Q: What about a midcap, largecap break-up over there? Any skew that you would want to work with? The argument has been that midcaps have a lot more going by way of valuation cushion.

A: If you look at the earnings positions of market participants for FY10-FY11, the earnings growth projections for the largecap companies are reasonably moderate. Combine that with the fact that valuations for many of these companies are at the top quartile band. You have a situation where eventually focus will shift to those midcaps, which have high quality of management. It will show growth and valuations which will not be so high. So over two-three year period, midcaps may outperform. In the shorter-term the wall of money may come into the largecap sector and hence in an immediate context maybe largecaps may out perform. On a more medium-term basis, my personal sense is that the fundamentals of growth will play out and it will be the midcap sector that will outperform.

Q: How would you approach the banks?

A: According to me, the medium-term financial intermediation in India, which includes banks and financials services, is a very big opportunity. In the near-term there has been uncoiling of the pessimism, which was there in the sector. However, we will enter into a scenario where interest rates will start inching up. Traditionally, it has been seen that in the first leg of economic upturn banks especially public sector undertaking (PSU) banks or those with large savings accounts basis benefit because they have historical pricing of deposits. Whereas, as the interest rates move up, they benefit from higher net interest margins (NIM) balanced out with a fact that mark to mark portfolios will see some losses. On the whole, the near-term scenario for banks is moderate. I don’t see a run away rally there. According to me, on a longer-term basis, we are very positive on financial intermediation as a theme for the Indian markets.   

Q: What is the problem with telecom? Has it just become a trader’s favorite for shorting or is there still a lot of pent up supply on that?

A: According to me, it was a sector which was over owned earlier. Some of the underperformance which has happened and is expected to continue for at least maybe in the next quarter or in the next couple of quarters is likely to put a strain on the sector. Apart from this, there is a general view that while medium term sector will outperform, in the short-term there is a significant overcapacity and that has to play out. Hence, for all these reasons short-term view of fund managers largely is that this sector will underperform. Once that period of volatility is over, there would be a fresh look at the sector and people would take positions at that time.

Q: How do you want to approach real estate? It has been a bit sticky even through the earnings season by way of performances.

A: Real estate is a sector the fund managers bet on when markets are fallen steeply. Since it is a high beta sector it typically bounces back a steep. However, for a longer term, there is concern on valuations and on the book value. The market caps are looking stretched and hence overall there is caution in the sector.