On the ground, PN Vijay says, its (political issues) impact on the actual macros of India like current account deficit or interest rates is going to be marginal.
Despite the everyday political drama, which includes the recent exit of two UPA ministers, portfolio manager PN Vijay does not think there is any serious political instability at all.
“Since last two-three years there is a feeling of political uncertainty because of the current affairs channels having a lot of their time spent on scams. However, politics is played on numbers and hard realities,” he told CNBC-TV18 in an interview.
On the ground, he says, its impact on the actual macros of India like current account deficit or interest rates is going to be marginal.
"We should not talk too much about reforms. It is nice to talk about them but when you look at investors and their way of buying and selling stocks right now, I think what we need the macros, we need to concentrate on current account deficit (CAD), interest rates and index of industrial production (IIP). They are sending mixed signals," he says.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: There have been hectic deliberations and developments from the political front. How should the market read it? Should it prime itself for elections as early as October which is the chatter in Delhi or do you think there is a different way to read this, it is probably going to have an impact on policy, not so much in terms of instant elections?
A: I don’t think anybody is seriously talking about elections in October at all. I think to some extent there is considerable media hype about these two ministers. I don’t see any reason at all for the Congress party to call for fresh elections. They are going to have some major state level elections in Rajasthan and a few other states before that. They would like to see what happens there.
So, I think there is absolutely no political instability at all. Since last two-three years there is a feeling of political uncertainty because of the current affairs channels having a lot of their time spent on scams. However, politics is played on numbers and hard realities.
How much Akhilesh Yadav wants the government to continue and many other factors. Nobody sees the TV channel and decides to how to vote in parliament. So, surely investors should not at all worry about political stability. However, one level below there is reforms as you were asking. Much of the reforms are out of the way, the FDI in multibrand, etc. One has a couple of things like Companies Act and the pensions sell and insurance, which would be of course good in terms of sentiment.
On the ground, their impact on the actual macros of India like current account deficit or interest rates is going to be marginal. So, here again we should not talk too much about reforms. It is nice to talk about them but when you look at investors and their way of buying and selling stocks right now, I think what we need the macros, we need to concentrate on current account deficit (CAD), interest rates and Index of Industrial Production (IIP). They are sending mixed signals.
The inflation is coming down slowly. The IIP has been terrible so we need to worry how fast the recovery is. There is some green shoot in the March numbers in IIP, but it’s too early. CAD of course is taking a relief from the gold and commodity prices. So, these are some of the bigger, macro issues that should worry investors. I would say it is sort of iffy, 50 percent this way, 50 percent that way.
Q: We didn’t quite get to ask you about the markets per se. Do you expect the market run to continue and what’s the recommendation that you would give an investor after this near 600 point rally in the span of one month?
A: We need to look at the market in two stages, two time compartments. Will it continue to go up in the next couple of months? I really doubt it. After the type run that you just said, it is normal not only for traders but even for investors to take some profits off the table given the volatility of stock markets in India.
So, in the near term, any further upside from this level is likely to be muted. However, in the longer term, let’s assume that the shadow of the election would be cast somewhere from around November or December when actual dates are announced and before that, the macro economics.
The set up for the market is extremely good till about October-November for two reasons. We are still under performing the global markets if you look at the Dow, the DAX, the Nikkei and all - they are at multi year high. We are below that.
Secondly, most large investors feel that India is at its inflection point. There have been five different occasions when we had a bull run and when the IIP bottomed out and interest rates topped. Today, the ten year bond rates are about 7.65 percent. Whoever thought six months back when the 19 year bond was about 8.5 percent that will be 7.65 percent. There is a very strong negative correlation between interest rates and equity markets in India.
So, some of the economic macros are favourable for continuation of a bull run. However, as I said, for the next 1.5-2 months, one will have to keep ones fingers crossed because naturally there will be a fair amount of profit booking by even large investors.
Q: There is some incremental optimism building on telecom as a space. What did you make of Reliance Communication’s numbers and would you buy anything from that pocket now?
A: Reliance Communications was sort of par for the core. We just saw the strong earnings were aided by one offs. They have managed to bring down the debt level a little bit, but the average revenues per user (ARPU) are very low. Their entry strategy of sort of giving it away is their ARPUs are less than 50 percent of the other major players.
The way Reliance Communications, after Mukesh Ambani’s indirect entry into the company, pummeled the stock from about Rs 70 to Rs 110 now, a huge run. It will be inadvisable to buy any more of Reliance Communications.
Probably, it is time to exit some of your holdings. Even the other telecom companies, like Idea has had a huge bull run. Bharti has its share of problems in the African acquisitions where things are taking a bit longer for the debt to be sorted out and for the profitability to come in.
So, they are all company specific issues and they are also industrial specific issues. At the current levels, I would not advice people to increase their exposure to telecom. They would remain at best market performers in the next 12 months.
Q: What would you do with Maruti and the enthusiasm surrounding it because of what has happened with the global currency moves?
A: Maruti is having a huge bull run due to two reasons. Primarily, as people have pointed out the end and in many of their newer versions, substantial portion of the completely knocked down (CKD) are imported from Japan. So, there is a very large improvement in the EBITDA because of that.
These are all material sensitive companies. The raw material to sales price is almost 70 percent in automobile companies. Reckoning, they (Maruti) have been very successful in their new models. Tata Motors has just come off in India as compared to Maruti, the success story of Maruti is its ability to understand the market and bring out new models. I should say on a longer term, the catching up of petrol six months back, the diesel prices were about 55-60 percent of petrol prices.
Today, they are 78-80 percent. So we are catching up one through petrol prices falling and diesel prices going up. Maruti as you know is king in the petrol driven cars. So all this is working in Maruti’s favour. Today, if you saw the automobile industry, it is at 20 months low.
The two wheelers are in trouble. So if anybody wants an exposure to auto, Maruti is about the best. So that’s also helping Maruti. Even at this higher level, at every decline, I would advice investors to add a little bit of Maruti. We should touch Rs 2,000 in Maruti in the next 12 months.
READ MORE ON PN Vijay, Portfolio Manager, IIP, CAD, ARPU, Mukesh Ambani, Bharti, global currency, Maruti, Tata Motors
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