Expect USD 20-25 bn FII flow this year: Raamdeo Agrawal

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Q: So far the leaders have been the banks. Do you see any kind of exuberance in bank valuations or do you think they can justify even higher levels?

A: I think it can justify high levels, given the level of competition. I think we talk about inclusion, but the RBI out of abandoned caution has not been able to allow the banks to expand to a level where there is more competition for the banks. So, what is happening is that banks' effective coverage area is not expanding and economy is expanding in the non covered area, whether is rural economy, semi-rural economy where there is no bank coverage.

We can have another revolution like telecom revolution and banking, if RBI and the government takes it up in the right earnest. I am not saying that you must blow the cautions of the wind, but there is a need for a massive increase in the competition for the banking. So, the competition is less and hence in resurging economy, banks are going to do very well.

Q: What is your takeaway for the two key protagonists now, Sesa Goa and Cairn , after the Vedanta deal? Do you think the markets concerns about Vedanta as a new promoter are warranted?

A: If you look at the group, all the three-four acquisitions in the past have turned out to be brilliant, it has worked well for the shareholders as well as for themselves. I can see two factors for this deal. One is lowest cost of money, at 230-240 bps above London Inter-Bank Offered Rate (LIBOR) is very low. So that's one starting point. Large amount of money is available for viable companies like Bharti or Vedanta or wherever there is cash flow in supporting balance sheet.

Second is probably they know about this business or what they want to do with this business, they want to take them globally because there is a confidence in Cairn to do full service from exploration to production. So, they have been very smart in terms of buying assets. So, I would think that they know what they are buying at what price.

Q: If you had to back any sector for outperformance now from these kinds of market levels, what would you go for?

A: If I am underweight, I would definitely go for financials, the banks, PSU banks or whatever banks I like because I still think that if the economy is to grow at 8-8.5-9%, getting 20% growth in the banks profits with a very low levels of non-performing assets (NPAs) is quite possible. There are a lot of stocks which are available at 4-7 times, fairly large banks. So that's the big chunk.

Second is oil and gas segment where you keep getting these opportunities. I think real opportunities I see are in the financial side at this juncture.

Q: What is your top underweight post earning season?

A: I don't do it that way. But I think telecom, the results has been much worse than what we had thought. I think with eight solid players, global and local players, the very long-term is good, but I still find it difficult to see how things are going to turnaround with eight guys solidly willing to ride the losses for some more time.

Q: You have a good sense of the trading mood as well. Any similarities that you would draw to 2007 situation or any overheating that you are worried about for the market?

A: We might be worried about 18,000-19,000 currently. But one has to see the valuation. Right now, if you look at the broader valuation that is marketcap to gross domestic product (GDP), if the current year's GDP is going to be Rs 70-72 lakh crore, we are at about Rs 65 lakh crore kind of a marketcap. So, it is a good valuation, rich valuation. But it is not over the top kind of like in 2008 peak, it was 1.8 times GDP and we are at just below one time. So can it correct by 10-15%? That is always possible. Can it crash? I will be surprised; valuation per se is not for a crash kind of a situation. Correction, you can always have healthy correction.