Avoid bargain hunting; stick to bluechips: PN Vijay

“Risk aversion being what it is, especially among small investors, this is not at all a good time to do bargain hunting with a stock which is not a blue-chip,” he said in an interview to CNBC-TV18.

Though the feeling is that the sky is falling down on the market, Vijay says institutional investors are still positive. “FII plus mutual funds have been net buyers in the Indian market right through May,” he said.

Going forward, Vijay expects post-budget session announcements and the Merkel-Hollande summit to change sentiment, both domestic and global, lending support to markets.

With this view, Vijay has a bullish view on L&T . “I think L&T would be a front runner in the Indian domestic recovery story,” he said.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: The big one is SBI today. What you are expecting and how would you approach the stock now?

A: SBI is expected to report good numbers because their chairman has been saying that there has been a turnaround. The positive in SBI is that the net interest margins have been very strong. After a long time they have crossed 3% and it is expected to stay there.

The fear all of us have is the asset quality because the public sector assets have been under strain, some more than the others. Here again SBI has been saying that they have been doing a good job, so we need to see.

The market expects slightly better results from SBI compared to other PSUs, which is why one a relative basis the stock has been outperforming the PSU banks. But it is an important stock to watch because it will tell us how deep the malaise of bad loans is in the Indian banking sector.

Q: Tata Steel went through a really difficult quarter the last time around. What do you expect to hear from there?

A: Tata Steel would I think look at the future with some optimism because the general prognosis is that the increase in the pace of construction activity and government spending would increase demand for steel.

The thing about Tata Steel is that their biggest competitor is imports, not Steel Authority, because they are very low cost producers compared to all other Indian producers. You get very cheap imports especially from central Asia. So with the rupee starting to hit the ceiling, there would be a negative sort of protection for companies like Tata Steel whose main problem is import competition.

So Tata Steel, as you rightly said, the Q4 is not going to be any great shakes. They don’t give guidance but they do give an outlook, and it should be pretty positive for FY12-13. That’s again an important stock to watch because it is slightly different from the regular metal pack. The base metals follow global cues, but steel does not follow global cues because it is not a globally traded, it is a privately traded commodity. So it might be a not so great Q4 but a pretty positive outlook for the coming year.

Q: The stock which has broken down over the last few days is Pantaloon . At Rs 160-170 people were hoping FDI (Foreign Direct Investment) would happen. That did not happen but the stock has just been falling continuously and relentlessly. Would you take a contrarian call or it is best to stay away?

A: Generally one does not ask people to take a contrarian call on midcaps. What's happening right now in the market is there is a great panic among retail investors, not really among fund managers because if you see the May fund flows they have been positive. FII plus mutual funds have been net buyers in the Indian market right through May, but the retail for some reason has decided that the sky has fallen down and these are stocks which retail investors and traders love to play around.

So the risk aversion being what it is, especially among small investors, this is not at all a good time to do bargain hunting with a stock which is not a blue-chip till the air is cleared and that would drive Pantaloon. I think Kishore Biyani is going about a recast of its group with great severity. He sold off a piece to Birla, now he is selling off his finance business etc. So the balance sheet is getting stronger but of course the big kicker is the multi brand FDI then it will become a prime target for investment.

Q: The rupee has been grating on the market’s nerves and the only space it could likely help is the IT industry. What would you still buy from there?

A: I am not buying anything in IT right now. I think it is overpriced because the price earnings is not attractive enough compared to other sectors. Of course IT had its great movement, but one is seeing a softness in the US. The Philly manufacturing index yesterday, which led to a selloff in US stocks, clearly indicates that growth is slackening there and there may be a QE3 over the next 15 days.

Right now we are not selling IT at higher levels, we are holding on. One is expecting some sort of pull back in the rupee from 55 levels as most of the investment banks are saying. So no fresh buying on IT right now.