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(Interview Transcript)
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Anand Tandon of Brics Securties feels that in the absolute near-term, one may probably see some kind of a short covering - maybe a 100 points down from here on the Sensex. He said that the crude prices may have reached its peak and now may ease out from here. He said that the effect of the depreciating rupee will have a positive impact on IT and other small scale industries.
Anand Tandon, Director- Equities, Brics Securities
Excerpts from CNBC-TV18’s exclusive interview with Anand Tandon:
Q: We have retraced a bit from a recent highs, do you think there is more downside than upside in the near-term?
A: Absolute near-term I would think possibly though technical analyst’s view is that you can probably see some kind of a short covering - maybe a 100 points down from here on the Sensex. So we have reasonably close to those kinds of levels. So there could be some minor bounce but in short yes, I think there is some possibility of more downside.
Q: How have you read the two overhead events that have developed this week, crude and currency?
A: Crude obviously has now got into a territory where probably many of the funds are now looking at positions because on the basis of demand-supply alone, it is a little difficult to explain the kind of rapid rise that we are witnessing in crude price. The best explanation I have seen so far is that China is restocking and wants to make sure that unlike January where they had a problem with some of their energy supplies, that we do not get into a similar situation like that pre-Olympics and therefore we are into an unprecedented bull-market because of that.
At this stage, the demand is coming from all over the place not necessarily on the basis of end-user demand alone - if that argument is correct, then it is quite possible that what we are seeing right now is probably at or near the peak. Therefore you could make a case for crude easing off from here and perhaps quite sharply at that. But we are seeing strange things in the recent past where we have had easing economic growth coupled with strong growth in things like commodities and oil which any framework that I have been used to does not tell me how to explain this kind of situation.
Q: What about the rupee - how are you reading that sharp depreciation and what it means for the market for FIIs for technology, how would you play it?
A: The obvious answer is that if the rupee depreciates, the exporters will benefit. Therefore we should be looking at strength in technology. Again that has not happened, largely on the back of the fact that many of the companies would have actually already hedged themselves against such kind of movements. But on the overall basis I am not surprised, we recently just a few months back saw a call saying that rupee should be allowed to float and it will float up against the dollar. The fact of the matter is we are running very strong deficits and if at all there was an upward pressure on the rupee it was on because overall dollar was weak against every other currency in the world and also we have had strong FII flows. Now that has eased off obviously the pressure has returned on the rupee, so overall I think that direction is not surprising.
The impact on that would be somewhat positive for companies, which have been somewhat stressed. So I would look at not only the IT companies but among the smaller sectors; for example, I would think that textiles etc would also be reasonable beneficiaries.
Q: To scratch the point in crude a bit more because the global view is that capital will go to where opportunity is i.e. energy. How would you play it in our own stock market -upstream-downstream or even some of the allied industries?
A: There are no direct plays other than perhaps Cairn Energy - it’s already been one of the best performance stocks. So to that extent, the upside perhaps is not that huge unless we assume that there is further increase in prices. All said and done, Cairn did manage to realise almost USD 100 a barrel in the results last quarter. So the best case assumption for Cairn today is that the valuation gap can narrow even today; perhaps Cairn is almost 25% on a relative basis cheaper than many of the oil exploration companies which are not incumbent by subsidy burden in global markets and I am talking about small size companies, not large ones.
So from that point of view, perhaps as we come closer to the time and they actually are able to generate oil from their newer fields which will be towards the end of this calendar year and we would probably get that kind of a valuation gap. So that’s a simple direct play on the oil market. The others are a lot less direct. So one can even short some refineries. I think that may be a way to play a rise in crude.
One could perhaps looks at ancillary sector - some of the pipe manufacturers are still doing reasonably well and are expected to continue to do well; so some of the steel pipe manufacturers, which are catering to that industry could be obvious targets for investments.
I am not necessarily sure that much play left in the oil rigs for e.g. or in the tanker space of course there is easy way to play the tankers again. But we do believe that oil tanker rates are showing some sign of firmness.
Q: The number seems to be picking up again for the auto industry. Would you start looking at that space?
A: I think so because probably that’s one of the industries that can benefit from the payout that will happen on the Pay Commission. If one goes back to the last time it happened, we had seen a sharp increase in sales for both two wheelers as well as small cars. I am not so sure about two wheelers this time but certainly the car manufacturers have a good season in the second half of the year as rupee ousts actually happen. Also the commercial vehicles (CV) cycle seems to be now beginning to show some signs of turnaround and to that extent one will have the CV manufacturers doing quite as well.
So overall, valuations are not very expensive though in a global context they are not cheap either. But the Indian market is far from saturated unlike some of the global markets that one would be comparing with. So, reasonably strong growth story, one can probably continue in the auto space.
Q: How are you reading the whole equity situation now? May more voices every passing day are talking about the possibility of no recession in the US. Do you think we may have seen the lows for the year or do you see difficult times over the next three-four months globally?
