks interesting to you right now?
Amitabh Sonthalia: I have been on the sidelines and holding on to a reasonably high cash level as I expect volatility and consolidation to continue in the next few months. However, I am happy to bite the bullet, as and when opportunities present themselves or one comes across relatively safe ideas. One such opportunity was in the CPSE ETF. When I looked at the components of the ETF, they were all attractively priced. In terms of price action, those stocks were at multi-year lows and had valuations at almost half of the market PE. They had single digit PE ratios, high dividend yields and businesses which are relatively stable. Their businesses have no threat of disruption as some are monopolies such as NTPC, Bharat Electronics, Coal India or IOC. The reason they are probably at these levels is due to the irrational selling by the government, the promoter via repeated follow on offerings. But hopefully, over a years time, once the disinvestment targets are met, these companies should revert to their mean.

ET Now: 2018 also saw election outcome in three states completely going against what the market would have like irrespective of that the markets actually rose up. Would you say that elections, given their actual bearing on the market, is a little overrated?
Amitabh Sonthalia: Going by this months price action, it seems like the recent setback was well absorbed. It also reminds us that politics matter lesser than what we think or believe. It might be the harbinger of things to come. May be that market will place less importance on that than they have last few months and hopefully it will make our lives easier if they do so.

ET Now: How are approaching the low oil price environment and low valuations for the mid and the smallcap segments?

Amitabh Sonthalia: The crash in oil prices makes India macro trade really attractive. This is other than the obvious plays such as oil marketing companies and airlines, which have already done well. There are also a lot of derived plays which are beneficiaries of lower oil price. A lot of companies and sectors have input cost, which are a derivate of the oil price. Paint is a good example. Of course, markets are very quick to react to such triggers. Most of the stocks, which are obvious beneficiaries, have all moved up very sharply. One has to keep looking for second level thinking. Auto sector could potentially revive as the cost of ownership come down with lower oil prices. Cement had got hit due to high oil prices and therefore could be another potential beneficiary sector.
ET Now: Your call on NBFC crisis in 2018 hit the bulls eye. But what are the things that worry you?

Amitabh Sonthalia: We are not completely out of the woods as far as the shakeout in NBFCs is concerned. We seem to have somewhat hit a bottom for now. But in India, there are always surprises in store for us. We do not know what disclosures are yet to be made by certain banks or NBFCs and clearly the last few months has separated the men from the boys. The confidence has shaken. It has sort of exposed the chinks in the armour. I would not be too confident about going in and betting on some of the lower quality names at the moment.

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