Bet on PSU banks, mid-mkt realty ahead of Jan 29: PN Vijay

PN Vijay of askpnvijay.com explains on CNBC-TV18 that PSU banks  and mid-market realty companies are good bets for investors keen on a rate-sensitive play ahead of the RBI policy announcement on January 29.

Sudarshan Sukhani of s2analytics.com adds that the high of about 6,047 recorded on January 7 is not relevant because the market's resistance of 6,030 was surpassed on Monday. "The market, from the morning, has been trading above that zone. So, clearly there is a very decent follow through. The market has literally taken off and has broken out and investors should be bullish." Below is an edited transcript of PN Vijay's analysis on  CNBC-TV18 Q: From the results announced so far, do you feel that the worst of the earnings downgrades are now behind us?
A: Probably. The pace of the downgrades will come down dramatically after worries on the IT sector. But Infosys and then TCS have made investors believe that the situation has turned around quite nicely for the IT sector. Apart from that, private banks are at par with Axis Bank and IndusInd Bank faring well on expected lines.
So, I would not say that the days of the downgrades are over. We still have to see beleaguered sectors like capital-goods, metals and automobiles. But the first pickings of the earnings season are pretty good. Q: Bond yields have softened to 7.8. Is the market completely sanguine of a 50-bps cut on January 29 or is the market getting ahead of itself?
A: The market is factoring in something more substantial than 25 bps because from the 8.20-levels that it has been stagnating at, it took a long time to post this 40-bps improvement. Of course the government has not come out with additional borrowing and somehow seems to be managing with PSU disinvestments, cutting down non-planned expenditure and probably banking on more revenue coming in from spectrum.
But the fact is that the government’s demand for money is not that much and that is also aiding with the demand-supply side. But this type of yield improvement by about 40 bps is surely based on a 50-bps rate-cut. Q: What are your thoughts on Sanjay Kapoor stepping down as CEO at Bharti-Airtel?
A: Bharti is solid in terms of top, middle and lower management. It is one of the most professionally managed company in India. The bigger aspect that puzzles me is that the market has begun to see something in telecom which it didn't find till yesterday. The sector is plagued by earnings pressure, all-India roaming to be free and other overhangs. I do not subscribe to the view that this is a runaway rally in telecom. Q: How are you positioned on Axis Bank -what do you make of the results and what would you advise on the stock?
A: Axis Bank has been a long-term favourite in my portfolio because it is making a transition in the last two years from a bank with PSU parentage to a private sector bank like HDFC or ICICI. That obviously means more net interest margins (NIMs) and probably less non-performing assets (NPAs) given the tough current industrial environment. I think Axis Bank is proving to be a blue-chip company. But at Rs 1,420, I think prices have run ahead of valuations. So investors should probably book some profits now. Q: What is your opinion with regards to playing the rate-sensitives ahead of the RBI policy on January 29? Any specific recommendations in terms of stocks?
A: Rate-sensitives fall into three categories- low-risk sectors like banks, the medium-risk sectors like auto and high-risk sectors like real estate. So, depending on the risk profile, investors can position themselves across all three categories. It may be a good idea in the rate-sensitive segment to increase exposure to public sector banks.
I think in the last quarter, the number of companies becoming non-performing assets (NPA) has reduced perceptibly and the valuation difference between PSU banks and private banks has become a bit too wide for comfort. So, if one wants to make an extra buck in the rate-sensitive, PSU banks are a good bet.
The other segment includes real estate companies that are better-managed, with higher cash flows and low debt. Unitech and HDIL have offered good returns to investors. There are also good bets in the Bangalore region which is the firmest real estate market. But if investors want to try and make money before the possible rate-cut, then it is not going to be easy. It will be probably PSU banks and mid-market real estate companies that might do the trick. Q: What is your opinion on DLF? The stock has rallied 10 percent in the last two trading sessions and the brokerage targets have been aggressive as well. Is it just momentum that is driving the stock higher or do you think there is a fundamental improvement?
A: Right now, it is momentum that is driving everything higher. In DLF, the fundamentals are improving slowly. A massive debt-reduction programme is underway and the company has achieved significant results by selling Aman Resorts. DLF has a pronounced concentration of land in Delhi-NCR which is still an oversupply zone.
So, I don’t see any dramatic improvement in the fundamentals of DLF and I would think that there is more of a momentum to this move. I still feel fundamentally that regional players are better suited than an all-India player. Q: Friday will be a cracker of a day in terms of earnings with ITC, Reliance, Wipro and HDFC Bank slated to announce results. On ITC, what are your expectations? Do you think that some amount of weakness will creep into the results because even the stock has been recording subdued performance in the last fortnight?
A: I don't think ITC will report negative results. I expect positive results from its core business. The company’s pricing has been firm and its FMCG initiative has broken even started to make money.
There has been pure rotational buying in the markets. Hindustan Unilever went all the way upto Rs 540 and came down to less than Rs 500 and ITC went upto Rs 308 and came down to about Rs 275. These movements happen as people switch their level of risk and portfolios. In fact, I expect fairly firm margins and positive results from ITC.