Bullish on infra, capital goods, telecom: Karma Capital

Nandita Parker , Managing Partner, Karma Capital , said sub-prime issues still need to be sorted out. She expects some Fed action in September and hopes this month's events will give a cue for the way forward.

India should remain relatively insulated from US concerns, she said. Parker likes infrastructure, capital goods, and telecom and sees these sectors as safe bets.

She is bullish on media in the long-term. However, Parker is concerned about IT due to the rupee and US slowdown. She is also bearish on real estate as prices are ahead of themselves.

Investors need to be selective in auto, she added.

Excerpts from CNBC-TV18’s exclusive interview with Nandita Parker:

Q: How will this whole global situation pan out for the rest of the year and how will we deal with it?

A: This whole sub-prime issue is really an issue of credit markets. That’s where a lot of de-risking of leveraged balance sheets is taking place. We also see credit spreads having expanded and there is still a crisis of confidence. So, all that has to flush out. The growth of credit that took place between 2002 and 2007 fueled the growth of asset classes across the world, whether it was real estate, equities, or art.

Going forward, a slowdown in credit can cause depreciation in asset classes. What we are looking for now in September is of course the Fed. We are also looking for USD 300 billion worth of LBO financing that needs to take place within this month and how banks react to that. We also are going to see earnings reports from a lot of the larger money center banks. So, September looks like a month that’s going to be full of events. This will really give us cues going forward, whether we are going to have a nice little fourth quarter rally or not.

Q: Do you think fourth quarter will get pegged back by more bad news from the global side or do you think emerging markets including India will be resilient?

A: It is too early to make that call. We would like to see all of this work through the credit markets and get to a point where a lot of the pain is behind us. When we talk to global institutions, the general sense is that India should remain relatively insulated from an economic standpoint. I think that’s a positive. We in India have our own set of issues to look at, like the possibility of early elections. There’s still a risk there. Secondly, we should start focusing on earnings in October, as that will be a big event for us.

Q: If indeed the situation gets stickier by way of global cues, do you think there will be a lot of collateral damage for liquidity in India or do you think that might remain intact?

A: That is always a wild card. In India, we are used to having two-three globally caused corrections in a year. We are sort off used to that and that’s certainly a risk that is out there.

Q: You mentioned earnings being the key from here on. Tactically at this point, who would you bet on by way of a sector or a space that might deliver better returns and hence be more insulated?

A: What we like right now is the infrastructure space as there is a lot of visibility in earnings there. We also like telecom. Those two seems to be safe bets in terms of margins and topline growth. We are also positive on media from a longer-term perspective. I think that is a sector which is certainly seeing structural changes taking place. If you look at the per capita spending on media and entertainment in this country it is the lowest in the world. Given a trillion dollar economy, it should be multiples from here on. Those are the type of sectors that we are bullish on.

Q: Which specific areas of infrastructure and media are you bullish on?

A: We are bullish on capital goods and power equipment manufacturers. We are very selectively bullish on construction companies. One factor that should give domestic investors some level of comfort is that private equity funds are still very active in India and are providing a floor to valuations. For example, if you look at Blackstone purchase of Gokaldas Exports and their investment in Nagarjuna Construction in the last 10 days, I think these are very positive signs for India.

Q: Are you bullish on print media, television, or movie production? Which areas have you invested in?

A: We are bullish on print media and TV. The structural changes that are taking place in the delivery methods, whether it is cable or DTH and now IP TV, will all lead to a re-rating of content providers. That’s where our bets are. We are more concerned about spaces like radio, where we are seeing a lot more competition and therefore some stickiness in terms of rates.

Q: Power has been the big star these past few weeks. Is there anything that you like there and which part – utilities or ancillaries?

A: We really don’t want to talk about specifics in our portfolio. But everything from BHEL and ABB down to Reliance Energy seems to be the obvious place.

Q: By the end of this year do you think this market might be trading at significantly higher levels or will this year be a bit different from the ones gone by?

A: It wouldn’t hurt to have some cash waiting on the sidelines in case there is a dip in September-October. There is nothing like cash sitting around waiting to buy in dips. Every time people have deployed cash on dips, it has really paid off and generated a lot of alpha. I would continue to do the same. 

Q: What’s your call on the underperforming sectors like technology and autos?

A: We are still concerned about IT services. We think they are suffering from a triple whammy. First, the appreciations of the rupee versus the dollar, which can still continue to happen. Second, a slowdown in the US economy can lead to a recession where again you are vulnerable. Third, an increase in wages. So, we are still concerned on IT services.

We are also concerned on real estate. I think real estate prices are ahead of themselves and especially ahead of the infrastructure that is in place.

Q: On autos and banks?

A: We are not doing a whole lot in autos. We think the picture is very mixed and you really need to be very stock selective. In banks, we don’t have much exposure.

Disclosure:

It is safe to assume that I and my clients may have an interest in the stocks/sectors discussed.