A: Let me address that in two different ways; I think we have not seen the worst in terms of economic data just yet. When we say no recession, I think that’s been overly optimistic. I think the fact that recession has many components, GDP growth is only one of them.
If I were to refer back to the history, what we have now declared as a recession in the US; two out of that three quarter which were in the negative were shown to be negative only one year after the data came out. The initial data had all of them in the positive. So it’s quite possible that what we are seeing is half percent growth in GDP; even this quarter may possibly be revised downwards, more data comes in or quality data comes in a few quarters down the road. So that’s the problem with all economic data comes in with a lag.
That said, the early indicators that one can also look foreseeing whether the economy is softening would be things like slowdown in income, a drop in job, unemployment and so on all of which point to the negative. So one cannot be that optimistic just yet on the economy front - whether that will translate into lower stock prices going forward from here is a different call together because the policy action again has managed to increase the risk appetite to some extent. But putting some money back into the system, my own feel is there is a possibility of one more shock down. But as of now, I won’t go out and put a big bet in that direction; I would trade with the market because many of the traditional models are getting flooded by the liquidity that is re-emerging. It’s little difficult to rely on them to make judgements on market; better to trade with them.
Q: Any thoughts on the entire cement sector and what you want to do with it?
A: Cement is now I think going to go through somewhat tough times because the capacities are now finally beginning to come onstream or will come onstream later during the course of this year. So capacity utilization for the industry is probably likely to fall and consequently will the prices; cartels do not hold when there are oversupplies - they hold as in the case of steel - when there is demand more than the supply can match upto. So I would imagine that price erosion can be reasonably high. Also margins have not been all that encouraging in the last quarter. So overall I think the best times for cement stocks; at least for the moment are behind us.
Q: How did you read all this news because Bharti has got punished a bit these last few days after the MTN news?
A: Issues in terms of financing will remain till it is clear how they are going to try and do this because obviously, the size of the acquisition is quite large. But that aside, to me it means two things - one is that you are trying to takeover a larger company which apparently is working in markets where penetrations are lower than in the Indian market. So that is a good upside.
On the other hand it also is a statement on falling ARPUs within the country and therefore the incremental ROE is perhaps beginning to ease off. Given the kinds of valuation that leading telecom companies in the country are trading at, probably it makes good sense to use that currency if you can do a share swap rather than a cash purchase. So I think it all whirls down to what price and how the financing will be structured.
Q: Today is inflation day as well - when are you expecting to see that number cooling off?
A: I think it depends on how you calculate it; since they do not change many of the figures in the inflation calculation for many weeks, it could cool off anytime. But I think if you look around and see the kind of prices that are there for every single commodity, I think it will be a while before it actually begins to taper off. The base effect will take some time to come.
Q: How are you playing sugar as a commodity now?
A: It's one of the few agri-commodities which has not actually gone up as much as some of the others. So given that international prices are a little firmer and that to some extent, there is some relief because they have taken a lower cost on the cane; obviously numbers have been much better than expected.
I think in the context of high oil prices, we can safely assume that international prices may not be that badly affected and therefore provided the legal system goes along with the industry, you would probably get some reasonable margins from hereon as well.
So overall, I think it should be much better than last year but not necessarily something which you can make very serious money on unless it comes and goes ahead and decontrols about which there were some rumours. But I am not sure how that is going to be possible in a year like we are into currently.
Q: You said you would look at textiles now. Which end of textiles would you like to be in. would you be in denim or fabric players or the garment manufacturers. What looks like a good play to be in textiles?
A: The theme that I would look at playing is anything which is getting depressed because of China because our belief is that China’s inflation is going to make it possible for many Indian manufacturers to do well which they would not have in the past. So I would look at all industries where there is anti-dumping duty on China and look to see if there is case to be made by them. Therefore that textile is one of the best plays.
Look at Chinese currency versus Indian currency - there is almost 9% move in the last three-four months in favour of the Indian currency and if one assumes that the currency may appreciate against the dollar for another 8-9% during the year, and you have a case like textiles where the margin differences are marginal, very marginal at the net level. I think there is a case to be made for almost all kinds of exporters especially in the garment segment. The beneficiaries though may not be actually the garment players because where the money will be made will be actually on the yarn side.
Don’t forget that garments would be exporting to countries which are under severe economic exchange and therefore they will be looking to push the margins down even further. So while the volume growth may happen on the garment side - I would bet on the yarn manufacturers as a possible play.
Q: How high or low are the chances that this series turns out to be another one of strength?
A: I would think right now marginally on the negative; the saying ‘sell in May and go away’ is still overhanging at least to my mind. May not be as bad as we have seen for many times in the past but by and large, we find that there is a kind of flipflop between April and May. April has been strong and May is likely to be somewhat weak. But like I said, since the participation is low maybe the direction will be somewhat weak.
It is safe to assume that my clients & I may have an interest in the stocks/sectors discussed.
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