Bet on private sector banks: Tata Investment Corporation

It was a rough start to the earnings season with the big boy singing the blues this quarter. Coupled with dismal industrial data and a global situation that had little to cheer about, the indices took all the disappointment on the chin.

The Nifty fell 71 points, losing that crucial 5,300 mark. The Sensex too shed a whopping 256 points. In an interview to CNBC-TV18, Amit Dalal, executive director of Tata Investment Corporation says, the foreign institutional investors (FII) flows have come in with some expectation in terms of change in reform process and execution at the ground level. "One of the things that I am looking forward is the way the 2G auction takes off. If those numbers of reserve price are just exorbitantly placed and very difficult for the sector to participate in, I think that will be a big negative for the market," he adds. According to Dalal, private sector banks definitely make an investment call. He is not very positive on the teelcom sector. In the midcap IT space, he likes KPIT Cummins. Also read: Motilal Oswal expects 5-10% earnings growth for FY13 Below is the edited transcript of Amit Dalal’s interview on CNBC-TV18. Q: What should a long-term investor do with Infosys now? There seems to be no near-term driver for the stock, do long-term investors just wait out for this underperformance to trough out or do you think it’s best to exit something like Infy and put your money elsewhere? A: I think the time to exit is perhaps a lot behind us. There seems to be an uncertainty, which they themselves have to monitor on a day-to-day basis. We perhaps will know best after one quarter whether they have been able to arrest the various issues that are confronting them. They do say that the environment is ticking off all these problems, but to a large extent the peers are not reflecting that. They talked about a strategic differential in which they are now positioning Infosys. One has to see how that plays out too. Definitely, one had expected a muted earnings season, muted growth for the corporate sector as a whole. But to start off with this kind of footing brings a little more disappointment to the picture than one would have expected going forward. Q: What is your view on the markets per se? Are you long or are you holding on to the Indian equity market, ahead of the presidential election in hope that after that we will see something by way of a reform which could trigger the market to move higher? A: The whole FII flows have come in with some expectation in terms of change in reform process and execution at the ground level. I think the time has come now for the government to say that what’s happened has happened, but going forward we are definitely going to have a more supportive environment for the corporate sector, be it public or private. One of the things that I am looking forward is the way the 2G auction takes off. If those numbers of reserve price are just exorbitantly placed and very difficult for the sector to participate in, I think that will be a big negative for the market. It’s very important that we position industry so that it’s remunerative both for the entrepreneur and the consumer, whether it’s infrastructure or telecom. All these are now very crucial points for us to look at. Q: Do you think that polarisation theory holds, TCS will continue to outperform and Infy will have its own issues to deal with or do you think the pricing pressure will plague the entire industry and we may see an underperformance from this sector in atleast a next couple of quarters? A: I can’t comment on what TCS will say and I have no knowledge of that. As an industry, it is a mature industry. If you go back ten years, would you say Infosys is going to put in 35,000 people more into employment this year and that will give them a 5% dollar revenue growth? It’s unreal. That kind of an industry growth in terms of employment should generate far higher numbers. That, to my mind, was a big question mark. If you had gone back ten years, 35,000 employees more in Infosys would have been atleast a 50% revenue growth for them. TCS also has announced a large number that they are going to appoint. We will learn from them what they are saying. The reorganisation of the portfolio of businesses, the platform under which Infosys wants to work are very specific to the company in terms of what they believe are their problems and what they believe is the guidance they have given. _PAGEBREAK_ Q: What is the expectation of the market with respect to the monetary cycle? Are we likely to see more rate cuts? A: On Monday, the WPI number comes out. That will give us some indication of where we are going from here. But I do think that there is grave need for the bank to respect the fact that the de-growth that is taking place in the industry and the manufacturing sector is substantially hurt by the liquidity and the interest rate problems. The WPI is getting hurt by food inflation. All that the RBI is doing is not helping food inflation because they are not related issues. So, given that background, I think there needs to be some action from the bank. All eyes are on RBI. The whole infrastructure space has just become practically a stalemate in terms of growth. Hopefully, things will revive from here. Q: Apart from IT, you have many private sector banks that are reporting their numbers in the next two weeks, there is HDFC Bank tomorrow and next week there is both Axis and Kotak Mahindra Bank. How would you approach this private sector banking space? A: The biggest problem in this market is that if you are an institutional investor and you want to deployments funds, there are very few sectors in which you can put money with confidence that there is going to be consistent performance, lower risk performance. Private sector banks, FMCG, pharma and to some extent IT because you are hedging yourself against rupee depreciation were the only places where you could hide. Now, going forward, that problem becomes even more acute because you already have one underperformance coming from IT. So, we again narrow our choice of stocks to buy and private sector banks definitely make an investment call. Q: What is the approach someone should take towards the capital goods/infrastructure stocks now? A: You have to differentiate between the two. Capital goods vis-à-vis the power sector has acute problems. In the power sector, the discom losses are still mounting. The reorganisation in the discom, I don’t know whether that’s sufficient to allow the discoms to operate as freely as they were before. So, there we are almost in 98-99, when there were accumulated losses in the discoms of Rs 25,000 crore. That number has perhaps gone up about six-seven times or maybe even higher in the current situation. So, capital goods have an inherent problem. That is not going to go away so easily, unless the government chooses to make amends. As far as infrastructure is concerned, it’s a play on interest rates. If you believe the interest rates cycle is going to reverse then one should invest into them. I personally prefer buying lenders to infrastructure like IDFC rather than buying developer itself. There are lots of imponderable in terms of execution today. So, I prefer buying the lending side rather than the developer. Q: You spoke about the importance of the spectrum auction for the telecommunication space. What does one do with these stocks? A: We are doing a little bit of a study on them. Definitely, there is going to be a huge outflow of capital from these companies, both for the spectrum and in terms of their own infrastructure outlay. I am not very positive on that sector. I am very concerned on the fact that there will be perhaps a very little free cash flow in the hands of shareholders in the next few years. If there is a very favourable to a spectrum policy then that’s something to look at. But I doubt it’s going to be that favourable. I am just hoping that it’s not completely huge number, which maybe possible for the industry to even cough up, if it needs to. Q: Anything that you would like in the midcap IT space? A: In terms of relative valuation and in terms of the growth, there is one stock, which we own and has run up a lot in the last few months, KPIT Cummins. That shows a considerable promise.