Cyprus to hurt sentiment in short-term; buy CIL, Exide: UBS

The Cyprus bailout deal issue may have an impact on the market just for the short-term. Infact, this correction presents an opportunity for long term investors to accumulate blue chips, believes Suresh Mahadevan, MD & head of Indian equities, UBS Securities.

Last week, euro zone finance ministers forced depositors in Cyprus to contribute towards a bailout which sparked concerns of contagion across other peripheral countries. "It is just a short-term thing. It will take some time for the markets to digest this, but certainly for the next one-two days the risk is off," he said in an interview to CNBC-TV18. Continuing his bullish tone, he added that most foreign institutional investors (FIIs) are optimistic on India after reform measures announced by finance minister P Chidambaram. However, given India’s twin deficit problems, some are still concerned about weak economic growth. On specific stocks, UBS Securities is betting on Coal India from largecaps and prefers Bajaj Electricals and Exide Industries from midcaps. The broking firm holds a positive stance on the Indian telecom sector despite regulatory risks. Recent money laundering allegations made by Cobrapost on private banks may weigh on the banking stocks in near-term, he cautioned. Below is the edited transcript of Mahadevan's interview to CNBC-TV18. Q: How big is this Cyprus issue? Have you got any early morning calls from your clients? Or what kind of behaviour you expect today in the sales pad because of this event? A: In the immediate-term, I think this whole issue will be kind of a risk-off when clearly gold has rallied. We will have to wait and see how it plays out. But frankly, it is just a short-term thing and we will have to think about the implications. It will take sometime for the market to kind of digest this, but certainly for the next one-two days, the risk atleast is probably off. That is the only way I read it. So, a long-term investor may probably get some interesting opportunities to buy specific stocks.

Q: What has been your experience in terms of what the money has been up to all of last week? We were quite volatile through that week as well. What did you pick up from the sales desk?
A: We certainly have seen both buys and sells. Volumes have been okay at our end. I do not think there is anything really specific with this latest development. In the short-term, people may tend to book profits where they are making money, but it will be very short-term behaviour. After that, we will have to gauge how it plays out.
Clearly, post the not-so-populist Budget and the Finance Minister too who in terms of his reform measures is not populist, I think investors are favourably disposed. Their biggest worry now is the fiscal consolidation. How much does it dampen near-term data? The near-term data points have all been weak.
If one consolidates too much fiscally, the government tightens its purse strings too much and then one can expect weak data atleast on the economic growth etc. for the immediate quarter or so. Given our interaction with clients, the investors are not too negative on India per se. If at all, they are favourably inclined particularly given the steps that are being taken by the government. The big worry in their minds is if the RBI will do its bit and if that then kick-starts the economy. As we get into second half of the year, there will be political considerations like elections etc. on everyone’s mind as well. So, these are probably some things they are looking out for. But, overall, investors are a little bit more favourably inclined. Q: You are cautious on where the rupee could be headed. Do you think that may go onto play an important part in the fortune of the equity market?
A: We are advising investors to hedge their rupee exposure, simply because the Current Account Deficit (CAD) is pretty high. I also get the feeling, atleast from the statements coming out of Finance Ministry that a higher CAD is something that maybe the government is happy to live with. So, to that extent the rupee maybe weak. The positive side is if the government gets aggressive on the reform agenda. Atleast in the first half we will still be expecting some more measures. So, the rupee is going to be a little volatile. Our economist is forecasting the rupee to be probably at 56/USD and then some appreciation along with the economic recovery.
_PAGEBREAK_ Q: National Aluminium Company (NALCO) just about scraped through and Steel Authority of India (SAIL) is up later this week. What have you been telling your clients to do on these offerings from the government?
A: It is very, very stock specific. It depends on our view on a particular stock. For example, on Coal India we have been positive, though we are neutral on SAIL. So, it becomes very, very stock specific. Ofcourse there are good opportunities. This is also coupled with the June 30 promoter deadline. That may offer a few interesting opportunities for long-term investors. So, investors should certainly look at it on a case-by-case basis. Q: The Department of Telecommunications (DoT) has issued some one-time spectrum charges on CDMA players. How negative could it be for companies like Reliance Communications or even Tata Teleservices Maharashtra (TTML) ?
A: Any one-time charge maybe very difficult to defend, especially if it is retrospective in nature in a court of law. Most operators will now move to the courts if they have a serious disagreement with the government and it is reasonable. So, I am not too worried about these kind of things, because the news flow in this sector will always be negative particularly with respect to regulatory.
We had two auctions which failed, also the Supreme Court will question anything unreasonable by the government. So, I am not too worried about these one-time fees especially if they are retrospective in nature. However, going forward, there is also this whole debate around renewal versus extension which I think the courts will decide. The long and short of it is that there are going to be so many regulatory issues. If the government and the operators do not see eye-to-eye, it will be up to the courts to finally decide on what is the right method and both parties will have to probably follow it. Q: You are overweight on banks as a sector right now. Any observations on the continued pressure that the banking space has seen across categories now?
A: This whole money laundering thing has been a bit of a dampener for atleast the private sector banks. It seems that the banks are taking adequate steps, however, in the near-term it will continue to dampen. Our old positive view on banks is based on rates coming down as well as an economic recovery. In our economic forecast, we have 5 percent for FY13 and 6.5 percent for FY14. So, that is clearly indicating some recovery. Our positive view is primarily premised on that. We have a bunch of private banks and a few public sector banks that we are positive on. We continue to maintain that view despite this near-term development. Q: It is a broad term to use for the space, but the problem has been the midcaps. Assuming that you expect to see some pick up for the market, how do you think the entire midcap universe will move from here?
A: It is becoming very, very stock specific. We like stocks like Exide Industries, Bajaj Electricals. We cover 40 odd midcap names, but within that we have really high conviction in four or five names. If the company continues to deliver and if the corporate governance is clean, I do think that investors are keen to look at bottom-up stories. Increasingly, they are also realising that the broad market may not be the correct gauge because certain companies can do extremely well and certain companies can do poorly within the same sector. The same holds true for midcaps. We like a select few of them. Some of the other names we like are Federal Bank. We like Sun TV and are positive on some of them. Q: It was not a bad pullback for infrastructure stocks last week. What do you like from that pocket?
A: We like some of the large cap names. We are positive on Larsen and Toubro (L&T) particularly. This is premised on economic recovery. We like Adani Ports. I do not know whether I can call Bharti Infratel an infrastructure name or no, but we like that name as well. These are some of the names which are present in our model portfolio which we are positive on.