UBS Sec bullish on auto, telecom; cautious on IT

Q: What's prompting the buy on Bharti? Is it that the valuations have slumped to very attractive level or do you think this phase of consolidation probably be smaller or shorter than what the market thinks?

A: I think there is definitely short-term pain in terms of quarterly financials for the entire telecom sector. However, but the key thing to remember is 12 players is not sustainable. My belief is that you will have some government policy probably early next year, allowing for easier consolidation of spectrum, etc. When the dust settles, a company like Bharti should emerge much stronger. As you rightly said, the valuations have become quite attractive as well. In the worst case we are looking at Rs 22 earnings per share (EPS) in FY11 for Bharti and at Rs 300 it iss like 14 times, it is not even valuing the tower company. So at Rs 300 or below Bharti becomes a strong buy in our view.

Q: What's the mood at the UBS conference? At these levels for the market, for most people, is it looking like a buy or avoid right now?

A: According to me, the mood is much better than what it was last year. The investors are still optimistic about the long-term prospects of the Indian economy. The thing that has changed at the margin is the stable government. I think a lot of foreign investors seem to be appreciative because without a stable government, you cannot have good policies for growth. People are worried about India being the first to tighten from a monetary perspective. My sense is that most investors will look at declines as buying opportunities. I believe that people have been increasingly deploying money into India. We can see that the foreign institutional investors (FII) flows well over USD 14 billion, have come in this year. India still looks very attractive with China for a lot of the global as well as emerging markets. This is the mood we gauge from interacting with investors at the conference.                

Q: Speaking of monetary tightening in India, what's the general view you have as a house on how to play financials like public sector banks now? What generally is the investor sentiment now towards that very important sector?

A: PSU banks have done relatively well in the last six months or so compared to private sector. However, the valuations are still fairly attractive. I understand the tightening argument and the treasury income kind of going down if yields rise. However, if you were to look beyond that, earlier they have always been compelling logic to own the private sector over public sector due to the huge differences in asset quality as well as returns.  Certainly returns while they have not fully converged, they are at least approaching each other. So my sense is that there is still an argument that we can make for PSUs to rerate. So our view is that we are neutral on banks overall but very much of benchmark bet on PSU banks which have actually helped us quite a bit in terms of portfolio performance. Hence we will continue to remain positive on PSU banks.

Q: I note that in your recent report you have removed ACC and Unitech from your preferred portfolio. Could you take us through the reasons why?

A: In ACC, we are seeing some pricing pressure in the South and with Ambuja which came in quite handy. We have just substituted ACC with Ambuja. With respect to Unitech, our analysts' conviction was not there. They felt that there are no tangible catalysts for the stock to do well. So we have increased the weight of Indiabulls Real Estate, which continues to be our analyst's top pick. So it's just a question of analyst conviction in the case of Unitech going out of the list.