Wednesday, July 27, 2011


Well, the RBI surprised again and came out with a 50 basis point rate hike while the consensus was 25 basis points with some of the real hopeful bulls even expecting a pause from the RBI. Now the one message that the traders should take from this move is not to second guess the RBI based on the views you see on TV or read in papers. The RBI will do what it thinks is right depending on the data and not what the economists/markets expect it to do.

Anyways, I am not writing this to debate whether the RBI move was right or wrong as that debate will never settle one way or the other. The real issue now is to live with it and how should one go about trading stocks now.

Let’s start with the first obvious sector, the banks. Now there are two schools of thought here. One says the 50 basis point hike actually is better than 25 basis points as now the banks have no option but to pass on the hike and protect their margins, while in case of 25 basis points, there would have been a bit of internal debate on passing the rate hike. The second school of thought says the environment for banks in general is quite vitiated now and the RBI will not rest till the credit growth comes down to its comfort zone. My sense is its mix of both. Over the next 3 months, you will see varied moves in banking sector with some banks rallying over 10% while other falling equally sharply. And in case of banks, it’s not just about interest rates any more. It’s got a lot to do with asset quality and a careful study of some of these banks should help one identify the winners and losers.

Now let’s move on to Auto stocks. Clearly the most vulnerable one right now is the commercial vehicle space as that is most sensitive to interest rates and we have already seen some impact on sales of companies like Ashok Leyland and going forward, this space may remain under pressure for some time. As far as passenger car space is concerned, over there as well, this is likely to hurt sentiment, especially in the entry level segment where a lot of middle class families aspire to upgrade from two wheelers to cars. Plus, the competition in car space has been quite intense and that too will play its part. The two wheeler players may actually come out least impacted because the incremental EMI hike will still not be out of comfort zone.

What can one say about real estate? It’s been easily the most hated sector ever since the big collapse of Lehman Brothers and the bear market that followed in India after that. And while rest of the market has gone to within 20-30% of previous peak, this sector is still 70-80% off from previous peak. And the biggest dichotomy here is that the property prices, especially in urban cities like Mumbai and Delhi are now higher than late 2007/early 2008. But clearly, the market knows that some of these prices are artificial. The builder lobby is strong, they don’t want to cut prices and the buyers are refusing to buy at such levels. Ultimately, I think it’s the developers who will have to throw in the towel and at least some of them would do that to stay afloat. The stocks that will survive and may still thrive here are the one where companies have zero or low debt like Oberoi Realty, Phoenix Mills etc.

Amidst all this, there are individual stocks which one should focus on, that of companies sitting on massive debt which should be under pressure and at the same time those sitting on large piles of cash, which can be used to buy distressed assets. Let’s first take a look at some of the companies sitting on a mountain of debt.

Sakthi Sugars: Has one of the most startling statistics. It has a market cap of only Rs 125 crore, but last year did sales of Rs 3,000 crores. It sits on debt of nearly Rs 1300 cr and paid over Rs 230 crore as interest cost. So forget about debt/market cap, it’s interest outgo is higher than the market cap. It made a pre-tax loss of Rs 117 cr last year.

Varun Shipping: Total market cap of Rs 364 cr and debt of almost Rs 3,000 cr. Again, it paid an interest of Rs 216 cr last year and pre-tax profit of only Rs 17 cr on income of Rs 837 cr.

Other stocks that will fall in same category will include Viceroy Hotels, Alok Industries, Aban Offshore, Vishal retail, Bharati Shipyard, Mercator Lines, JP Associates, Hotel Leela, Patel Engineering and Videocon among others.

But in every adversity lies an opportunity and this is the time when cash rich companies tend to do well. Some of the companies with high cash would include Phoenix Mills and Oberoi Realty as I mentioned earlier apart from Pfizer, Blue Dart, Info Edge, Castrol, Bharat Electronics, Divi’s Labs, HUL among others.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation. Please consult your financial advisor before acting on any piece of advice in this article. This article should be used as only one of various parameters before making an investment decision.


  1. lovely analysis of fed and rbi

    love it

    thanks for your support keep educating us.

  2. sir i am a great fan of your and read everything you posted. sir, i just wanted to know that from wh4ere we can know the varied prices of petrochem products like MEG etc thanks in advanced sirji