CLSA +ve on power, road; bullish on metals

Q: Do you see any apprehension on part of people who are attending on conference on infrastructure sector on how sanguine they are about capex actually picking up?

A: Some investors are doubtful because the sector has actually held up fairly well in terms of valuations and while there is visibility in the medium term for some companies due to strong order book, you cannot give the benefit of that for an extended period of time. The reason why we think that the investment cycle should pick up is what we are hearing or seeing from corporates that have deferred their capex plan last year around this time in response to they credit crunch and the fact that the demand really fell off severely. They are coming back slowly. The mood is still of caution, so they are coming back slowly but what we also see is that even for the smallest of companies, the SMEs which we track through a quarterly survey, the capex intentions are clearly rising. So two quarters ago, just a little more than a quarter the companies in that sample were investing in that capex, the rest of them had put their plans on hold and less than only around the third we are actually looking at undertaking capex in 2009, things are changing on both counts. Hence, about 40% are now in investment mode and a little more than 50 are talking about investing in the next 12 months. Therefore, the momentum is starting to pick up and outside of this like power and roads, there was clearly a big pipeline that had got built up but where projects got delayed or deferred because of capital constraints or in some cases policy related issues as well and I am quite optimistic with at least in these two infrastructure sectors, one should start to see things picking up.

Q: You have two of the largest telecom companies being profiled today. So what you have made of that space that has easily been the biggest earnings disappointments this quarter?

A: Yes that was the sector in which it pulled down the growth what we were expecting. The sector is in a fairly early stage of disruptive pricing. By this I mean that the companies responses are still coming in, but you do have tariff levels which are already very competitive. So we could argue about how much further price erosion you could see. You also have a number of new entrants which are yet to make a big impact on the space and their own response and signals on how aggressively they will enter the market may start to change or they may indicate that they would not be as positive on this market as they would have been. Hence, according to me, there is a bit of trouble in the short term. The market may look at the stocks and say that these are levels that which there seems to be value or buying into the stocks just yet especially because you have not had even a quarter of results after these big tariff cuts have come through. So the sector is going to be a bit sluggish for the next couple of quarters but you would probably find some value investors who have got ht e luxury of taking a much longer term horizon starting to nibble around these price levels.

Q: Where do you stand on global commodities because numbers from some of those companies, the large ones like Hindalco, Tisco have not exactly been up to street estimates? Are you bullish on global commodity stocks generally or you think they could correct from here?

A: There is again here a short term versus the longer term issue. Some of the global commodities correct a bit in terms of prices, it is in the short term again going to be a function of what you see on the dollar and whether risk aversion creates a stronger dollar and correspondingly impacts commodity prices. When I look at most of the stocks in the metals space, compared to any time in the past ten years or so, this is the first time that I can see most companies in the sector having a reasonably strong volume growth story over the next two-three years and that is something that which is the attraction of the sector that right now so we are positive on some of the names. Principally, we think that even if there isn't a very strong price recovery, we have a combination of good volume growth coming on account of new capacities. In some cases that is going to lead to meaningful cost savings as well just because of economies of  scale and some cases of restructuring of overseas operations. So we are actually quite bullish on that space. Some of the stocks have corrected and are starting to look very interesting.

Q: How much margin pressure you expect to see over the next two-four quarters because that is what has helped to autos and even cements to some extent?

A: You will definitely see margins tapering off. The commentary from all the auto companies during the results season has been that the margins have been very good this quarter. However, I don't expect them to sustain. So they have been very cautious on that and I do think that as the cost trends up a little. We will see some margin pressure. The extent of disappointment may not be that much because companies have been guiding for that. Cement is another sector which is in the relatively early stage of price correction but as supply comes on and there is a lot of it over the next 12 months, we could see prices coming under more pressure which will mean that margins will take a beating. So I do think that the margin outlook for the second half of the year is certainly going to be a lot more challenging than what we have seen till now.