Banking & property: Best bets in mkts, says IIFL

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

With private sector banks doing well & property looking up after the new FSI regulations, Deepesh Pandey of IIFL feels these two sectors are the best bets now.

The involvement of the PMO in Coal India has the optimism of sustainable solutions. India will continue doing very well though it needs to consolidate in the very short term .

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: After speaking to several investors, are you getting a sense that we might hit a valuation cap sometime soon or do you think when liquidity comes its blind to valuations.

A: What we must remember that this rally has taken place from a low base last year. While stocks in some sectors seem to have doubled, they also fell very sharply last year. What we are seeing is a more normalisation of a correction, which happened last year. Incrementally fundamentals are turning around on lot of accounts be it on inflation, interest rates, policy making etc.

I would think possibly some of the large cap stocks may hit a valuation cap soon but if you look at the broader market there are lot of opportunities, lot of stocks to be pegged especially sectors which have got overly beaten down last year and that's a feedback I hear from the peer group.

Q: The broader market has perhaps good bets so to say, any specific sectors you would be looking at perhaps cyclical or defensive or banks, rate sensitive anything in particular?

A: Rate sensitive is an obvious segment to look at primarily banks where one is seeing better comfort on asset quality. In Q3 results private sector banks did very well on asset quality. Even the government owned banks where exposure to infrastructure and power sector particularly has been a concern, stocks still look attractive.

They still trade less than one time price to book, so banks, financial is an obvious segment to look at. Property sector also considering that there has been some movement ahead in terms of specifically Mumbai market on the new FSI regulations, interest rates will ease. Liquidity situation should improve.

The stocks have fallen 70-80% over last two years, which is another segment where selective stocks look good. Beyond this one obvious outcome of yesterday's decision on coal supply improving for power producers is that the whole power equipment, power value chain will start looking interesting again. We are already seeing that happening today in terms of some of the stocks, some of the companies catering to that segment doing well.

This trend should primarily benefit possibly some construction companies, some equipment suppliers and you must remember that these stocks did badly last year. Hence, that is another segment looking good. Midcaps in general look quite good on valuations still.

Q: You were referring to the PMO statements. Do you think there is more headroom to go for power companies? They have been badgered and seen several days of rallies but the bigger issue of paying for the power has not yet been resolved. In addition, the SEB issue has never been historically resolved. The loans were rolled over and made into State Government Loans. They have received SLR status 10 years ago and now no movement in that direction and thus SEB receivables are mounting. Even if the supply situation is somewhat corrected would you go and buy out any of these power companies?

A: When we talk about power companies, it spans across companies, which are into generation, to distribution, and companies that are just equipment suppliers, service suppliers. I would be very selective when I look at power generating companies because a lot of them still have huge operational issues to be resolved, be it in terms of coal supply or be it in terms of imported coal pricing.

I would much more focus on possibly equipment suppliers, construction companies and those kinds of segments. Again, within power generation also selectively one or two stocks may look good. However, broadly, what one has seen is that these companies have been aggressive in terms of building up capacity, some of them have gone overseas, balance sheet looks stretched, and visibility is limited.

But coming back to the power sector situation, at least in State Electricity Board there is very significant focus. There are two or three committees being set up to give recommendations. Hopefully State Governments will realize that over a period of time providing adequate and reliable power is important and therefore having viable SEB's is very important. Therefore, the State Electricity Regulatory Commissions have been given additional power to increase tariffs to a longer-term solution.

Hopefully this problem won't recur this time but yes we need to see going ahead how effectively these measures are implemented. But at the seriousness of the situation, wherein PMO got involved tells you that this time we will have a sustainable solution and that's what makes me more bullish. In any case, sentiment is at its lowest for these companies, these stocks, so therefore any marginal improvement in the sector should result in good improvement in stock prices.

Q: For the moment how much headroom, do you think there is in the market, that stocks are still good to go?

A: In very short-term, it is difficult to predict what will happen. Right now considering just a sharp rise, which we have seen over the last few days possibly there is need for consolidation. However, I see this market buying on dips. Incremental will ease, sentiment is improving in terms of policy making, inflation, and interest rate outlook is improving.

So from a situation of last year all these issues being headwinds and we are entering a scenario where we are seeing lot of tailwinds in all these parameters. I would think there would be increasingly more interest.

There will be more foreign money coming into market so it will become more of a market, which will buy into dips unless you have a bigger problem coming up in euro zone or in terms of commodities. I think India should keep on doing well but very short-term there is a need for consolidation. Some correction but I do not see a big correction taking place now.