Stocks/sectors that you can bet on if RBI cuts rate

Over the past week, Indian equities gained over 5% on hopes of a rate cut from the Reserve Bank of India on its monetary policy review on June 18.

While the street is still waiting for the inflation number out Thursday, as that will be the determining factor, experts have pegged their hope on a 50 basis point repo rate cut or 50-100 basis point cut in the cash reserve ratio come Monday. Today’s dismal IIP number of 0.1% for April further cemented these expectations. Portfolio manager PN Vijay believes a core inflation number of below 4% will encourage the RBI to give a double booster to the market by way of a 25 basis point repo and CRR cut. He, however, goes on to say that this will not largely impact the market because it is already factored in. Coming to individual stocks and sectors, Vijay says banks will not see much of a rally on Monday because investors will look at booking profits after the policy meet. However, he doesn’t see the money leaving the market, but instead move into indirect beneficiaries such as infrastructure companies and real estate companies. “I think people will sell the news and move into the infra and real estate companies which are the secondary companies which would be the beneficiaries of the pass-through of rate cut,” he said. Since we are already seeing banks pass on the benefit of the last rate cut, Vijay says user industries will benefit the most from any further rate action from the central bank. Speaking about yesterday's S&P statement, Vijay says it should come as a warning to the government to act before it becomes too late. Below is an edited transcript of his interview with Sonia Shenoy and Reema Tendulkar. Also watch the accompanying video. Q: A word on the technical setup. We didn’t expect this huge reversal today but now that its come how would you approach it? A: I have to differ with you on this statement. We never expect anything from the markets. What we know was that we were long in the market and we had a level of sub-5,000 at which we cut out trades. So to that extent the market will always do the unexpected and I am not surprise at the fact that we gap down and then rally it up. So there is a slight difference here. The message is that this market is fairly strong on the bullish side. The fact is that we could gap down and do this intraday rally. We did similar pattern last week. It tells us that the corrections that we are now seeing in this market are something that is called running corrections, they just happen intraday and people cannot even see it. So I would expect that this market is well on its path to reach 5,200. Q: There is talk now that there could be more aggressive action because of how slow the growth has been. All eyes of course will be on inflation figure as well. What are you expecting to hear and how would you approach the banking space in anticipation of that? A: Of course the IIP number is calling out strongly for loosening of credit policy because all of us know that the problem in India is lack of investment demand. There is just not that much confidence in the private sector to go and part with some cash and put it into long term assets. So to the extent the cost of capital goes down, whichever way you can, the investment ratio will increase and then you will have a multiplier effect. So there is a compelling reason to cut CRR and the bank rate. However, as Dr Rangarajan was mentioning today, we need to look at the core inflation. We don’t want a stagflation type of situation, so we need to look at the manufacturing inflation. If we are anywhere below 4%, given that the commodity prices have sold off across metals and other commodities in the last month, we could get a double whammy of 25 basis points each on CRR and base rate. Talking to industrialists, what's clearly worrying them is not Greece. You and I worry a lot about Greece and Spain and what Bernanke is saying, but what they worry about is three things – high commodity prices, high interest rates and lack of government orders. If we can get some strong action on government spending and interest rates, I think our IIP would improve dramatically and we would be 7% plus in 2012-13. So from that point of view, if inflation is fairly okay or benign, we should get a double whammy on Monday. Q: If we do get a 50 bps repo rate cut or a 25 bps repo and 25 bps CRR cut, how is the market likely to react to that? Can the rally continue from this 5100 mark or will the market pause and perhaps we see a bit of profit taking? A: I agree with you that some amount of discounting has taken place. My past experience is the immediate beneficiaries of rate cut, namely banks, will peter out because the front running has taken place extremely highly in PSU banks and in private sector banks. I think people will sell the news, but the money won’t leave the market; the money will move into BHEL and L&T and, if you have the risk