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Big correction in markets unlikely: Veda Investments

Published on Fri, Nov 13, 2009 at 11:29 | Source : CNBC-TV18

Updated at Mon, Nov 16, 2009 at 09:39

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Vikas Pershad, Founder and Chief Executive Officer, Veda Investments

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Vikas Pershad, Founder and Chief Executive Officer of Veda Investments tells CNBC-TV18 in an exclusive interview that the Sensex can gain 15-20% by the first quarter of the calendar year 2010. However he adds that it is unlikely to see a big correction in the markets. "India can hit all-time highs in 12-24 months."

He advices investors to play on telecom via strangles and go long on gold and uranium. Not long on financial in India, he cautions them not to hold anything in the infrastructure space.

Pershad likes coppers and finds energy stocks more appealing. Suzlon remains one of his favourite shorts and says investors can buy Educomp for the long-term.

Here is a verbatim transcript of an exclusive interview with Vikas Pershad on CNBC-TV18. Also watch the accompanying video.

Q: What is your call till the year end? Is the market going to break out above 5,000 or do you see a correction as more likely?

A: The correction is something that we have been waiting for or year. Since March, people didn't believe in a rally. In March and April, you have had detractors all here. I believe that a big correction is not likely. We have these 5-10% sell offs every few weeks. It would be flattish until the end of the year. However, I see no reason why India and particular should not hit all time highs within the next 12-18-24 months. Just looking at the values out there and the growth trajectories, it is not likely that we will have a huge sell off any time soon.

Q: Some of your peers have made the case for 20,000 Sensex by the time we are done with the year. What is your view?

A: I think that is little aggressive. These days nothing would surprise me but being up 15-20% between now and six weeks from now, it seems a little aggressive. However, maybe by the end of Q1, it is not so aggressive.

Q: Do you own any telecom stocks in your portfolio now or you have cleaned the amount?

A: If you look back from May 18 we had the big spike of Bharti Airtel, Idea Cellular, Reliance Communications and Tata Communications. All were down by 35%. I think the sell off is over done. The previous guest was talking about selling strangles out of the money strangles, selling the puts and the calls. I do like that idea. I think it is a good idea in this situation. Perhaps not in a 1:1 ratio, I am just not a big fan of selling naked calls, but maybe if you do 1.5:1 or 2:1. I do like the telecom valuations here. They are migrating towards more like a utility type valuations. I am long on some other emerging market telecom stocks around the world is MICC, which is the leading provider in Africa and Latin America, there is Vimpelcom in Russia. The competition here in India is gaining quite tense. It has been evolving towards that point of the past two years or so. However, this seems over done in the telecom sector.

Q: The other unloved space lately is the capital goods/infrastructure space. What do you still hold there?

A: In that space, nothing in India right now.

Q: Why is that?

A: If I own any capital goods stocks, they will be more outside India. I just find more appealing valuations in Japan, US and in Europe. However, I am spending a lot more time on energy these days. I think that is just more appealing right now.

Q: Given what the dollar is doing in India, how are you approaching commodities, particularly metals?

A: I am a long-term investor in gold and uranium. I have not invested much in steel. However, I think the metals are still interesting here.

Q: The people are quite unhappy with the change in accounting policies in the Educomp story. How have you read them?

A: I can understand the concerns. However, about a month and half ago, I spend a lot of time with the management team when they were in New York for the Kotak Investment conference. A lot of these near-term changes and policies annoy me. Over the long-term, the value will be realized. Therefore, I am still a fan. So if you are already a shareholder, I would recommend you add a little at this price. If you are a long-term shareholder, than it is not a problem in initiating it at this price. If you look at what the company is looking to do over the next not six months or three months, there is an incredible amount of value. They are the dominant player in India in that space. Education is something, especially in the emerging markets, that I would want to be a long-term investor for. In India particularly, Educomp is the name.

Q: Do you own anything in the financial space aside of the large names like SBI, ICICI Bank, which are very well researched? Is there anything below that level which interests you?

A: I haven't been spending much time on the financials. I sure about some of the financials in US and Europe but not in India right now.

Q: You mentioned energy. I assume you would club power into that. Have you been participating in any of the power IPOs?

A: Adani Power was the only one.

Q: What did you think of Indiabulls Power?

A: It was not as appealing to me as some of the others. So I decided to stay away.

Q: There has been a move in some auto ancillary related stocks. Is your pick over there Amara Raja Batteries?

A: Yes. I have been spending a lot of time on energy, globally. There is a difference between the storage energies and fueling energies that I think are viable and those that are not so viable. I think the non-viable one's are wind power and solar in the near-term. I just don't think that they are economic. However, in the battery space, I am bullish in lithium companies and lithium related companies around the world. I have interesting batteries, which I am sure is some of the alkaline battery producers. I think that technology is becoming obsolete. However, I am interested in storage energy. If you look at that space especially in Asia, Amara Raja Batteries has very compelling valuations to all the others BYD in Hong Kong, which trades at 45 times forward earnings, Amara Raja Batteries trades at 9. So if you look at the company, it hit all time highs for topline even last year when it was very tough year. Decent margins, improving margins and the cost of raw materials have come down a little bit. Hence, this has helped them. However, compelling valuation, they have tie-ups with Maruti and Tata. The Tata tie-up would get them into Africa. Johnson Controls which is the world's leading battery manufacturer has Rs 90,000 crore market capital company based in the US, USD 18 billion. They own 26% of this. There might be an event angle as well. At some point of time, they will take up their stake. They are leading in the technology space for these batteries. So that is appealing to me. If you look at long-term chart of the company, back about eight years ago, stock fell about 60-70%, it fell down 30-15-10% day after day. That was for stock manipulation reasons that had little to do with the company or the current management. So if that is an overhang, you would look past that.

Q: Would you have compared Amara Raja with Exide in the local market and chosen one over the other?

A: Yes, with the valuations and the tie-ups, the stake with Johnson Controls adds a bit of the event angle. Johnson Controls has been leading around the world with USD 18 billion market capital. Then, there is Amara Raja with USD 215 billion market capital. There is a compelling strategic reason for them at some point to take up that stake at some point. So yes, I prefer that over Exide.

Q: What about Suzlon in the alternative energy space. Do you like it or you would give it a pass?

A: From the May 18, the elections, it is down 35-40%. The company has been working on its balance sheet or selling some assets. However, if you look at Gamesa, which is a Spanish company, they reported earnings last night after the market closed in Europe. The market capital is twice that of Suzlon. If you go through the transcript and news, they are starting to talk about 2011 already because 2010 they know will be weak. The demand is just not there. The economics are not that compelling. I spend a day on wind farm in the US about a month and a half ago to understand the appeal. It is a very appealing technology and a very investment thesis on paper. However, solar and wind are just not viable in the near-term.