Mkts getting mixed signals from economy: PN Vijay

Excerpts from CNBC-TV18’s exclusive interview with PN Vijay:

Q: We have come back to 17,500 - do you see more upside this month or do you think we will need to spend or do more work around these levels?

A: We may have to do a bit more work around these levels. I believe we have come a long way from end of March; we made about 10% in April and about 5% in May so far. We did lose about 27%-28% in the first three months. So we are half way down the mark. Inflation continues to be stubbornly high, rupee continues to be weak. So in this environment, nobody is really going out and buying stocks in a big way. True, the market has discounted a lot of this in the sense that two Fridays in a row, we had horrible inflation numbers and the market ended very strong which means that the market by its very nature of things is tending to discount these macrofactors probably looking three-four months ahead. Another slight positive - one may want to look at is that the domestic liquidity figure is very good. I read that banks are keeping about Rs 30,000 crore with mutual funds;j liquid funds last month. So there is liquidity, which is unusual when you have RBI tightening etc. So it is all very mixed actually; I think that the market is trying to absorb too many factors at this point in time.

Q: Last week’s surprise performance by way of leadership was the whole base metal pack Hindalco, Nalco, Hindustan Zinc, do you think there might be good for more or is that whole LME led run or LME connected run done?

A: It could go on for a while and interestingly Sail joined the pack-  if you saw on Friday having a 7.3% rise post results. Probably globally, India is not seen as a commodities market - we are seen as a service sector, infrastructure story but there are such strong pockets of commodities and we have seen money globally moving into commodities on the back of this huge rally in the last few months. So commodity funds maybe chasing these stocks. So right now, I think the going is good for them though long-term over a year or so; I do not have any great faith in base metal stocks.

Q: How do you look at IT now after the bounce - is it a good exit opportunity which has been provided by the rupee’s weakness or do you think things are indeed turning around and the sector could continue outperforming?

A: You should not exit IT right now in my view. The sector is evoking interest after a long time. If you look at the portfolios of the most fund managers they have hardly any IT; their portfolios are full of Reliance, L&T, BHEL the likes of that. So the sector is definitely coming back to light, nobody really expected the rupee to fall all the way to 43 and at some point in time that is going to get reflected. True, the slowdown in the US is affecting them but incrementally I think IT would get added more into portfolios than reduced.

Q: What about fertilizer, it was not a bad week for that entire space? Is it just a trading play you think or might that warrant some attention?

A: That whole sector is a trading play, a bit like the oil marketing companies; just reacting and here of course there are much smaller and more speculative stocks like Nagarjuna etc. It is definitely not a long-term investment given the strong control that the government has on every aspect of that industry.

Q: What are you doing right now for the rest of May and looking into June? Are you building a little bit more cash in your portfolio after the recent move up or do you remain fully invested, are you buying stocks given that we are now at 17,500 not quite at 15,000 anymore? How you are approaching investing?

A: We are keeping the cash at about the same level as last three week's, around 5%-6% because our clients are high net worth investors - bit more aggressive in their outlook than retail investors. We have done a tremendous amount of churning I should say, I do not remember in the last one year we have reshuffled our portfolio that much. We went about a month back a bit more into refining, IT and pharma and cut back a bit into our exposed positions on the old economy sectors because we saw clearly that the great run that we had in old economy was sort of flattening out due to cost pressures and interest rate pressures and I should say that has stood as well in performances vis-à-vis the Nifty.

Q: Just to get back to that point about inflation, aside from the fact that it has moved higher this week a lot of analysts are concerned about the backdated revisions things are being hiked up quite significantly and some people are working with almost figures of 9% for the week we just wrapped up, do you think inflation is going to be a big problem as we step into the next few weeks of trade aside from anything else?

A: We have a very good economist running the country. It is the inefficiencies in the CSO (Central Statistical Organisation) and I do have problems in the weightages in inflation - they were about 20-years outdated. Having said that, I think the general perception among economists in Delhi is that the effect is slowly there. All the firefighting which the government has done the last one month; I am not talking about apologies of the government who have to say the right things but even people who take a contrarion view - they are convinced that this 7.5%-7.8% will peter off because in India we do tend to focus too much on year-to-year inflation; in the US they see week-on-week - what was it in the previous week and then compare it; week-on-week has been pretty good in last six weeks. We had a little bit blip last week; but week-on-week has been falling quite nicely, which means that people are thinking of something around 6.5 levels in about three weeks from now and if the monsoon is going to be good, I think we are sort of out of the woods in about 5-6 weeks that is my impression.

Q: How would you position yourself in this sector now, real estate particularly the midcap real estate, non-DLF, Unitech?

A: Among the three rate sensitive sectors - banking, auto and real estate; real estate definitely looks the weakest because here we have a huge oversupply phenomenon at least in the metropolitan cities in India. The play interestingly should be in the midcap real estate space though one should admit that these are the riskiest stocks to pick. My own favourite is HDIL - actually, it is a unique story; all over the world there is no slum development project as big as the one that is going on in Mumbai and HDIL has a unique business model. So that is a very good play in the midcap real estate space and as you have mentioned Brigade Enterprises with their service apartment concept and Kolte-Patil with their Pune strings, they are all interesting stories that can be bought but the sector as a whole I am not so sanguine.

Q: Did you have a look at Tech Mahindra’s numbers, any thoughts on that stock generally?

A: Yes, Tech Mahindra has been a bit of a disappointment -one expected it to at some point join Infosys, Satyam and Wipro and TCS as the blue chip of the sector. Somehow they seemed to have lost along the way; some vat compared it to Biocon actually in the pharma space. I am a bit uncertain about Tech Mahindra, great parentage etc but nothing really on the ground.

Q: Give us one word on the entire brokerage space as well, most of the quarterly performances are out how would you approach this pocket now?

A: This sector is very interesting, the positive is that it is getting re-rated and getting some respectability as it were and a lot of foreigners are getting interested in acquiring as we saw the other day. So these are the positives. The negative is that it swings too much with the capital market, most of their income comes from intra-day and derivative, small broker-traders and that really dies down when market sort of cools down and they also do a lot of margin funding and they get the interest. Both these are very sensitive to capital markets - high beta stocks, you can ride them and get huge gains but as we saw in January, February and March, the bottom can sometimes fall off them.

Disclosures:

It is safe to assume that my clients and I may have an interest in the stocks or sectors discussed.