PN Vijay's top picks post RBI shocker

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Maruti Suzuki BSE | NSE 01/06/12 Are Mutual Funds betting on Maruti Suzuki? Other Stocks in this news Bharat Heavy Electricals | Hexaware Technologies | HCL Technologies | L&T Finance Holdings | LIC Housing Finance | Shriram Transport Finance Corporation | Mahindra & Mahindra Financial Services | Bajaj Finance | Infrastructure Development Finance Company | Bank Of India | Yes Bank | IndusInd Bank |

PN Vijay, Portfolio Manager, in an interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee gave his views on how to play in the market after the policy shocker. He feels that government's ability to reign in the fiscal is very limited and hence, the RBI is taking up the battle more on the monetary front.

"Maruti and BHEL have shown that they can live with adversity quite well. I also like Hexaware in the midcap space as the company seems to have a very strong business model. HCL Tech is also a good bet because of a relative repositioning of the company vis-à-vis its competitors," he added.

Below is the verbatim transcript of his interview. Also watch the accompanying video.

Q: Has yesterday changed anything because till yesterday the mood was building up, everybody got jolted by the RBI, do you relook at the possibility of a breakout now?

A: The RBI shocked everyone including the Finance Minister probably but after the knee-jerk reaction is over, the RBI's message is coming out is very clear that they are not expecting too much from government in terms of fiscal consolidation. Especially government just lost about Rs 25,000 crore in petro product duties last month. So the ability of the government to reign in the fiscal is very limited. So RBI is sort of taking up the battle more on the monetary front.

It's not a bad thing for India, if the script that is being outlined, the market will have to put up with little bit of deceleration in the short-term growth, maybe to even 7.5%- 8% but we will reign in inflation and that goes well with long-term investors.

There would be a major movement of portfolios away from rate sensitives for a while towards stocks which are not that rate sensitive. However, on the whole for the market this is not a bad thing because this shows the seriousness of the authorities to reign in the main culprit that is inflation.

Moreover, there is no asset bubble building up in India. With this type of consumerism and consumer spending going on unabated, one would have imagined there would be something like Shanghai where asset prices going through the roof, but fortunately that has not happened. So, the economy can take this jolt. Maruti and BHEL have shown that they can live with adversity quite well and we will go along but on the whole, it think it's positive for the Indian economy.

Q: How much stock would you give the optimistic point of view which is that the RBI is probably mostly done with the rate hikes and if anything they have opened up some room for downward surprises from here?

A: It's possible as we are in a very unnatural situation. We are having the ten year bond and the overnight; almost same which is a prescription for a sharp reduction in interest rates or a prescription for total chaos which our economists are following. So this is a very unnatural situation which cannot last long. If one has to be an optimist, then one could see a sharp deceleration.

In the short-term interest rate, the yield curve gets its normal slope which is the natural order. If that happens one could see some very strong rate reduction in the market place if not with the RBI going into the last quarter of this calendar year. It is possible though there are some pessimists who say India may just get one knockout punch some time in September before Mr. Subbarao takes a holiday.

Q: Typically when the Reserve Bank of India surprises on the rate front that action shifts back to the relatively non-interest sensitive sectors like IT, FMCG etc. Do you see that happening this time and in that light how would you read HCL Tech's numbers?

A: I don't think that will happen. If you see smart traders have been beating bank and auto stocks down and building up unnaturally high positions in the ITCs and Lupins of the world till they know that price multipliers have reached the stratosphere. So I think the smart trade has been done much before the RBI came with its act.

So going forward, I don't think there is much parlay in moving back to these oldies at 35 PE etc. From that point of view, HCL Tech is actually doing what TCS was trying to do two years ago. TCS was the Cinderella of the market three years and the spokesman used to tell us that they were as good as Infosys and nobody was listening but now people are listening.

Mr. Nadar is doing the same and he would be trying to tell world that I am not as bad as you guys think and from that point of view, some amount of rerating would continue to happen in HCL Tech . They are also in a more comfortable vertical conglomeration, more towards industrials and so on. So from that point of view, HCL Tech is a good bet because of a relative repositioning of the company vis-à-vis the other biggies.

Q: You keep an eye on Hexaware, do you think it's still good for more from Rs 80 level?

A: Hexaware has been a bit of favourite of mine for the last several months because among the midcap, they seem to have a very strong business model and recently they got some blockbuster client additions also. The stock has not moved much, it has been in the Rs 70-80 range and this might just be the trigger to take it to a different level.

Here again if you see the vertical concentration, its not that much into BFSI like the other solution providers in India but more into ERP type of solutions and the general perception is the manufacturing sector is doing well in the US and EU as compared to other verticals. So that should give them a sustained earnings visibility and volume traction.

So given all that, I think Hexaware coming out with such good numbers is just a confirmation as to what many of us have been thinking that this is the stock on the move, so I think it's a good buy around this level.

Q: What do you do with the NBFCs given the way rates have moved stories like IDFC etc?

A: NBFCs are a good spot. I am not so excited for IDFC in particular but I like Sriram Transport or Mahindra and Mahindra Finance or even the L&T Finance that is going to list shortly. I also like LIC Housing Finance to some extent because these people have differentiation in the sense they don't have treasury problem like the commercial banks have and also their Net interest margins are very strong.

When you are talking about banks you are talking about NIM margins between 2- 3 %, here we are talking about 6-7% upwards. It is true they have a bit more restrictions from the RBI but they are not awful as compared to banks.
 
So from that point of view, well-run NBFCs with a clear cut business model which are exhibiting a CAGR of something like 30-40% would be very good buys in this period of uncertainty and in that category, I would put Shriram Transport , LIC Housing , Mahindra and Mahindra Finance and Bajaj Auto Finance .

Q: How to go about the rate sensitives now, do you think they will give you better price or entry opportunities over the next few weeks to buy them or would you buy them right away on yesterday's fall?

A: It might be worth waiting for another two weeks to get results season out of the way because as you are pointing out different rate sensitives that are reacting to adverse situation differently. For example, OBC has stood up quite well. Bank of India has capitulated; IndusInd Bank has done well but Yes Bank has not to that extent.

So it's like the Curate's egg; the results are good in parts. So wait till July end, make a reasonable call. But my trade for the next 6 months would be to use the catastrophic conditions after the RBI shocker to build good long-term positions in all rate sensitives like banks, auto and some of the better real estate stocks.

Houseviews: 4 stocks on brokerages' chart