Anand Tandon, CEO, JRG Securities explains to CNBC-TV18 that 2013 is not going to be a great year for investing in equities with no hope of a fall in interest rates, lack of private equity interest in key sectors like infrastructure, firm commodity prices and increased dependence on government reforms. He advises investors to buy Tata Motors on signs of growth in the company and exploration companies like ONGC.
Technical expert Sudarshan Sukhani of s2analyticals.com adds that the sudden weakness on the Nifty reemerging despite support from Larsen & Toubro (L&T) provides for a case of buying 'puts'. "Puts are primarily to take a bearish position. The immediate advantage of buying a ‘put’ is that the bearish position is protected with an in-built stop-loss."
Below is an edited transcript of Anand Tandon’s analysis on CNBC-TV18
Q: What have you made, after your interaction with other analysts, about the reason for so much damage in the midcap space?
A: Apart from other explanations, it is possible that the damage was caused by investors assuming that somebody will come and take it off their books in January because of the so-called further allocations to India, especially in a situation where the finance minister is also trying to hard-sell to institutional investors. If nothing really happens and there are no major offtakes, then the cost of holding these stocks come back to bite.
Overall, even from a valuation point of view, most of the stocks had done quite a bit of catching up and there isn’t that much expected from the frontline stocks that leaves for room to play on the upside. So, therefore the scope for growth for many of the midcaps, especially those which have run up 50-70 percent is strictly limited and there is no particular reason why investors should hold on to these stocks.
Q: Do you see this trickling down to the large-cap space or do you see this tale of two markets continuing- midcaps continuing their savage correction while large caps remain relatively stable?
A: They will remain a little more stable than the midcaps of course, but the question really is that how much upside there is in the market now. If you have seen in the last month or so the attention of market is largely focused on those sectors where the government has allowed price increases to happen.
The market is pretty much back to looking at government policy to determine which sector is going to do well. So you have seen oil prices go up and then perhaps power prices are going to follow and on the basis of that you would have seen a good move up in some of the utility stocks.
The theme that was being played out in the last two months of 2012 was that interest rates would be cut and commodity prices would fall, seems to have fallen by the wayside. Now there is not much talk of trying to play cyclicals because they have already run-up too much. The realisation that there will be no fall in commodity prices no likelihood of a very sharp reduction in interest rate policy cut has begun to sink in.
Though, probably the market has run ahead of itself. So, without those two triggers the estimate for the next year looks to be rather stretched which means the market is not as cheap as it looks. So, there is a likelihood that you may find that, except for guessing what the government may pull out of its hat in terms of tax incentives for the market, there is not much to play for, in terms of the real economy right now.
Q: Within the infrastructure and the real estate segments, is there anything that you would pick up on a dip or would you just leave these segments alone for while?
A: The rally really took off on the basis that interest rates would fall sharply over the next 12 months. The market is beginning to realise that interest rates will be cut perhaps only because of the intense pressure on the RBI and the cut is not likely to be very sharp with inflation continuing to cause havoc. Therefore the interest rate cycle is not likely to reverse consequently many of these companies which are largely dependent on large-scale debt-driven orders are not likely to find any sudden change for the better.
So, I don’t think there is much to cheer about in the construction space except those involved in for housing development. The stress is very evident. There have not been any deals as indicated by the absolute lack of private equity interest in existing road projects.
I think except for the little bit of cheer that was expected on the basis that foreigners will come in and rent out large amounts of space for retail, I don’t think there is much to cheer about the housing segment at least in the key markets of Mumbai, Delhi and Bangalore.
Most of the projects have become unaffordable and housing interest rates are at levels from where is little expectation of any dramatic fall. So, aside from some tax-breaks or priority sector kind of norm changes, I think both these sectors are not going to give much upside and corporate governance is going to remain an issue in these cases no matter what way it is look at. It may be futile to expect corporate governance from the realty business, especially housing, where a majority of the transactions are conducted in cash.
Q: Would you buy Tata Motors now or have you turned cautious after what the management had to say?
A: Investors need to wait for a little while. Obviously, the street has been taken by surprise. What was surprising was the continued growth in volumes despite the dismal scenario in Europe. I think there will be some more selling before investors will actually begin to look at it to buy again. It still remains probably the cheapest stock on a consolidated basis in the sector. So if it were to report some growth, it will be something that investors would want to hold on in their portfolio.
Q: What is your outlook for the next few weeks? Do you see a bigger correction seeping into the market before the Budget or is that unlikely?
A: I think it would depend on some extent the selling skills of the finance minister and whether people believe his promises and assurances. Right now, the pitch focuses on no change in taxes, increased spending on food and plans to reduce the fiscal deficit – all of which put together can’t be done. So, therefore the finance minister has included an exit clause in his pitch of the promise to broaden the tax base.
Now I don’t know how that’s going to happen any time soon. But the last I heard was that there was a move to take off the short-term capital gains. But if things like that were to happen there could get a little bit of a spike and the motto of 'If you can’t fix the economy, at least fix the market' would come into play. But a trend of this kind doesn’t last too long.
So, at best there will be a front-loaded run and then after that you have to be very circumspect because I don’t see the market doing anything great for the rest of the year, And depending on how far it falls, it will be able to rise that much again. But this is year to be is not a great year for equity investing.
There will probably be a sell-off due even before the Budget because most of this would already have been factored-in.
Q: The only respite for the market seems to be coming in from the oil-and-gas stocks. Do you see higher fair value for some of these stocks like ONGC, Oil India etc?
A: For ONGC and the exploration companies in general, the answer would be yes. But I would be little cautious to see how far the diesel price hike is actually allowed to go because the incremental hike may not enable diesel to reach the so-called final market price.. Only if the diesel price is allowed freedom to touch market-price levels, will there be a significant upside in these counters.