Fiscal cliff no hurdle; Bet on pharma, NBFCs: Gandotra

Pathik Gandotra of Dron Capital Advisors explains to CNBC-TV18 that the US fiscal cliff will have no bearing on the Indian market except for the increase in uncertainty for IT companies. Gandotra's favourite sectors for 2013 include pharma, private-sector banks and NBFCs.

Below is an edited transcript of the analysis on CNBC-TV18. Q: Do you believe it could be the beginning of a bull market or is the market still looking like the drag that it has been in the past year?
A: I think these are signs of a bull market developing. I think the economy is bottoming out as evinced by the collapse in the capex cycle, the RBI on the verge of cutting interest rates  either in November, December or January and the end of earnings downgrades. While there have been no upgrades, there have been no major downgrades as well. So, all the negatives are looking like they have been priced-in into the market.
The midcap space has started doing well because now if you have a new idea and if it reports good earnings, there is a big following on it. Add to that, liquidity is very strong in the markets. So it is all the makings of the beginning of a bull market.
Now whether it develops into a bull market or not will clearly depend upon the way the government takes it forward. So the government has to think about whether it has to follow up with the reforms process again. If it does not, then obviously this could be a false start. But given the way the government has seen its popularity absolutely increase once it started on the reforms process, I think the government will follow through, at least with what it can do within its own executive powers, if not legislative powers. Q: Will the US fiscal cliff hinder any rise in the market or are we insulated?
A: I think the US will sort its problems on its own..There will be obviously some amount of tax realignment which will impact the US economy a bit for a quarter or so, but I don’t think Indian investors should take that very seriously.
It, however, does impact uncertainty. So till the issue is resolved, till US companies don’t freeze their tax spends, the revenue growth of IT companies is uncertain. Q: So are you pitching with year-end targets for next year or are you just going with a constructive kind of marketframe for 2013?
A: I will prefer the latter. We focus only on stocks, I don't have any index target. However if you have a GDP growth of around 6.5-7 percent next year and nominal growth of around 12 percent, you will have corporate earnings of 12-15 percent growth next year. So, it is realistic to expect a 15-percent return on the market for next year. Q: The media segment is attracting interest after 4-5 years. Do you like anything in the segment?
A: I think all the stocks in the media space are largely expensive. I think the opportunity in digitisation has been taken very well because of the obvious prospect of very strong earnings going forward. But I think the market is pricing too much too soon because once the earnings start coming in, there will be disappointment. These stocks will start getting expensive once the earnings traction starts coming through. I think there is limited money to be made on this space. Q: Overall, if one had a constructive view for 2013 like you do with a bit of a bullish bias, how would you rejig your portfolio? What would the sectors be that you would be overweight on now?
A: I would be overweight on midcap pharma; private banks because they are not trading at anywhere near their bull cycle valuations; non-bank finance companies (NBFCs) ; commercial vehicles because I think if the economic cycle starts turning that is a segment which will react the most violently on the positive side.
Apart from these there are isolated stocks.  We are also be very constructive on telecom because clearly the government has realised that there is a fair price to everything, so Bharti  and Idea could both outperform.