Must these 10 stocks be in your portfolio? PN Vijay answers

Having bounced back a lot from the lower levels, Portfolio Manager PN Vijay says the market is somewhat pleased with the speed with which big nations of the world are responding to a possible major crisis in Greece and Spain. “This month alone we had the G20 summit at Camp David then we had a small EU summit as a precursor to the larger one towards the end of the month."

He adds, "In between we had the first ever major conference call of central banks and G7 finance ministers where they discussed an action plan in case on June 18, Greece decides to leave the EU and then Bernanke and ECB have said that we are ready to pump in liquidity in whatever form with whatever speed.”
So, in a sense, nobody is ignoring a possible Greek crisis or a possible Spanish bank default but the feeling that is there is that the best forces the world - the G20 economies are fuelling up their resources for a post Lehman type of action in case the crisis blows. Vijay says, this is giving the market some confidence and is the only reason he would ascribe to the bounce we have had globally.
In India, after the terrible index of industrial production (IIP) data we got, opinion is veering around to a possible rate cut, which was not there 15 days ago. He sees all of this as enough ammunition to be optimistic, the fact that there could be a crisis but the world is well positioned to manage that crisis. Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more. Q: Do you think the worst is over for the rupee at that 56.50 level we saw last week? Do you see a correlation now between a recovery in the rupee and a similar movement in the equity markets?
A: I think so. I wonder if it will go back over 56 soon. For two reasons, one is that after hitting a low of 1.22 I think the euro is slowly bouncing back to 1.24-1.25, which is of course helping most other currencies. Secondly, in India with India’s average crude price falling by about USD 12-13 per barrel, we saw the first signs of that in April when we had the least trade deficit for 16 months and May when the prices have been quite low and gold imports have fallen about 80%, we may have a decent trade figure which means on the trade flow, we are seeing less pressure on the rupee.
All these things together, it is giving some semblance of respectability to the rupee and exporters who have been waiting on the sidelines maybe just tempt in to put in their dollars. So I won’t say the rupee is a great currency but here also I feel a crisis has been sort of brought down to a manageable level. Q: There has been a lot of activity around infrastructure ever since that meet and whatever dialogue came through from the Prime Minister. What would you play between capital goods or construction stocks? What do you think warrants a look or a buy?
A: Infrastructure is a very big area and the Prime Minister is doing a good thing. It is fairly apolitical in trying to get investment back, which is exactly what China is also doing if you saw in the last two weeks. The thing about infrastructure is that I would avoid the big developers because they have multi-various problems even if the environment got friendlier with them.
I like capital goods quite selectively because of the investment cycle. Let us not forget that our investment to gross domestic product (GDP) ratio is below 30 and the lowest is about 15 years or so. So even if the investment ratio goes up to the usual level or 35-36% of GDP, we should see capital goods benefiting enormously.
But the real positive could be in the highway construction sector where it is very easy to award contracts, where it is very easy to get things going because these are project based, these are IRR based, these are implementation based, they are not so tough, there is not that much of environmental issues.
If one had to play infrastructure or one would play the capital goods cycle and the likes of IRB Infrastructure or IL&FS Transportation Networks, which have very decent risk free revenue model. One has to be very careful. It is the riskiest sector among the economy stocks but these are sectors which can give you a decent bounce in the next six-12 months. Q: Did you hear anything in Reliance’s commentary yesterday to suggest the stock is going to move out of its performance so far?
A: Probably, yes, apart from the fact that promoters are paid to be bullish about their companies otherwise they won’t be promoters. For the first time one saw a certain amount of quiet confidence in the way Mukesh Ambani was talking about the exploration business though I do not share his optimism about the retail business that he is talking about because if you look at Reliance why is it that it has underperformed so much. For 20 years it was moving with the index with a slightly higher 1.09 beta.
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Why did it fall off the cliff in the last two years - it is because of a deep sense of disappointment among investors about the E&P business and now he is coming out and saying - I have a game plan. I have invested a lot in shale gas and getting the benefits of that. He is putting certain numbers to the E&P exploration output. This is good and he has got big brother BP who is helping him technically and financially.
Of course, the other businesses are mature businesses; the petrochemical business etc which follow the global cycles. But if I were to say something optimistic out of what he said it is that he seems to have a roadmap for the exploration business. Q: Hopes are getting built up quite high and you are seeing it in spaces like banking that have been rallying for so long. How high is the probability of a correction coming into the banking space post the events in June?
A: The correction could be there. My own sense is that the banking stocks have got beaten down like crazy. Just look at Bank of Baroda (BoB) for example. It was quoting at Rs 800 just recently; it went all the way down to Rs 620. Look at ICICI Bank, it was not too long ago at Rs 1,050, it came down all the way to Rs 700 and during this period most of the banks have reported fairly decent numbers, except State Bank of India (SBI).
Incrementally, I feel that going forward whether we get a rate cut or not, the NIMs are expanding, the bad assets are stabilising and the CDR influx that we had in the 2011-12 is slowly receding. Incrementally, bank balance sheets are going to be improving as the quarters go by. There is no reason to sell, say for example, Bank of Baroda back to Rs 650 levels or an ICICI Bank back to Rs 700 levels. If at all value investing is called for in the Indian stock market, it is in commercial banking but you need to think six-nine months ahead when the rate cycle change would help the banks. Q: How would you approach the stories of Titan, Jubilant Foodworks and Bata India?
A: Bata is different because there are many stories built into it and fundamentally also there are lots of triggers. We do have Bata in our long-term portfolios. I think Titan and Jubilant Foodworks are very expensive. Titan is a blue chip stock and Jubilant are fast runners in the market but having said that this is for value investing. The big money is going to be made in selecting good growing well asset based stocks and these people had their good time in the bear market.
I would not incrementally add to Titan or Jubilant Foodworks and I would let it shift away and book my profits and move into something stable such as an auto counter or a banking counter or even some of the infrastructure stocks that we talked about. So it is risk-on right now and these do not qualify on that scale. Q: How would you approach something like IT now? It was weak yesterday not just because of the way the rupee moved but now brokerage concerns are resurfacing on BFSI and on issues seen in the banking space. Do you expect to see more of pressure over there?
A: I don’t think so. The way IT has corrected stock wise, Infosys of course went through the bottom, Tata Consultancy Services (TCS) has spared and HCL has been stable. What I am saying is that the sector has undergone some sort of a correction. In this recent bounce it has not participated. What I like about IT and it used to worry me before was the distance in the valuations that the best IT stocks commanded, the premium that they commanded over the Nifty.
If an ITC or HUL command that premium, it is easier to understand because he can almost say that these people will be reporting 20% profit growth every year for the next 100 years. You cannot say that about the IT stocks, there are inherent risks in the business. We have some very good blue chips. Infosys or TCS for example and most importantly HCL Tech, which one could buy on the decline because over the term, I see the US economy becoming the most robust economy among the four sections of the world, India, China, EU and US and these people are very well positioned.
Of course the rupee is the weak currency absolutely. So all these together I would buy IT on dips and there is a dip going on now. So probably get a bit more equal weight on IT from underweight as we have been in the last couple of months.