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Trading in ONGC and Oil India over gas price hike may be over for now and Reliance would be a clean bet, believes Dipen Sheth of HDFC Securities. He added that the capital flows will continue to be volatile this week.
Dipen Sheth, head of institutional research at HDFC Securities expects foreign capital inflows in India to remain volatile. India's over dependence on overseas funds to finance its current account deficit (CAD) is a concern, he told CNBC-TV18 in an interview.
"Every time there is a rush towards exit by foreign investors, markets crack and when there is a bit of mending of quantitative easing (QE) not going away substantially, the money rushes back. I am afraid, we are at the mercy of the volatile capital flows and to much more than what we should ideally be," he elaborated.
Meanwhile, he is positive on the oil and gas sector on the back of recent natural gas price hike. He advised investors to trade in Reliance now. One should not bet on PSU players Oil and Natural Gas Corporation ( ONGC ) and Oil India based on gas price hike because gains from price hike will be offset by subsidy issues.
From the IT pack, he is cautious on Infosys . According to him, valuations of TCS are expensive, but one can bet on HCL Tech from the large cap names. After Tech Mahindra 's merger with Satyam, the stock warrants attention.
He is underweight on auto stocks and public sector banks.
Below is the edited transcript of his interview to CNBC-TV18.
Q: We had a fairly sharp pullback for the market come Friday. The worst in terms of price damage maybe behind us at least in the short-term?
A: Not really. There is no volatility and that is all which is evident. Every time there is a rush towards the exit by foreign investors, markets crack. And every time, there is mending or increased prospects of quantitative easing (QE) not going away; the money rushes back.
We are at the mercy of volatile capital flows and too much more than what we should ideally be.
Q: What do you think is tilting things this way and that? Is it up due to a a couple of domestic developments? Or is it still centrally a global problem as also linked with the rupee? Is that is going to determine how the next few weeks shape up?
A: India amongst the emerging market (EM) economies or EM pack; we are excessively dependent on capital inflows to fund our CAD as it were. Many of the better EM economies have current account surpluses.
So yes, they do have volatility when money rushes into their markets and out. But for us, there is a structural problem that we are plugging with these capital inflows. I really do not know whether we will ever get less dependent on global mood swings.
As for internal initiatives, a lot could have been done in the last few years. I see them as lost years for the Indian economy, quite frankly. You might call me a cynic, but that is how I see it right now.
Q: What does all this amount to in terms of an equity market movement? Do you think we had seen the worse at that 5500 level for the Nifty or because of the reasons you alluded to we could breach that as well?
A: There is going to be more volatility because of our dependence on foreign inflows and outflows. There is going to be sharper mood swings every time money rushes in and out.
If you think 5500 is a good enough level for the markets to stabilise at or find a bottom, I could tell you that it should be 5200 or something. So headline valuations will not make sense.
The Nifty itself is a composite of many different kinds of companies and sectors. Valuations across the Nifty are completely skewed too. So, there are parts of Nifty which look very costly at 25 times and more, and very cheap at 7 times and less.
So, on a blended basis, quite a few market gurus have been saying that 13-14 times looks like a good number to be invested in. I am not so sure about that. The skew is only increasing in the Nifty. It is not going away. That again is attributable to the kind of money that is coming into the country.
Q: The oil and gas stocks were in focus last week because of the gas price hike. You have been slightly sceptical about the formula that has been put into place. Can you just take us through why and how you would approach the oil and gas names now?
A: This formula that has been suggested and implemented in the form of a gas price hike now to USD 8.5/mmbtu. It is all wrong. Globally the gas market is a distorted and deficient market in terms of efficiency. You have Henry Hub prices in the US which had gone up and now have crashed because of huge domestic finds in the US.
European prices are reflective of what is happening in Russia and the North Sea. Asian prices are again distorted by the excessive demand from India and base demand from Japan.
Natural gas is actually not a fungible market and a freely tradable commodity, because it poses tremendous challenges for storage and transportation. So you will find completely different prices in different parts of the world.
And for this, Rangarajan Committee to take a call that we are going to average out all these prices in some complex manner and then say that is the price that we should pay Oil and Natural Gas Corporation (ONGC) or Reliance at the wellhead looks not so logical to me.
So I am not sure whether this is a very feasible and sensible formula. That said the price that they have arrived at is a substantially higher price than what is in vogue right now. Hence, a lot of extra money will accrue to the upstream sector, whether it is ONGC, Oil India (OIL) or Reliance at the margin.
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