Talking to CNBC-TV18, Anand Tandon, CEO, JRG Securities says that the IT sector is the best investment bet as of now, as despite clouds gathering on the horizon in terms of visa rules, there are hardly any other sectors which are trading cheaper and which have better fundamentals. He advises against taking positions in the FMCG sector.
In this market, it is best probably not to go valuation hunting but stay in liquidity-based stocks which you can move in and out quickly, says Anand Tandon, CEO, JRG Securities.
Talking to CNBC-TV18, he says that the IT sector is the best investment bet as of now, as despite clouds gathering on the horizon in terms of visa rules, there are hardly any other sectors which are trading cheaper and which have better fundamentals.
A sector where underperformance is most likely is the FMCG sector. The Food Security Bill will dampen food inflation which is a big positive, he says.
Below is an edited transcript of his interview with CNBC-TV18
Q: We are seeing some of these beaten-down names like Firstsource rise quite a bit, with influential investors pumping in money. What is your view on how to approach some of these names now? Is there anything that looks attractive to you at these levels of the beaten down names in the broader market?
A: I am sure if you look for stocks on a valuation basis, there will be many which will look attractive. But there is a single rule that is best used when you are looking at smaller companies, which is if liquidity is tight, do not trade down.
This is because almost in no condition will the market actually give you an upside in smaller names unless there is ample liquidity coming through. Therefore, if somebody is looking at short-term trade or a valuation gap narrowing, you have to really wait for liquidity to become very easy again which currently doesn’t look likely in the near term.
So it is best probably not to go valuation hunting but to stay in liquidity-based stocks which you can move in and out quickly.
Q: What is your call on the IT sector as we head into the earning season? The street is extremely divided in terms of what Infosys will come out and say in terms of valuations, and what stocks look attractive. It is completely divided?
A: There is no choice. If you want to buy a company which still has cash on the balance sheet, which is still probably growing faster than the market and which is giving you a return on equity which is well above 20 percent, in most cases I don't see any other option but to be in IT.
There are clouds gathering on the horizon in terms of the visa rules and that may impact the margin somewhat going forward. But despite that, you will find that there are hardly any other sectors which are trading cheaper and which have any better fundamentals from the IT space. So, if you are not in IT you should be there.
Q: Is Tata Motors a good buy at this sub-Rs 300 level?
A: Tata Motors has had a stellar run for the simple reason that they have managed to get their overseas model doing very well. The challenge is how long it will continue to grow there, especially if they are not going introducing new models.
Now, that is a question that I don’t have an answer for and perhaps some of the analysts will have a better view on it. My own feeling is that the next round of R&D will have to happen sometime fairly soon which will take up a lot of capital. We have just had a great period in Tata Motors so probably will continue for a little longer.
So, the short answer is you need to be perhaps still in it. If you are a longer term investor, you may want to start wondering about at what level you want to get out because I don’t believe that every launch will be as successful as the last few have been.
Q: The news that came out on the macro front was the Food Security Bill and the impact that it would have on the subsidy figures etc. Today, the market did not react too much to it, but how do you gauge the news and the sentiment dampener that it could be for the market eventually?
A: We have heard a lot of arguments why it is bad, so let me try and make a case for why it is good, not that I believe it is, but just to have some variation in the opinion.
One of the first things that the Food Security Bill will do is that it will dampen food inflation and that is a big positive, because that has been a big problem that we have had in the last few months that food inflation has been rocking.
If you assume that food inflation actually comes down that would mean real interest rates go up and if real interest rates go up we actually have no problem now on the capital account deficit because money will start getting saved and more importantly currency will stabilise.
So that is one area. The second thing is that the deficit will go up. Typically, when you have GDP growth which is slowing down and it is slowing down because there is no investment going through, then the only thing that the government has to do is to increase its own expenditure.
So actually the focus on the reduction in fiscal deficit is all wrong, it should not be there. At this point of time if you are really worried about growth what you need to do is go out there and get the government to spend which is what they are doing and what the rest of the world governments are doing as well.
They are trying to pick up growth by spending more. So what exactly is wrong with that? If you actually see what will happen is that it will increase the GDP growth rate, it will reduce the inflation at least near-term and it will stabilise the currency and exactly what is the quarrel we have with that.
Q: How do you approach some of these metal names like Steel Authority of India (SAIL), Tata Steel, Jindal Steel and Power (JSPL) which have all lost 40-50 percent of their market cap since the start of the year maybe more for names like JSPL. Is this a good time to be dipping in or would you completely stay away?
A: The metal sector can't be doing well because we still have a problem globally. If China were to slow down, then the demand for metal falls and global prices will also take a dip, which is what we are seeing reflected in the stock prices as well.
The near-term benefits can be a little more because of the fact that the rupee depreciation will also put some level of protection to the domestic manufacturer. So, Tata Steel is obviously not necessarily a beneficiary because it has exposure overseas.
But some of the companies like SAIL which are largely in India will have a little bit of respite in terms of the landed price of steel versus what they can price at. So to some extent the dollar strengthening will help them. So, selectively you may want to look at them but the trend largely seems to be down because until and unless we see a revival in the global economy there is just too much steel capacity right now for it to be allowing the steel prices to go up.
Q: We are just going to see earnings season now kick-start with IT. You spoke about your expectations for the IT sector, but in general the slowdown in the economic activity will reflect into the revenues of corporates this quarter around. In this earnings season which is the sector that you would be most bearish about in terms of earnings performance?
A: It depends on what do you mean by bearish. If you are saying where growth will be lowest, obviously infrastructure is the place. But I doubt if that is going to affect the stock prices because that is pretty much well known.
If you are looking at those where the underperformance or the expectations will most likely be missed I would argue that that is most likely going to be the FMCG sector.