What does Brics Sec like in this news-focussed mkt?

In an interview with CNBC-TV18's Anuj Singhal and Latha Venkatesh, he also speaks about his choice of stocks and sectors in this kind of an unpredictable market. Where, on one hand he feels that the Basmati segment has seen some rally globally; on the other hand he is weary of investing in Apollo Tyres for the long-term. "In the short term the stock is fine, but from long-term perspective it is overdone," he reasons.

Below is a verbatim transcript of his interview. Also watch the accompanying video.

Q: What's your sense of current market situation? Today we have seen big moves in individual stocks. The sector we were just talking about for example is rice, where we are seeing 20% moves. Everyday we are seeing this sector churn. How do you read this kind of price movement in some of these stocks?

A: There are two-three things I would like to highlight. One is market has become extremely news focused. A day you have news specific to a stock or a sector like today it’s been the sector. We have been noticing fairly sharp moves in relation to that. Rightly or wrongly one doesn’t really comment on that or I am not still coming to that.

Second thing, a whole lot of stocks which are of reasonably good quality but beyond the index or beyond the front liners or even beyond the F&O. A whole lot of midcap which is of decent quality, which have participated in the rally in the last few months but not as much and there is a huge catch up rally which is happening. Although most of them are not absolutely cheap, they are still relatively cheap compared to the either largecap players or relative to stocks in some other sectors.

I mean when you mention rice, most of them have been available even prior to this news item. They have been available at sub 10 times earnings. In terms of size and scale most of them are fairly large in that sense. Most of them are trading at maybe four-seven times cash profits which in a bull market looks cheap quite honestly. Whether they are cheap in every market is debatable but at least in this kind of a market the news just acted as a trigger for a re-rating which could actually go on.

Q: Spot some stocks like this for us. You spoke about the rice stocks. You justify the rally in KRBL , Kohinoor , LT , Lakshmi , all of them. Is there more to go?

A: Depends upon the magnitude in that sense. In the sense that as far as the Basmati segment is concerned there has been some rally globally. As far as the Basmati prices are concerned and most of the stocks that you mentioned are actually in the Basmati segment. The only other large player who is in the non-Basmati segment is Lakshmi Energy and Foods which has got a limited presence in the basmati segment by way of the variant which has been their PUSA-1121, but that’s probably only 10% of its volumes where they have an indirect presence. Otherwise Lakshmi Energy is a pure domestic non basmati play.

Now this news item of global rice prices having gone up actually doesn’t affect Lakshmi Energy in that sense. Just because all stocks are up even this is up 7% but this seems an interesting bet on the domestic side of it. The surplus in the domestic market, if it is allowed to be exported as the buzz is that exports are going to be opened up in the non-Basmati segment also.

Q: Can we go outside the rice segment? Where else do you say that relative values are still fairly good?

A: In auto and auto ancillaries, yes. Likes of Eicher and Escorts in the farm equipment and commercial vehicles (CV), that’s one segment related to auto ancillaries where there is some play. One has to do bottom-up fishing rather than take a top-down approach in a lot of these things.

Q: Since you spoke about auto ancillary, are you tracking the movement in Apollo Tyres ? We have seen about 25% rally this month itself. Is that justified? Do you think it’s good for more?

A: From the short term perspective its fine. From the long term perspective I think it’s been over done. It’s all on lot of the hopes of increase in tyre prices, the shortage and so on and so forth. But I think there is still some momentum to go but from a long-term perspective not much.

Q: Mid cap banks, Indian Overseas Bank ( IOB ), UCO Bank , all these have been having a fairly steady run. In the midcap banking space do you still smell values anywhere?

A: Values in the sense from the momentum perspective, yes, if you are a very firm believer of relative value. In the banking space if you were to look at as to what's been happening in the last one year. All public sector undertaking banks (PSU) banks traded at roughly about one time book value for the last 10-15 years. From the time that all of them have had any sort of public markets history, relatively the larger and the better ones, the Punjab National Bank ( PNB ) and the Bank of Barodas’ ( BoB ’s) of the world traded maybe marginally high than one time, maybe 1.1-1.2 times book.

We have seen a huge re-rating in the banking section in the last one year where your larger and the better banks have moved close to two times and the others, the midcap, the midsized and small sized PSU’s have all have moved from 1 time to about 1.5 times. In that sense it’s been a sort of a catch up rally, the whole sector has seen a re-rating and midcap banking space is a result of that.

In some of these banks also there have been tremendous improvement in fundamentals in terms of better non performing asset (NPA) management, higher growth in credit partly on a small base, partly because of the buoyancy in the economy, partly also because of the aggression from the management.

Q: So which will you buy now is what I am asking?

A: For example Union Bank, Bank of India, are still better bets. A United bank could be a sort of a dark horse. Although it’s not had a very long public markets history, just about less than a year but that could be a sort of a dark horse which could surprise.

Q: What's your call on the market levels? We are now at 5600 for the Nifty.

A: One has to be cautious. I don’t say that we are at the end of a bull phase but one has to be cautious. Any sort of a correction could surprise most market participants and even a 5% correction which is maybe just about 200-300 points in the Nifty could lead to individual stocks falling anywhere from 10% to 15%. We saw that just a few weeks back. To see that happening every couple of months which is part of a bull market is not going to surprise.