Stay out of telecom for next few quarters: Kotak Sec

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Stay out of telecom for next few quarters: Kotak Sec

In an interview with CNBC-TV18, Sanjeev Prasad, Head of Research, Kotak Securities, spoke about his reading of the market and his outlook.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS JPMorgan bullish on Educomp, sees target at Rs 1000/share See IDFC SSKI's market outlook/stock picks for this year 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 Nifty BSE | NSE 29/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news Hindustan Petroleum Corporation | Educomp Solutions | Reliance Industries | Oil and Natural Gas Corporation | IVRCL | NCC | Bank Of Baroda | Union Bank of India |

Q: What remains your high conviction overweight right now?

A: Not too many stocks which you can look at from an absolute perspective in terms of making 15-20% from where we are because most stocks have become very fairly valued as far as largecaps are concerned. Some of the public sector undertaking (PSU) banks still looks okay but most of them are now trading at pretty much the high end area of trading in terms of price to book. But I think once people get little bit more comfortable then the NPA problem is largely behind us, you will see NIM expansion going forward and also loan growth coming back because first half numbers have been quite weak as far as loan growth is concerned, last data which came out we have loan growth down to 10%.

Once you start seeing some of the infrastructure projects getting rolled out and credit growth picking up then maybe you could still see some of these stocks performing, some of the stocks which you could still look at is maybe Bank of Baroda (BoB) or Union Bank of India which are trading at 1.2-1.3 times price to book and most of these PSU banks still deliver pretty high RoEs. For example Union Bank is about 21% RoE for fiscal 2011 on a price to book of about 1.3 similarly BoB would be at about 1.2-1.3 price to book on about 16-17% RoE. So I think these are some of the banks we could still look at. Other than that from an absolute return perspective, I think there are very few stocks which you could look at seriously and hope for 10-15% return.

Q: Within infrastructure you are positive on a couple of construction stories like IVRCL and Nagarjuna Construction , what is the story there?

A: They are okay on valuations, they are not pretty expensive and the thing is that once the government starts awarding all these infrastructure projects, we could see earnings starting to surprise us bit on the upside. These companies are sitting on a fair amount of order book anyway but I don't think the earning numbers are going to be - too much of a negative surprise should be there. Going forward, the government has been talking about an amount in terms of two infrastructure projects be it on the road side or irrigation or whatsoever. Now once those start coming through, I think people will start taking a lot more confidence in the fact that your '11-'12 numbers would be a lot better than what its indication is for the time. That should be the driver for this stock. Valuations are quite okay, I think both the stocks would be somewhere about 11-12 times on 2011 basis, so clearly there is a scope for both earnings surprise and once that comes through, we would also see multiples adding from where we are.

Q: What about cement, there has been some volatility in that sector, the results weren't bad in this quarter but people seem to be quite circumspect, are you?

A: Yes, we are cautious on the fact that you would see cement supply/demand balance liquidating quite significantly from where we are. If you see the supply/demand balance between '10 and '11 fiscal year, you are seeing something like 65 million tonne of new capacity getting added compared to that your incremental demand even in the best case scenario would not be more than 35-40 million tonne. So you would see operating rates dwindling down to somewhere about 80% which means the pricing pressure would start building in. If one of the guys become more aggressive and starts increasing market share, that will be the breakdown of pricing arrangement which has worked so far in the industry quite well. Already you are seeing prices in Andhra Pradesh has been coming down quite significantly and I don't see any reason why it should spread to the rest of South India also. North prices have held up reasonably well but I think even there once you see the new capacity coming on, you would see a similar issue there too. We are building in a price decline of about Rs 10 per bag for next year but even in that kind of a scenario we are still looking at this company, it is doing very well as far as cash in terms of cash invested or RoE, RoC is concerned. So I don't rule out further weaknesses as far as cement prices are concerned particularly if some companies decide to become aggressive on pricing in order to place the volumes and increase market share so that would be a real problem for the sector.