Sanjay Dutt, director, Quantum Securities explains to CNBC-TV18 that the market has to consolidate to reflect the gains made by substantial movement posted by a few stocks. Dutt adds that he is bullish on the telecom sector and prefers beaten down stocks rather than join the rush for IPOs. In the telecom segment, he favours Reliance Communication over the Bharti Infratel IPO.
Below is an edited transcript of the analysis on CNBC-TV18.
Q: The market seems to have been dithering for the last couple of days. What have you made from the price action?
A: The market has to consolidate - take two steps back and three steps ahead. I think it is a very positive sign that supply is being absorbed at the current levels because this is an indication that all the weak hands who want to get out or who aren't confident of the months ahead probably want to sell.
My apprehension is that probably some of it may be the larger domestic financial institutions who are subscribing to some of the government paper. Within the market, there is a churn taking place with some stocks that have gone up coming off. So the Index is not reflecting the gain in some of the other stocks which have moved substantially.
Q: Are you buying the Bharti Infratel initial public offering (IPO)?
A: If I need to buy something in the telecom and the ancillary telecom space on which I am bullish, I will go in for of the beaten down stocks and my favourite bet at this point of time is Reliance Communication. My view is that the way the Bharti Infratel issue is being subscribed at current valuations, there is going to be a massive rerating of other telecom infrastructure companies.
Therefore, I would prefer a proxy play than getting into this mad IPO scramble and buying into something that is about nearly USD 800-900 million market-cap. So I think it is better to pay proxy-plays whenever these IPO listings happen than rush in to buy because they do not fit my risk profile.
Q: From the PSU stable, after National Mineral Development Corporation Ltd (NMDC) what would be an interesting prospect for you?
A: I think there are a lot of them. In fact some of the listed companies which may not be going on an offer-for-sale (OFS) are looking pretty good particularly in the power sector. I think the fact that government is pricing them correctly and is getting a good response for them as some of these companies have tremendous potential ahead particularly in the infrastructure segment.
The power and the infrastructure sector is the place to be and stocks like the Rural Electrification Corporation (REC) or a Power Finance Corporation (PFC) or a NTPC look very exciting and I think those are the stocks to invest in rather than probably going via this OFS route.
Q: If you think that the market is consolidating right now, how much upside do you think it has? Are you confident about a reasonable return over the next couple of months?
A: I do not want to predict what the index levels would be and I am not into playing the index as such. I think even at this 5,900-6,000 level, there is still a lot of opportunities in companies whose stocks have not gone up and have created substantial competitive barriers in this interim term in terms of land acquisition, setting up plants, fuel linkages and environment clearances.
Any new player who is going to come up and set up capacities is going to take not less than 5-10 years. So investors should not worry about the stock, whether it is JSW Steel or Indiabulls Power or maybe Adani Power or Reliance Power, offering negative margins over the next three-four quarters. I think investors need to look at these companies from a longer-term perspective and understand the difficulties and time involved before coming to the level they are at this point of time.
Q: Has the popularity of the whole non-banking financial companies (NBFC) sector partly to do with the fact that the Banking Amendment Bill might be passed and would result in the granting of some licences? Would you be excited on stocks like L&T Finance or IDFC?
A: I would not want to comment on the two specific stocks because I think they have run-up quite a bit. IDFC has not probably run-up, but L&T Finance I think is stretched at this point of time. Otherwise I am extremely bullish on the sector and I would look at undervalued companies with strong balance-sheets particularly keeping in mind what NBFC guidelines are going to come in force in the next year-and-a-half.
I think there is a huge opportunity in cross-functional plays in the stocks which have exposure to finance, real estate, financing, mortgage financing, mutual funds and insurance.
Q: Would you buy anything in aviation?
A: I am long Kingfisher contrary to beliefs and my criteria of stock selection, and is primarily based on the fact that there is definitely a deal and restructuring in place. Otherwise I don’t like aviation.
Q: What's the next big trigger for the market?
A: I think the trigger has nothing to do with what will carry India ahead. The key trigger will result from the outlook of global equity along with government macro-economic policy initiatives that’s going to drive the market ahead in 2013 as long as the currency holds and there are no external shocks.
Q: What do you think will drive market next year- will be equity, fixed income or any other asset class like real estate or gold?
A: I think it is equities all the way for the next five-to-eight years in India. I would be underweight on gold and real estate. Of course, real estate in pockets offer opportunities
Q: Has the time come to start bearing positions in FMCG?
A: Absolutely, no doubt. I have been mentioning that for quite some time, probably I was early and I was wrong, but no second thoughts. I think it is not the time to be in defensives, it is definitely a time to be underweight defensive.
Obviously you cannot be zero defensive in your portfolio but this is the time to be underweight defensive overweight cyclicals, overweight interest rate sensitives, overweight infrastructure particular companies in the power sector and of course, banking NBFCs.
Q: The disappointment over the last few weeks has been technology. Would you be circumspect about prospects or is this a buying opportunity?
A: I have been underweight on technology because I think the entire model is coming under threat mainly because of the human resource cost, the cost of delivery that the company needs to keep bringing down for the clients overseas. Currency is something that they are not able to forecast and if I am talking about large inflows and rupee-dollar equations being favourable to the rupee, technology is going to be a challenge.
Q: What about cement which has been a star performer these last twelve months?
A: I think it will continue to be a star. One needs to look at some of the companies below the top three or four because my sense is that some of the companies may see some more M&A action and consolidation. I think the sector will be lively for the next year or two, offtake will be good and pricing power will remain. The sector as a whole over the next 2-3 years is in for good times.
Q: Do you think some of the commodities, especially agri-commodities such as sugar is going to go through a lean patch again?
A: I think it is very difficult to forecast sugar or any other commodity because the entire sector is under immense government intervention I advise investors to stay away from commodities.