Bullish on mkt; infra, fertilizer stocks may gain: HSBC

The Union cabinet cleared the Land Acquisition bill and formed a cabinet committee for the long-pending infrastructure projects in a meeting on Thursday. Dhiraj Sachdev of HSBC Global Asset Management spoke to CNBC-TV18 regarding the policy decisions taken by the government and how it will affect the market.

Sachdev believes, government has taken the right step in project clearance and will now see whether the execution improves at the ground level. He is bullish on the market and expects infrastructure and fertilizer stocks to gain. "This step is in the right direction and besides the urea expansion almost held for 13-15 years and the savings in subsidy is estimated to be somewhere close to Rs 4,000 crore to Rs 5,000 crore," he adds. Below is an edited transcript of Dhiraj Sachdev's interview on CNBC-TV18 Q: What do you think of the announcements on the cabinet committee on infrastructure and the Land Acquisition Bill? Do you think the market will respond positively or with skepticism? A: We have switched from the policy paralysis environment. We are back to something which is incrementally positive. Large portion of the investments, particularly in large projects like Rs 1.3 lakh crore has been held up due to delays in approvals. This step is in the right direction and besides the urea expansion almost held for 13-15 years and the savings in subsidy is estimated to be somewhere close to Rs 4,000 crore to Rs 5,000 crore. So, the market should react positively, particularly on the infrastructure and fertilizer stocks. However one has to see, the policy gets executed well at the ground level.

Q: We had a strong rally and the market seems to have falter in the last few days, how are you approaching the market? Are you working with strength going into next year or do you think it will be a more flat line performance now? A: We are fairly positive on the market. If you see the last couple of years, till 2010 you had almost 13 rate hikes from the RBI close to 375 bps. As we step into the next year, we expect - after this year of being a pause, on the interest rate cycle - a reversal on the interest rates and also some moderate decline in the inflation. So, these macro reversals are a step which will rally the market going into the next year. Besides the fact that most of the earnings deceleration has already happened and the earnings downgrade cycle seems behind. Given the fact that there is incremental positive step on the part of government in terms of foreign direct investment (FDI), earnings deceleration being behind and reversal in the macro variables, the market is poised decently going forward.

Q: Do you expect any relief from the Reserve Bank of India (RBI) in their next policy meeting, as that could be a big trigger for the market? A: It is difficult to point the quantum and pace, but we are factoring about 75 to 100 bps in FY14. As far as cut in the interest rate is concerned, it is difficult to say whether it will happen in December, January or March. But the time has come where the RBI will take a cognizance of the fact that one has to push growth, given that anticipated inflation could be lower over the next 12 months. So over the next three-four months, the rate cut cycle should begin to happen.

Q: Over the last few sessions, sectors like fast moving consumer goods (FMCG) and IT have not done very well. Have you started pruning some of these sector allocations in your portfolio as you go into 2013? How are you doing your sector allocations now? A: We are doing sector allocations pretty aggressively, because our portfolio is based on price-to-book and return on equity. The shift has to happen from the so-called defensives like IT, pharmaceutical or FMCG in favour of cyclical, not the global cyclical but the local cyclical like auto, auto ancillary, banks, cement. Start nibbling into some of the capital goods companies, though it could be delayed in terms of responding to the earnings. The cyclical in terms of valuations are at a significant discount to the defensive names like FMCG. So, we are increasingly overweight on the cyclical names compared to the defensives.

Q: Did you apply for any of the recent initial public offerings (IPOs) like Bharti Infratel, NMDC, CARE? A: Yes, selectively.

Q: As they all are extremely diversified offerings from the primary market, which IPO appeals to you? A: We are fairly focused on the midcap side of the market besides the primary market. This is because in the last two years, midcaps have virtually seen some hibernation. When the sentiment is low, midcap segment tends to underperform the larger counterparts. Midcap tends to outperform the market post the market bottom-up period. The valuation gap is still pretty high compared to the largecaps and with the bottom-up focus and price-to-book ROE (return on equity) focus; we are fairly overweight on the midcap side of the market. _PAGEBREAK_ Q: Are you playing the extremely compressed stories, something like the high beta space, spaces like media that have underperformed for nearly five years now, or have you gone with the relative safety of pockets like pharmaceuticals? A: It is a diversified basket because the universe of midcaps runs into few hundreds to few thousand companies. We have companies raging from auto ancillary to select private and public sector banks. Selectively IT, real estate companies, some of the media companies as well, agrochemicals, consumer durable names. So the basket is pretty wide as far as sectoral allocation towards midcaps is concerned. Q: You have been including public sector banks which seem to have woken up after a long period of underperformance? A: It has been a fairly mixed response from public sector banks; some of them have done well where the non-performing asset (NPA) levels are controlled and some of them obviously disappointed on the restructuring book and higher NPA level. The fact of the matter is if you see the periods of last 10-15 years, banks have been in the growth business and India is a capital starved economy, so there are periods when incremental NPA tends to move up and the market tends to overreact and over discount this phase of public sector banks. At valuations of 0.6 to 0.7 times, on the adjusted book basis plus a dividend yield of close to 4-5 percent, these banks are attractively priced. As the economy tends to improve and the higher provisioning norms behind, we believe the results going forward from public sector banks could be better which the markets will get excited about plus the decline in interest rate cycle will also help them. So we are selectively picking and buying public sector banks as well. Q: Do you think 2013 will be the year which marks the return of the Indian retail investor into equities or do you think they will continue to give it the pass? A: We hope that they return, this time close to USD 20 billion. Foreign institutional investors (FIIs) have taken lead in this market rally. We believe and we hope as the macro tides reverse, the retail investors come back. Unfortunately they should not be late in the curve as has been in the past but we do hope that they return. Q: It’s been a pretty strong year in terms of return so far from the equity market. What kind of returns do you think one could confidently point to in 2013, in that 15-20 percent range or something better? A: The least we can expect is 15-20 percent and some of the midcaps could do even better. Q: What do you expect to hear or see in terms of flows as strong as what the last two months have been? A: We are seeing flows despite rupee depreciating by close to 20 percent. So FIIs are not worried about the currency part and pumping from their side continues even at 54-55 levels. So if there are signs of rupee appreciation, we might see further acceleration from the FIIs who are waiting in the sidelines because of the currency risk. We might expect that the flows from the FIIs should sustain given the fact that now the policy decisions are also positive and in place. Q: How are you approaching the very expensive FMCG basket that’s been correcting sharply these last few days? A: We have not seen any revival during the festive season or seasonal sales, as far as consumer business is concerned. Just to reiterate, we believe that the valuations relative to other sectors be it auto, auto ancillary, banks, cement, selective infrastructure capital goods plays, is pretty expensive. So we are underweight on FMCG and relatively overweight on the other side of the market or other segments. Q: Do you think the current pessimism in IT is overdone or do you think it’s warranted given the fundamentals? A: IT has been an overweight across funds. Given the fact that despite rupee weakness, the demand side equation is not turning in favour, plus the spate of the guidance downgrades which is happening from bellwether stocks is not helping the sector. Also the other sectors are coming back on the forefronts. So we believe that the relative switch from IT to other sectors though temporary will continue to happen.