Portfolio manager PN Vijay says if one is assuming a market, which is trending up, then the midcaps should give investors decent returns. However, as far as results are concerned, it will depend on the sectors as IT or pharma or real estate or that sort of thing.
Here is the edited transcript of his interview with CNBC-TV18
Q: First your word in terms of the Puravankara Projects numbers that we have been talking about and what are your expectations in terms of midcap earnings season?
A: I don’t track Purvankara because we tend to track slightly bigger stocks. However, the results have been good and I have always felt that if you want to invest in real estate, you should look at micro markets as they are exhibiting different tendencies, and Bangalore has been a good market. You are getting a better occupancy rate and even there, diversification is in related markets around in South India.
So, it looks good, the valuation is very undemanding. Purvankara obviously has met investors and surpassed their expectations. As for the midcap, it is better to look at stocks on a sectoral basis because now sector logic is prevailing.
However, generally one could make a generic statement that the midcaps have underperformed the large caps. If you see the performance of the Nifty midcap against the Nifty itself it is a huge underperformer which is not normal, in the sense that you are playing a beta and the midcaps normally have a higher beta.
So, if you are assuming a trending market which is trending p the midcap should give you decent returns. However, as far as results are concerned it will depend on the sectors as IT or pharma or real estate or that sort of thing.
Q: What are your thoughts on Reliance Industries post its numbers and what you would do with the stock now?
A: Reliance right now could be a hold because the numbers were reasonable. We got decent margins on the refining and petchem was okay, not great. The exploration side - the oil and gas - the production has been coming down and they have gone to the government with a formula for increased prices. The redeeming feature was both shale and retail.
So, on the whole, it was a decent set of numbers and on a year on year (Y-o-Y) basis So, these results don’t merit a jumping buy but they don’t merit a sell. I think Wednesday's unwinding maybe more because in the last few days, the market have been very bullish and people have started taking long positions and bit of derivative unwinding.
However, I don’t think any serious selling would come on the stock especially given the results on Tuesday.
Q: How would you be placed on private banks and would you possibly play them on the upside from current levels ahead of their numbers because till now they have been pretty solid. Yes Bank for example reported a good set of numbers in Q4. We had Development Credit Bank (DCB) as well which reported a good set of numbers before that and IndusInd Bank comes out with numbers on Thursday. Any sort of long calls you would recommend on the private banking space?
A: I think you spoke about this on Tuesday. Generally people feared a fall below 5,400. I said that the best segment is private banks and they have all gone up about 8-10 percent after that. I still believe they are good buys. For example, if Yes Bank’s performance is an indication – a smart ramp up in earnings.
I would go for IndusInd Bank because it has got somewhat similar business profile and IndusInd Bank could be a great buy. Axis Bank has gone up a lot, it was below Rs 1300 just a couple of days ago and now it is close to Rs 1400. So, you may have to wait on Axis Bank and ICICI Bank but IndusInd Bank it is worth a buy before the results.
Q: You had HCL Tech in your portfolio. What would you do with it now post the numbers?
A: I would probably add to it. It is very interesting if you looked at earnings before interest and taxes (EBIT) and earnings before interest, tax, depreciation, and amortisation (EBITDA) over the last eight or 10 quarters. There was a huge difference in EBITDA between HCL Tech and Infosys, almost an 8-10 percent difference.
Today, they are neck-and-neck. HCL Tech does not concentrate just on the banking, financial services and insurance (BFSI) vertical. They have distributed themselves into industry in a big way where it is not really discretionary spend, but non-discretionary spends.
So HCL Tech, the results have been good. There have been a little bit of selling the result, but I would continue to argue that it is a buy on every decline.
Q: Mahindra & Mahindra (M&M) is the big gainer, perhaps because of short covering. In the last one month that stock has seen quite a bit of fall. We also had some news from Skymet, where they foresee a normal monsoon this year and many tractor makers would be relieved to hear that. How would you approach a stock like M&M? Would you buy it?
A: You should put M&M on your watch list to buy. The stock went through carnage down from about Rs 950 if I recollect all the way to close to almost Rs 800 due to the general negative feeling about the auto sector. This news coming from independent sources that we are going to have a good monsoon is obviously the trigger which has forced lot of short covering. If that is the case and as you know in the utility vehicles are showing a smart movement in the otherwise desultory auto space, and they are not into heavy commercial vehicles.
So things are going positive for them and if one were to work on the assumption that the monsoon will be good then one could probably start nibbling away. But it would be better still to wait for the results, and even if you pick it up a bit higher at Rs 910-915 you go for that, because if the results are really terrible you might get a dip in the stock.
Q: There is a lot which is being spoken about in terms of the improving macroeconomic environment that we have been facing such as the Current Account Deficit (CAD) trajectory which could possibly improve because of lower commodity prices such as gold and crude. Would you then possibly see higher levels in the market from the 5700 mark based on improving macroeconomics or do you think that the best is factored in?
A: We are probably in the start of an inflection point. These are very fundamental macro indicators, especially inflation and oil and gold prices. There are primary macro indicators and secondary macro indicators. These are primary macro indicators and next one based on that would be interest rates and then the CAD.
To the extent that inflation is at a 40-month low, it augers very well for India, because we cannot be such a high cost economy with borrowing rates at 11-12 percent and the rest of the world borrowing at 4 percent. We just cannot survive on a CAD of 5.5 percent. It is impossible. So if Brent remains in the USD 100-105 range and inflation remains around 6 percent that is great architecture for India.
At least for the next few months, we could be in the start of a very strong uptrend.
Q: What you would be watching out for in terms of triggers in the next week because we do understand in the next coming days we will have the Budget session which will reconvene and then we will have a lot of earnings, which will start trickling in, in terms of higher pace as well?
A: There are three things that the market will be looking for. One is the Budget session, where the Budget will be passed without much of a hassle. What’s the fate of the Pension Bill and the Insurance Bill? If those two get passed with some support from the opposition, there will be a pretty good firmness in the market because they are structural reforms. The second will be the earnings of the biggies.
What’s the great erosion, is it just about okay? So, the earnings would be going on right through this month and early next month. The third and most important, I guess would be the Reserve Bank of India (RBI) policy. So in that order I could say that it will be very positive if we had these two bills passing through the Budget session.
I don’t see any political turmoil right now in parliament and the earnings can be a great dampener. I don’t think the earnings have enough to improve the sentiment. The rally has to be sustained on macros and last but not the least, I guess the credit policy due in the first half of next month.
Q: There were another couple of counters that were buzzing around on Wednesday that was JSW Steel and Sesa Goa. Would you be buying any of these counters?
A: We are not positive on commodities right now. As far as commodities what is happening is quantum shift in investor thinking that’s probably moving away from commodities. On the whole this is good for India, but not good for commodities or for the ilk of JSW and Sesa Goa. So, I would rather buy users of these commodities like auto companies and so forth rather than the commodity companies themselves.