Jan 24, 2013, 04.40 PM | Source: CNBC-TV18
Aadil Ebrahim of Bowen Asia, says that he feels that stability in Delhi has returned post Chidrambaram’s entry into the finance ministry and market sentiment has also improved.
Aadil Ebrahim (more)
Managing Director, Bowen Asia | Capital Expertise: Equity - Fundamental
Below is the edited transcript of his interview to CNBC-TV18.
Q: What are investors or people gathering from the speech made by the finance minister?
A: Stability is back in Delhi post Chidambaram's return to the finance ministry. The government spending has come under control, currency stopped weakening, different policies being passed and finally, Parliament started functioning. This explains the reason why the Nifty is back up to 6000 levels. I think the people are impressed and he has managed to do some bit in last couple of months. The macro numbers are still are not great but that's all in the past. Market is discounting future earnings; future growth and things are looking fine.
Q: What are FIIs thinking towards India? 2012 was very robust in terms of inflows for us? Do you think that could continue as a trend in 2013 hence we could possibly scale new highs for the Nifty?
A: The FIIs are chasing earnings growth which is visible here. Many companies have announced their results and earnings looks in mid teens-20 percent growth. Earnings have been solid and FIIs are looking at earnings growth and valuations. So, naturally money will flow.
In terms of competition, the Chinese market is being horrendous over the last one-two years. One may face a bit of competition in terms of flows trying to catch cheapest valuations and high single digit valuations. But for high quality stocks, India will get its fair share.
Q: What is your sector-wise opinion? Are you churning your portfolio in the IT space? We have seen some spirited performance. Would you say that some of them are on the cusp of leaving behind the worst times and marching on? We seem to get that feeling from the TCS stock at least. What is your view on the IT space?
A: We have been long time holders of Infosys so we have suffered to an extent over the last two years while TCS , HCL Tech and Cognizant have done phenomenally well. We held our view that the management will get its act together and turn it around which we already saw in the previous quarter. This quarter was not great but the market loved it. Importantly, orders and execution is coming in and the churn is slowing down. We feel that people will rotate out of TCS to Infosys and maybe Cognizant to Infosys.
Q: The talking point in the past 2-3 days for the market has been the strong downfall that we saw in couple of select mid-caps stocks, case in point real estate, HDIL is down 17 odd percent. Couple of infra stocks, are coming off Lanco Infratech down around 4 odd percent. What is your view towards the mid-caps space? Do you have any exposure towards that and would you take exposure at current levels?
A: We have small exposure in the mid-cap space. Balance sheet and cash flows are two important components that need to be looked at for the companies and sectors just mentioned.
Can they fund our expansion from internal cash flow, getting debt is tricky, raising equity is even more difficult. So, the balance sheets are stretched. We see many of these companies suffer share price and a many promoter’s shares are pledged and that has been an issue with couple of these stocks. So, in mid-cap space unless there is visibility to balance sheets, can invest your own cash flow back into business, many companies and sectors just mentioned don’t fit our criteria.
Q: Your top holdings in the Bowen Asia fund are still HDFC and Bajaj Auto from India. Would you want to look at any other sectors, maybe oil and gas, Reliance , telecom - any of them if the worst is over?
A: HDFC twins - bank and mortgage financing company provides 20-30 percent returns, valuations are not stretched and have good top management which delivers every year and every quarter so why would one pick some other sectors which may give quick returns but at the same time there is possibility of tremendous downside.
Q: What about pharmaceuticals and FMCG? We saw select stocks run up quite significantly. Case in point is Strides Arcolab , Wockhardt from the broader market. Any sort of specific stock recommendations or stocks calls that you are making in 2013 to see those over 100 percent returns?
A: I don't track pharmaceutical space nor have any exposure, so I cannot comment. In the FMCG space, volume growth numbers of HUL were tepid. I am not worried about royalty agreement as it was already on cards. I think in certain FMCG stocks growth has lowered and competition has increased. I think HUL is using the right strategy where they are slowing down their wheel, their lower price sachets, move up the ladder.
Obviously there is a transition period but HUL's valuations are 30 times, average PE 25 times - it will suffer. Other stocks in the FMCG space are trading at 25 times. As long as they continue the earnings momentum, they should do fine.
Q: You mentioned that India should get its fair share of money in the current year as well? What would that be contingent on? Would that be contingent on anything the government does in particular would the fiscal deficit assume a lot of importance?
A: It is two-fold first is global factors and second is the Budget. Global events matters like the US postponing their doom's day now by another couple of months, euro has stabilised, Spanish yields, Portuguese yields, Italian yields have come off. So, I think globally we are fine. People will look at Budget to see what the plans to reduce the fiscal deficit are.
Flows will come in if the current account deficit (CAD) comes under control and gold import is reduced. Crude is still the wild card. Issues in Algeria, Mali will not be favourable for global crude prices. Cutting down of subsidies is critical but at the same time inflation becomes an issue. Oil import has been the biggest hindrance for India and as commented by the oil minister, if India becomes self sufficient in 20 years then market will double and treble. But India is still long away.