Lot of steam left in bull run: HDFC Sec

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Sanju Verma of HDFC Securities is not reading too much into today's fall, which was to some extent on account of BoJ's decision to hold rates. It is reflected in the fact that almost all Asian indices without exception closed in the red. She adds that the markets needed excuse to correct because of the gravity-defying move that we have seen.

 

Excerpts from CNBC-TV18's exclusive interview with Sanju Verma:

 

Q: What have you made of this interesting week and is the nose still pointing up?

 

A: Well, the nose is certainly pointing up. I am not reading too much into today's fall. Three and a half weeks back, I was on your channel when the index was at about 15,500. I had categorically said that we are likely to test new highs, albeit with a few hiccups. I feel pretty vindicated, though the hiccups have not come along. It has been a one-way street northwards.

 

Today's fall has to do more than anything else with one big reason. The Bank of Japan yesterday decided to hold rates steady at 0.5%. That certainly did not bring cheer to the markets, as it otherwise should have in the normal course of things. It is reflected in the fact that almost all Asian indices without exception closed in the red. Some of the economic data emerging out of Japan is certainly concerning. For instance, the core consumer price index there has fallen consecutively for seven months at a stretch and is at 0.1% raising fears that the Japanese recovery was very nascent and deflationary fears could spring up again.

 

Apart from that, the inflation in Japan for the month of August has gone up from 3.6% in July to 3.8% in August, which is again worrisome. So, the point is that the Japanese economy, which is humongous by any measure, the economic data out of that is not cheering the markets. Asian indices basically nose-dived in response to that.

 

Our markets needed some kind of excuse to correct because of the heady and gravity defying move that we have seen. People are also concerned about what the busy season credit policy will finally come out with.

 

There are fears and this is not our house view, it is a personal view, that the CRR hike could be anywhere in the region of between 50 bps to 100 bps. The correction was on account of a mixture of factors, both global and domestic, and also the fact that Infosys results have been anything but flattering. So, the tone as we enter the second quarterly numbers has certainly not been very welcoming. 

 

 

Q: What have you made of the USD 4 billion this month? Are you in the camp that believes, this is more or less a liquidity driven rally and not much else?

 

A: This is certainly a liquidity driven rally. I would like to reinforce that the Indian stock market is a unique animal, which moves on three legs. In the immediate term, it is sentiment; in the medium-term it is liquidity and in the long-term its earnings. Speaking of liquidity, there is a reallocation of funds out of the emerging markets/developing world space into India.

 

In fact for the last three weeks, I was on a road show. I met up with a lot of investors in the US, UK, Canada, Hong Kong and Singapore. By and large, the perception is that money will continue to pour in. There is no shortage of liquidity and petrodollars, thanks to oil being anywhere in the region of between USD 78-80 plus. Those petrodollars should keep flowing in.

 

Barring South Korea, Taiwan and Thailand, which are trading in a PE band of 11 and 14 times and continue to be cheap, most of emerging markets are trading between 15-20 times. So, India is not more expensive than the rest of Asia, which is the wrong perception.

 

I think at 18 times one year forward, we certainly have a lot more steam in terms of attracting flows. Lets not forget that today the Hang Seng is actually quoting at 39 times book. I am told this is ridiculous, given that the long-term 10 year average has been just 6 times book. I think we are nowhere close to that.

 

So, even in terms of valuations, given the fact that on a one-year forward PE, the earnings yield comes to anywhere between 6-6.5%. Given these factors, I think liquidity is here to stay and I would not be surprised if we continue to attract those dollars and the greenback should certainly keep rolling in.

 

 

Q: Just one quick take on technology. Have you more or less under weighted the sector?

 

A: We continue to have a neutral rating on most of the biggies. The only stock, which we have a massive overweight position on, is a mix of technology and telecom. Tanla Solutions is one where we had reinforced a buy at Rs 470 and the stock moved up to Rs 650 odd before stabilising at the current levels of Rs 600 or so.

 

 

Q: You integrated your opinion on what might happen from the credit policy, but how would you approach one of those rate sensitives like the autos now?

 

A: I think autos for the time being will have to be kept on the backburner. Our house view is that when an upturn in the auto sector happens, which seems at least two quarters away if not more, it will be the passenger cars first, which will have an upmove followed by CVs and then perhaps two-wheelers. Putting all this in perspective, one stock that we are certainly, bullish on and which we believe has bucked the otherwise negative trend within the space is Maruti .

 

The passenger car segment has basically shown a year-to-date growth of about 12-13% whereas Maruti has shown a growth of 19-20%. Last quarter their margins were actually higher year-on-year at 14.7%. I would not be surprised if they continue to show margin improvement this quarter as well on the back of excellent response to SX4 and some of their other new variants.

 

So, the point I am making is that it is going to be very stock specific, very bottom-up. I wouldn't touch two-wheelers with a bargepole, given that the year-to-date growth has actually been negative to the tune of 10%. While we have a buy on Bajaj Auto , I think it is not for the fainthearted, given that today it is no longer cheap at 13-14 times, which was the case a quarter back. It is trading at about 17 times plus. So, clearly one should enter the two-wheeler space with their eyes wide open, if they have a one-year time horizon. So, cut to the chase, I would stick to Maruti and Telco in that order, within the auto space.

 

Q: The most phenomenal performance has come from the power space. What would you buy between the generation companies, the ancillaries, or even something like a Power Grid or PFC ?

 

A: Within the power space, I would like to divide the space into two. In the standalone generation EPC companies, you have your picks from a BHEL or Alstom Projects . Then you have the T&D space, where you have Power Grid in the transmission-infrastructure space, you have the likes of KEC , Jyoti, Kalpataru . The fact of the matter is that the power sector is poised to grow in geometric progression, given that the government is committed to add 78,000 megawatts of capacity in the 11th Five Year Plan. We are not even talking of replacement demand here. So, if you take that into account, the growth would be far higher.

 

Within the power space, BHEL is an over-researched and over-broked story, so, I will reserve my comments on that. We like Alstom Projects in terms of standalone EPC generation companies, because of sheer valuation comfort. I do not think there is any other company with a similar business profile, which trades at something like just 17 or 18 times FY10 multiple. Again, the order book is phenomenally strong and the commitment of Alstom globally to its Indian entity is increasing by the day, which was not the case earlier. And within the transmission space, the picks would be KEC, Jyoti and Kalpataru, in that order.