Jan 24, 2013 01:38 PM IST | Source: CNBC-TV18

See 25bps cut in Jan; positive on JLR, pvt banks: JM Fin

Sameer Lumba of JM Financial Institutional Securities believes the JLR franchise remains strong and therefore, they are positive about the stock and approaching it with a long-term view. "JLR obviously has a very strong franchise. I don‘t see longer term challenges there for the franchise that they have built," he explained.

News of Tata Motor's luxury Jaguar Land Rover (JLR) unit taking a hit on its margins in the third quarter revenues hurt the stocks quite badly in early morning trade on Thursday.

Sameer Lumba of JM Financial Institutional Securities believes the JLR franchise remains strong and therefore, they are positive about the stock and approaching it with a long-term view. "JLR obviously has a very strong franchise. I don’t see longer term challenges there for the franchise that they have built," he explained. He also sees long-term investors accumulating Tata Motors' shares on declines.

Lumba also said that the Indian market is finding support from strong foreign inflows and he is looking forward to a 25 basis points rate cut from the Reserve Bank of India in its upcoming monetary policy. However, the fundamentals are yet to catch up with the equity market rally, he opined. He is also worried about India dedicated funds which not yet seeing significant inflows.

As FIIs seem to be keen on accumulating private banking stocks, Lumba also remains positive on this space. But, he feels the public sector oil companies are not a high conviction call at the moment. According to him, ONGC is close to its fair value post the recent rally and it is likely to find support from the strong dividend yields.

Going forward, Lumba prefers realty companies with a strong balance sheet and efficient management.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Before the market, let’s talk about Tata Motors which probably will open seven-eight percent lower today on the JLR news. How would you approach it?

A: We were just discussing the same thing in the morning today. JLR obviously has a very strong franchise. I don’t see longer term challenges there for the franchise that they have built. Yesterday’s announcement in the evening has come with a surprise. So there would certainly be a correction of 8 to 10 percent and this is what is expected in the morning.

On the back of that you would see longer term investors coming back and accumulating the stock. Clearly, the franchise is there and the opportunity is there. This announcement has taken people by surprise but, I think it will stabilise at those levels.

Q: Just comment on that phenomenon in specific. What has happened with some of these blue-chips and the fact that people will probably have to churn their portfolio significantly through this earnings month in order to stabilise positions?

A: I think with any portfolio you have to look at certain core components of it, which is fairly structural. In fact we have been advocating a strategy wherein you shouldn’t really be focused too much on the index because if you look at the last five years, you bought the index and you haven’t really made much money.

I think the theme for us has been, when you look at franchise companies, you look at granularity. There is no point in playing the Indian theme. Now, we have got some tailwind today, currently because Chidambaram is giving all the right messages to institutional investors. We are also talking about possibly a 25 basis point (bps) interest rate cut coming in, which we think is realistic and conservative.

But, I think financial markets have also run ahead of the real economy because when we speak to our corporate clients, we clearly are not getting the message that there has been a big turnaround in the domestic economy and it is too early to call for a big rally. I think you have got the environment where the foreign liquidity is extremely strong, but is the real economy rally booming at this point in time or showing signs that in the next six months things are going to be extremely positive? I think it is too early for that.

But the good part about the market is there is enough and more high quality companies available there, which one can bottom-fish and buy. I was in Singapore recently and met institutional investors. The story remains the same, Indian funds are still not seeing much inflows. The flows are coming more from the global funds and Indian funds are not really able to get more money in the India-dedicated funds.

You also had the China influence because China has also done quite well. The newsflow has turned quite positive. I think India as a market is benefitting because of a host of factors. Clearly, we have had no tailwind. At this point in time, there is clearly more positive message in the market. We have been extremely positive on private banks and I think that’s a structural story because you are 17 to 20 percent of the market in terms of deposit market share or loan market share.

You can easily assume a 50 bps increase in market share over the next few years and these are companies which have build very strong franchises. The other biggest plus point is that we have been involved with a few deals like Mahindra Finance, IndusInd to name a couple, wherein the response was clearly overwhelming because these are firms with strong franchise and the ability to access capital has been great for them.

What has happened is that you see a run up leading to the deal and post the deal, you again see another run up in these stocks. But, I think the investors are smart because they figured out what’s really good out there.

You look at Yes Bank, the kind of corporate investment banking franchises they have built and the kind of returns the bank has delivered to the market is for everybody to see. You look at ING Vysya Bank, they have been delivering very strong returns over the last one and half years, but predominantly because on every parameter they are showing improvement. So cost to income, return on equity (ROEs) all parameters are going up.

The private bank Non Banking Financial Companies (NBFC) space is clearly what we are very positive about. We have been positive not only now, but for the last three years. We think this is structural and then there are other parts of the market where you have to cherry-pick. There are some trading opportunities out there. But I think the real economy part is too early to call for a structural rally.


Q: There is talk this morning that the cabinet is pushing for a gas price hike for ONGC and Oil India. How have you been approaching this entire oil and gas space, upstream and downstream, in the light of recent developments?

A: The good part about these stocks is that they have a pretty good dividend yield. If you look at Oil India, there is already a 4 to 4.5 percent dividend yield. Clearly, they are in the value zone and they are underowned. Any newsflow which is positive is going to impact them quite positively.

At these levels we think it is close to fair value in terms of the discounted cash flow (DCF) models that we run. Any positive reform measures that are announced are clearly going to impact these companies positively. But, there is always unpredictability out there in a market such as ours because you can be surprised. Your expectations may not be met given our past track record.

I would say that at these valuations, we would say it is fairly valued. But, how much upside is there and is it a very high conviction call from our side, I would say, not at this point in time.

Q: While some companies are managing to closeout deals successfully as you pointed out, do you still sense a lot of stress in some of these high beta pockets? HDIL is an example. Yesterday Citi Global apparently completely exited that company along with the promoters selling. Is there still a lot of stress on some of these faces?

A: It is difficult for me to comment on HDIL because we don’t really track that company. Our focus, as I mentioned, is that it’s a large market. You need to pick companies which have a strong franchise in place. You need to be granular in terms of understanding what have these companies created.

In Mumbai, a company we really like is Oberoi Realty. You look at their execution capability, look at the kind of pricing power that the company enjoys, look at the brand that they have. I think our recommendation is to buy companies where you have those things in place, where you have a strong management quality in place. Your downside is almost zero and your upside is a lot. That’s the way we prefer to look at the market.

Q: Uday Kotak was speaking to us at Davos and he made the point that even though India is pulling money, there is a difference. It’s a portfolio approach, not a strategic approach. If that is the case, would you expect to see a lot more volatility in our market this year as opposed to the last year?

A: It is a shallow market relative to the other global markets. So to move the Indian market, USD 200 million is sufficient to move the market on a daily basis. But, USD 2 billion of inflow brings a lot of smiles on a lot of people's faces. Similarly, a USD 2 billion outflow is not taken well at all. So the market, given its free flow, given its size relative to what the global funds can deploy and pull out, is by definition makes India a volatile market.

Then we have a host of factors like oil prices, currency which are kind of hard to predict. But, I think investors have become smart. People who actually don’t run index money but, who say that listen, we want to run a portfolio when we are looking at 25 to 30 companies. I think you will see more emergence of those because those are more successful models at work, wherein you are picking 25 to 30 well managed companies.

That’s really the India play because it is hard to play these macro themes. You have to look at granular detail and say okay, which are these companies which we should be buying.

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