appetite, the infra and real estate companies which are the secondary companies which would be the beneficiaries of the pass-through of rate cut. Let’s not forget we already had one and the pass-through is now taking place through lower bank loans, through lower bank deposits etc. So this means that there could be a 0.75-1% fall in the interest rates across the economy and we can see the 10-year treasuries slowly going towards the 8% mark. So the secondary industries, the user industries will benefit and probably people would be selling State Bank and buying a BHEL for instance. Q: If the S&P goes ahead and acts faster than the government and downgrades India, then there could be a big sell off. How have you read into it? A: I don’t think there will be a great sell off immediately. US got downgraded on August 3, 2011 and after that Dow had a huge rally. S&P has some historicals, we guys are 3-6 months forward looking, but physiologically there would be a bit of a bump. I like the S&P document; I read it and I reread it because the first time an international agency questions the Indian political system. It is saying that we have a dichotomy, we have got a setup where we have a powerless prime minister, but what are you going to do about it? If doesn’t shake up the UPA, I don’t think anything will. As a warning, as a fire under your chair, I like that. I do hope these guys will stop their denial mode and do things. Read for some stock specific calls.. _PAGEBREAK_ Q: Many of these midcap infrastructure names have rallied very hard. How would you approach them now? A: I am going to slightly up the risk. One has always had L&T, which everyone picked up around Rs 1,100 or so. But now we are getting into slightly more treacherous space. My pecking order in infrastructure is like this. When it comes to power, power equipment plays like BHEL and Voltas. When it comes to hardcore infrastructure companies, avoid the developers like GMR Infra, GVK Power because they are filled up with debt. Go to IRB or IL&FS Networks which have a toll model, which have a revenue model, which are mainly into highways, where the imponderables are far less and the traction in orders is really being seen. So one is doing a little bit of a shifting of risk, going to those where the cash flows are visible and the debt is low. I think those could be giving you a 40-50% rise from the low levels in the next 15-18 months. Q: Between SBI, Tata Motors and DLF, if you had to choose one stock to pick up at this juncture, which one would it be? A: Tata Motors I guess. SBI has run up a lot and I think it will be a sell on news candidate because it’s been one of the best performers from Rs 1500 to Rs 2200. So at some stage, there will be profit booking. DLF is still very debt ridden. It’s nice to see them hiving off properties faster than you can talk, but even then the debt is very high. The real estate market is very sluggish; Delhi NCR is running at 22 month inventory to sales which is the highest in last eight quarters. That leaves us with Tata Motors. I think the market over reacted to the flattish JLR sales. If you see, BMW, Benz and Audi on the DAX have been some of the best performing shares the last three months. This means that if you took JLR as a share, it’s not doing too badly either. There is a very strong correlation between commercial vehicles and growth in India, so all that put together, I think it’s on the way up. I would give it back again up to Rs 320 in next six months. Q: How would you approach something like Suzlon? It’s lost about 2.5% despite getting approval for extension? A: Shares like Suzlon, SKS and Kingfisher have fallen off close to 90%. To be contrarian, you can make big gains, but you must see the light at the end of the tunnel. If you looked at Suzlon’s balance sheet, it doesn’t give you any confidence at all. So if you are a trader who knows open positions and shorts and longs etc, you might play it for a week or two. But I would not recommend any serious investor to buy Suzlon, SKS, or Kingfisher for that matter. Q: What are your thoughts on the cement space that has been seeing continued traction for almost a month now? A: I have been generally bearish on cement because the supply-demand dynamics are not good for the industry because of which the pricing has been an issue. But in the last one month, talking to cement makers, I find that they are getting a huge amount of increase in demand from both construction and the highway sector, so we are relooking the sector. We are not having that sector right now, but we are wondering whether it will get back to be in favor. So one is hearing from the industry of renewed demand. Of course during monsoon it gets a bit sluggish, but after monsoon when we go into the puja seasons etc. they are expecting very, very strong demand and price recovery. So the jury is still out. We have been rather negative on the sector, but we are relooking at that for an upgrade.