JM Financial see 10-15% upside in telecom at current levels

Talking about the telecom sector, he said that there is a need to monitor market share changes in the space. Moreover, he sees 10-15% upside in the telecom space from current levels.

Lumba prefers exposure to non-banking financial companies (NBFCs) and likes M&M Financials at current valuations. He also pointed out that sovereign issues and asset quality are weighing on the bank valuations.

Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video.

Q: India has suddenly seen a big knock in sentiment. What's the mood among your investors on how the tail-end of this year may shape up? Is it much worse than what the best part of the year has been for India?

A: The response has been fairly overwhelming. We have got close to 90 companies in our conference. We have around 300 investors present at the conference. These investors are from all over the globe. There is a good breadth of investors.

Over the last many months, the country funds aren’t seeing very strong inflows. Largely, the global emerging market funds of people, who are global minded, are seeing clearly more flows. This is the reason why we are seeing concentration in the largecap space, which remains bit of a challenge.

The investors want to look at their existing portfolios and holdings, and see how the companies are doing. Given the current environment, we assess your existing portfolio and look at some interesting new ideas. The mood for investors remains fairly upbeat.

They are taking a long hard look at the sustainability of businesses because there are many concerns about on the inflation and interest rates front. There is a fear that India, in certain sectors, may out price itself. There are challenges, but there are lots of opportunities out there too.

Q: Investors at the conference are talking about the possibility of year-end move, which would help them after a dismal year. Is the mood such that people are not betting on major upside in the near-term?

A: In the short-term, it will be volatile, but India is fairly protected at the same time. We are a diversified market, and have a large consumer sector and IT services that will remain resilient. There is too much hype at this point about the sentiments in the markets.

The investors are looking at capital preservations. Over the next six months to one year, the single minded objective will be from most large investors. This theme will catch on greater momentum as we go long. It is about how we preserve capital and ensure that we make reasonable money.

Over the next six months to one year, ensure that your fund is protected. . I don’t see India struggling too much from here. The rural and consumer theme is robust.

There have been lots of problems and challenges on the power or infrastructure side, which is now 90% priced-in. There is only 5-10% downside from here for some of the smaller names, but they are not a significant part of the portfolio in any case.

Q: Himanshu Kapania of Idea is one of your first speakers at the conference. How are you approaching this whole space and stocks like Idea in specific?

A: There has been a lot of excitement in the market about pricing power coming back into the sector. These are early days and one needs to watch the situation over the next three-six months and how the market shares change based on the price increase, change between incumbents and new players entering the market.

At this point, the valuations are not cheap. Even telecom stocks globally have not done phenomenal over the last one or two years. I would be reasonably positive in this environment and would look at a 10-15% upside. We would advice investors to be cautious.

Q: The private and public sector banks have probably faced the most pressure – ICICI Bank and State Bank of India (SBI). What call are you guys putting out on banks now?

A: On the bank front, the larger banks have well established business models and are fairly well researched. Some of the larger banks in India have more coverage than the global banks. The Indian banks have almost twice of the global banks’ coverage. These are fairly well understood banks and appreciated by the market.

Two things are affecting the banking valuations. First, banks globally come off substantially. Most banks are trading at 0.4 to half book. Some of the Japanese banks’ stock prices are down almost 70% from peak levels. Banks across the board have come down. People don’t know about the book and business model because most of these banks are operating in different markets.

The Indian banks are far superior and our banking system is a lot more robust. We are currently getting impacted by global valuations, which are coming down because the global pool of liquidity remains the same.

Second, our domestic problems are affecting valuations on the recovery front. We have been bullish structurally on some of the banks like IndusInd Bank, Yes Bank, ING Vysya Bank and Federal Bank, and investors have made a lot of money.

For a trade over one-two year horizon, these banks have very strong CEO’s. Romesh Sobti and team at Indus Ind have done a phenomenal job. Rana Kapoor at Yes Bank and team has again done extremely well. We like ING Vysya Bank’s Shailendra Bhandari and his team’s stance of being predictable and boring.

At this point in time, it is a good time to look at these companies. The plus point about these banks is that they are well capitalised. They have raised capital at the right time. We don’t think their books are risky and they run the business very efficiently. For some of these names, it is clearly a great opportunity ahead. I would be very positive on these names.

For the rest of the pack, one needs to look out for some help on the policy and macro front. Unless the interest rate cycle dust on the ground and inflation tends to ease at this point in time, it is hard to take a call on both these aspects. This is the reason why we would want to recommend franchises like these because we respect and admire them.

We have been extremely positive on M&M Finance. From the time we initiated, it’s up almost 150% and is a phenomenal franchise. I would urge everybody to look at Mahindra Finance and see how well positioned they are to tap the rural opportunities. There is brilliant management.

Over the short-term, we could see minor headwinds in terms of interest rates going up, but this franchise has lead competition and has the ability to show good growth with very good monitors and great efficiency.

There are some very exciting companies which will create a lot of value for shareholders given any environment. Once the macro environment turns positive, which should be over the six months to one year horizon, you will get a multiplier benefit due to that.

Q: What kind of expectations do you have from the market? How high do you see the probability of us breaking the lows? How high is the probability that we break our range as well?

A: Given the under penetration in the consumer sector, the Indian average per capita spend is 1.4 euro, which is less than Vietnam and Indonesia in the personal care segment. If you take a 5-10-year view, it is headed only up. If there is a correction in the stock prices, you would get an opportunity.

There is very high probability of the institutional investors ceasing the opportunity. So, the basket remains very strong. We see the two-wheeler space very robust. Mahindra and Mahindra have an outstanding management, good rural opportunity and very good play. We don’t see issues on auto front.

For IT, outsourcing trends will get stronger with whatever is happening in US and Europe. We would recommend an overweight stance on IT. There isn’t much serious correction expected there. The only sector which we have been cautious for a while is real estate.

We need to see corrections in real estate prices in general because one of the challenges for modern retail are high real estate prices and clearly you have got inefficiencies of the supply chain side.

If real estate prices come off, it will be great for the economy as a whole because that will spur demand and a lot of productive investment will be made. I have a positive bias.

There are still enough opportunities in India to outperform. For the index as a whole, I don’t see too much downside from these levels.