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Vice President and Chairman of First Global Shankar Sharma says he would recommend sell on Cairn at current levels and doesn't see it sustaining current valuations. The company's IPO did not see enough demand from genuine investors.

 

 Excerpts from CNBC-TV18's exclusive interview with Shankar Sharma:

 

Q: Your contention has been that you should not buy the Cairn IPO. which is listed today and trading at Rs 130-140. At this price what would you do?

 

A: You should sell any allocation that you are unlucky enough to get.

 

Q: You don't think it will bottom out anywhere close to these levels? Your fair value estimates are even lower than the current price?

 

A: It is quite a bit low. The valuation metrics are way out of wax; so unless they really hit an absolute hot streak in terms of incremental discoveries,I don't see how they can sustain since the valuations can fall to the extent of contracting 30-40%, wherein you can see the stock being at double digit.

 

I don't think there is absolutely any sense in sticking your neck out and trying to say that this is bad enough; it would get worse and then the crude cycle itself is a definite dampener. In the last few weeks we have seen crude really cool off. There are inherent problems in the company itself in terms of the high pour point of the crude that they are sitting on and the evacuation issues as well as several other issues. There is absolutely no reason why one should go out and buy. You should go out and sell if you have any allocations.

 

Q: What sort of comparisons would you draw with global peers though and in that case where is Cairn stack-up?

 

A: The comparisons are quite amazingly disparate; in the sense that Cairn is trading at USD 32 EV for the probable and proven result, which is two times PE and that is like USD 32 EV per barrel. I don't see how those numbers can sustain unless they hit upon incrementally very strong discoveries and in the oil business you can't bet on that happening by any measure or certainty.

 

Q: Which of the concerns do you see as the key problem? Is it the quality of crude and the regulatory issues that might come up because of the pipeline issue?

 

A: I think it is a combination of everything, but one could have boxed-in all those risks and concerns had the valuations been cheap. If it were priced at the level that Chevron is at, then one would have said that it is fairy valued in the range. You can probably have some comfort even if some of the risks do materialize to some extent.

 

But here it is expensively priced and the risks are completely unboxed so it could go anywhere in terms of what the evacuation problems can be, what the cess can be and what the actual capture from this quality of oil would be; so everything put together at USD 32 EV two times PE makes no sense.

 

Q: What do you think would happen since everybody seems to concur that they got the pricing horribly wrong? Do you think they were trying to do pre-IPO placement at a benchmark and then get the other investors in at a fairly steep price point?

 

A: If you see the pre-IPO that went largely to the Malaysian Petronas and then to Videocon, who are strategic investors, the objectives are completely different from the secondary market portfolio investors.

 

So I don't think they have got enough demand from genuine investors who are just in the business of investing in the pre-IPO round. The benchmark had been set and they could not price it lower; clearly the investment bankers did a terrific job and it is a standout issue. I think this issue should be held up as an example of what good investment banking is all about - that you can sell a company like this at this valuation and get at least a one-time subscription. It is phenomenal, nothing but pure admiration.      

 

Q: How are you feeling about the market now because we seem to have been stuck in a bit of a range and got a bit volatile? Which way do we break from here once earnings trickle in?

 

A: I think we will break probably to the downside rather than the upside for a little bit of range. The markets are not looking particularly strong at the moment. The reason for that is clearly that we are getting some mid-term jitters in terms of whether Q3 numbers, which will be all that they are stacked up to be and traditionally it is a soft quarter. The issue  really is that India is one of the good hot markets, which don't really collapse in a heap; especially at these valuations which are high 18s or may be the low 20s, it is still not bubble territory. So I think we are okay but let us be prepared to lose some ground quite rapidly in the coming weeks.

 

Q: When we spoke a while back, you had turned positive on the oil marketing companies. Do you still hold that and do you still see value in these stocks?

 

A: Definitely. They rallied and came back, which is very typical for companies that have been in a very long bear market. They have been sitting on a stock for three years, which has not gone anywhere except down. So that is what has happened; stocks do come back after those kind of rallies coming out of a big bear market.

 

Now I think the rally has recommenced and especially with crude clearly not looking good at all. Clearly lot of people in the US are going to be sitting on lot of inventory because of the mild winter. Everything points towards a bear market and crude, and if that is true then these companies ought to be big beneficiaries of that and so are the airlines. So those are the two kinds of sectors we have liked in the last few months again being placed really on declining crude scenario.

 

Q: What is the problem with FMCG, which you are quite optimistic on? Why are these stocks such big underperformers for the last couple of months?

 

A: I think this year is okay in terms of numbers. I think the market is not looking far enough to see whether these companies will really benefit from the overall spending boom. That is where the opportunity really lies, because the market may or may not always get it right in the short-term; it will get it right in the long-term. So one has to be prepared for underperformance. They have underperformed lately and the underperformance may have some room left to run. But at these valuations and numbers you could probably beat the market over the next 12 months but you could be lagging it by two months.