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HDFC Sec sees more near-term pain in mkts
Published on Tue, Jun 24, 2008 at 17:34 , Updated at Wed, Jun 25, 2008 at 12:21
Source : CNBC-TV18
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Food prices are likely to come down after the winter harvest comes in, she said. According to Verma, the infrastructure space is likely to give good returns, if investors stay for the long haul. "The government's focus on higher infrastructure spending will provide long-term benefits." Excerpts from CNBC-TV18's exclusive interview with Sanju Verma: Q: No clear signs of bottoming out yet, we are just seeing lower and lower levels every day? A: If one goes by the about three million shares that have been built up with respect to July futures, and given that they are trading at a 30-40% discount, then it clearly indicates that fresh short positions have been built. Interestingly, the rollovers have not been great this time around, vis-à-vis last month. They are still in the region of about 40% or perhaps lower. This again indicates that bears are not in a mood to cover up, so these two indicators clearly suggest that there is still more downside and pain left. This is purely with respect to playing the devil’s advocate. The markets are pricing in a lot of bad news with respect to oil. It could perhaps go all the way to USD 150 per barrel or even higher. People are just willing to reflect on the positives that will accrue from the inflation front, because food inflation will come down for FY09. We have had record wheat production at 76 million tonne, coupled with rice production at 96 million tonne. So, six weeks from now, once the winter harvest comes to the market, food prices should certainly come down.
Given that food and primary products have a weightage of about 46% in the Consumer Price Index, it clearly suggest the benign impact of lower food inflation. That could be the big positive which the markets are not willing to give credit for. However, this could clearly be a surprise.
Q: What is going on with institutional selling, because of the way some of the largecap names, especially stocks like Unilever, ONGC, and NTPC, have sold off today in the last few minutes? It seems like the global selling is relentless. What are you picking up from your clients? A: To some extent, there seems to be blanket selling. It is little to do with which stocks are delivering and which are not. It is more to do with the fact that people want to cut their losses, where they are not making money, and book profits where they are still in money. At 21,000, every news was good, while at 14,500 every news is bad. It is more to do with sentiment having taken a huge knock on the chin, more than fundamentals. Large players like RIL and ONGC are not really outperforming. In the case of RIL, it was largely to do with the fact that it is over-owned by both institutions and retail investors. Also, the fact that naphtha prices which is the basic feedstock for RIL has relentlessly risen by 30% last year. There is no sign of that cooling off. This means that RIL’s margins are likely to take a hit, at least on the petro-chemical front, which has been the Achilles heel for Reliance. It is a similar story for ONGC. Oil bonds, if anything, it is just a window dressing measure. It does little to either improve cash flows of oil companies, both upstream and downstream, nor does it do anything significant with respect to addressing the key problem. At the end of the day, having bonds is great, but what oil companies need at this point is hard cash. That is certainly not coming, and that is precisely the problem with ONGC. The company will continue to languish at these levels, because global investors still have a lot to choose from. If one is a global investor and wants to buy into an upstream company, then one still has a Petrobas, and PetroChina which are trading at about 10-11 times EV per barrel. This is almost the same level at which ONGC is trading at.
Q: Where do you stand on this whole infrastructure story? L&T is back down to sub-2300. There was an attempt at a pullback in some names like IVRCL, and Punj Lloyd. Do you see more pain for the capital goods, and infrastructure lot? A: Capital goods and infrastructure are sectors that are very rate sensitive. Irrespective of whether interest rates move further up, the fact remains that although there is money in the system, it is certainly not coming in cheap. Money is available but has become dearer. While L&T’s results were great in the last quarter, the key discerning weakness visible was the fact that interest expenses had gone up sharply. That trend will continue. This will obviously weigh down operating leverage, which is one of the company’s biggest strengths. It is not going to be easy for infrastructure players. I read a very interesting article which said that USD 22 trillion will be spent by emerging markets alone in the next decade on infrastructure. If you have a longer-term horizon, infrastructure can give handsome returns. Out of this, USD 22 trillion is supposedly going to be spent on infrastructure. The World Bank estimates 43% to be spent by China alone and the remainder by bigger economies from the Latin American space and India. India is planning to spend in excess of USD 500 billion on infrastructure. So, that is a long-term opportunity. Today, infrastructure spending as a percentage of GDP stands at a meager 4.5%. The government intends to scale that up to 9%. |
Sanju Verma, ED, Messages on Market Outlook - Short Term
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