Jul 22, 2013, 12.13 PM IST
Since dollar denominated revenues make sense at this point of time, IT, barring TCS, was quoting anywhere between 11 and 12-13x or so on. Midcap ITs were going for 8 and 9x and this is less than a month ago and IT stocks continue to outperform.
Bank stocks continued to fall significantly through last week. Dipen Sheth, Head-Institutional Research, HDFC Securities, does not see a change in the trend. In fact he says the skew in valuations looks like it is at an extreme point, maybe close to a tipping point of sorts. But a reversal does not seem to be in sight. According to him, the temptation to buy PSU banks is huge, but the leaning is still towards private sector banks.
In an interview on CNBC-TV18, Sheth says IT sector looks good and investors must look at it. But consumer, especially FMCG, looks very costly. And in auto, investors should wait for a cyclical rebound which may not happen anytime soon.
In PSU companies, Sheth sees a further 20-30 percent downside for BHEL because of the kind of capacities that they have now and the kind of capacities that are required over the 13th, 14th or even 15th Plan period and the kind of pain that is prevalent in the power sector.
He further cautions against L&T. He suggests doing some deeper down study of L&T before jumping at it just on the basis of order inflows.
Below is the verbatim transcript of Dipen Sheth’s interview on CNBC-TV18
Q: Last week was a curious phenomenon of the banks falling significantly, but the market being held out by a few defensive sectors. Do you see that trend persisting?
A: I do not see any reason for this trend to change soon, although I must confess that the skew in the valuations is now not just worrisome, it looks like it is at an extreme point, so we maybe close to a tipping point of sorts. Even near the tipping point I would look for triggers and sadly those triggers are not happening. You have Fast Moving Consumer Goods (FMCG) stocks at 30-35 plus valuations. You have PSU banks at half book and so on. So you are right, there is skew. I think the skew has gone to extreme levels, but sadly I still do not see a reversal.
Q: Which way do you think this skew will start giving way? Will people start showing some interest in the broken, beaten valuations of many sectors like industrials etc. or do you think some of these very expensive defensives are set for an explosion?
A: Last week when I met a very senior and respectable fund manager, he said this half in jest but I could understand where he was coming from, he said that the job of brokers right now is to identify the next big Punj Lloyd or Jaiprakash Associates or Himachal in the consumption space. While it sounds hilarious, but that is the thing. People simply cannot digest these valuations anymore and like I said I do not see a tipping point happening soon, but we are getting increasingly close to that tipping point.
Q: What is your sense on how to play a sector which is not that expensive like consumers; IT where valuations are still in that Rs 15-20 kind of zone. Do you find those valuations being able to expand somewhat more?
A: If you look at our strategy note of early July we have said that dollar denominated revenues make sense at this point of time in our economic cycle. Hence, IT which was as a pack, barring Tata Consultancy Services ( TCS ), quoting at anywhere between 11 to 12-13x or so on. Midcap ITs were going for 8 and 9x and this is less than a month ago and IT continues to outperform and I think it still makes a lot of sense. If you ask me over the last 15-20 years if there is one industry at which this country has beaten the rest of the world, it is the IT and hence any trouble that IT goes through whether it is in the form of Immigration Bill and so on, I think these are opportunities to buy into a very capable sector.
Consumer, I do not think I would agree with you. Like I said within the consumer vertical the FMCG space definitely looks very, very costly. There might be little bit of value picking on the sides, but in things like auto you have to wait for a cyclical rebound and I do not think that is happening anytime soon.
Q: What are you comfortable purchasing from the banks especially after the kind of carnage there was last week?
A: The temptation is to pounce on the public sector undertakings (PSU) banks. We like them when they were 1x book or adjusted book, we like them more when they were 0.9x or 0.85x and now things like Oriental Bank has fallen to 0.5x adjusted book. This could be illusory, I am not specifically talking of Oriental Bank , but what can happen is that as the economic cycle toughens in India over the next one or two years, I suspect it will, we are in a different growth trajectory now.
So some additional non-performing assets (NPA) accretions could happen to adjusted book value, which might make the current price by adjusted book values revise significantly upwards and the same price levels for the banks. So, I would still say that private bank should be bought on decline. There are some very capable names there. Not all PSU banks are relatively incapable, nor are all private banks relatively capable. But with some intelligent stock picking I think the leaning should be still towards private banks.
Q: A lot of institutional holders have been distressed by the way some of these big names like Tata Steel , Bharat Heavy Electricals ( BHEL ) have continued their downward drift. In which of these names do you see the even further potential for derating after the damage or carnage that has happened already?
A: One structural story of derating could obviously be BHEL. Last week we published a note in which we said that we just do not see any hope of a turnaround for the stock, not that it is an incapable company by any stretch of imagination, but simply because the kind of capacities that they have now and the kind of capacities that are required over the 13th, 14th or even 15th plan period and the kind of pain that is prevalent in the power sector, if you look at BHEL on a price book basis and that is the way to pick industrials at the bottom of the capex cycle, we still see valuations as being at a significant premium to what they used to be in the last down cycle.
Markets face resistance; Nifty likely to correct soon
After expansion comes contraction - this is the theme which the stock markets have begun to work on. This letter has been upbeat on the market. We still are, when it comes to the long term. The short term scenario may be different. For short term traders the strategy should be to take swing trades lasting one or two days, only on extremes.
Action in Bharat Heavy Electricals
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