Bullish Anand Tandon says market may touch 5600 by Dec

As investors are nervous and trading on the edge, there are some experts who still feel that Indian market has steam left for a further rally. Anand Tandon of JRG Securities believes that the fear on the downside is 'little exaggerated'.

In an interview to CNBC-TV18 he said, "Barring a collapse of the euro, which is due sometime, may cause one good buying opportunity to emerge when the market falls. Other than that I don’t see anything that can happen which will really drag the market down anytime soon."
Tandon is optimistic that the market rally can run up to 5600. Don't miss: How to play your favourite stocks next week Here is an edited transcript. Q: What is the sense you are getting now? Are we going to see a good bit of risk rally? May be that’s something that could last a couple of months globally?
A: I have been some what of a bull in the market for the last few months now. I think the fear on the downside is perhaps a little exaggerated. It is not that we have anything to be happy about but the fact that we have nothing to be happy about usually means that you can have a good run in the market. From that point of view barring a collapse of the euro, which is due sometime, may cause one good buying opportunity to emerge when the market falls. Other than that I don’t see anything that can happen which will really drag the market down anytime soon. Q: So when you say bull do you mean raging bull or a mild bull in the sense that do you think the markets could get back to those year highs of 5600 or is that a far stretch?
A: I think by December I wouldn't be surprised if you see 5600 again but I am not a raging bull. Q: Is this largely because of global cues? One of the disconnects in the market has been that for every month starting from January we have been downgrading our GDP estimates from 8% to 5.5% and yet we are the second best performing Asian market. What explains this dichotomy and does it get stretched now?
A: This is where the economies come in. Remember that economies drive backwards. So the forecast that you are seeing are based on what you have just seen in the past. The market has to drive looking forward. So the analysts will always be behind the market, there is no question about it. We had a policy disaster and that has been in the making for the last 8 years.
The effect of it in economy large ship it takes a long time for it to change. So we had lot of people applauding the dream team. Now people realise that it was actually a nightmare. By the time they have realized it, the damage is done. So therefore what you are seeing today is the effect of whatever has happened in the last 6-7 years or not happened which is more appropriate except for the scams.
Going forward therefore the assumption that one is making and he could be wrong in that is that somewhere along the way people will wake up and the nightmare will go away and at that point of time you will actually get an upside. So what you are doing is preparing for that. Q: The next trigger that the market is keenly awaiting is the hike or the proposed hike in diesel prices. Do you think given the kind of political turmoil that the government can go through with it and if yes what kind of a quantum are you looking at realistically?
A: First of all from economic point of view it is a disastrous move, I have been saying again and again that should not confuse over expenditure of government to subsidy. There is no subsidy that consumer base that the government is giving to the consumer; the government is subsidized by the consumer. That said can you raise the prices and can you get away with it. Probably given the fact that the government is anyway lost the popular mood I doubt whether they will gain or lose too much by increasing the prices and at least near-term the debt rating agencies will feel happier.
We will have severe issue in terms of inflation and all the fallout affects of that. While you can fudge the figures for a while I think the fact that the consumer is getting pained a lot by raising prices is not going to help any time soon. The short answer and the long answer is it should not be done and therefore in my view I cannot give you a number, in fact, we should be reducing it.
_PAGEBREAK_ Q: You were saying that the market is getting diversified. I assume you were saying that you are seeing a lot of buying in the FMCGs and the private banks and severe decimation in the debt laden stocks, the infrastructure and some of the PSU banks if you would complete that argument?
A: That is right. Basically there is a bunch of stocks which is at an all time high almost and then there are those which are close to if not all time lows but very low. Other than the FCCB companies I would think that some of them will actually provide you significant upside over the next 3-5 years. I don’t believe that there is any company in India which will go bankrupt because the banks will take it away from the.
So it will just be restructured and life will continue. That is what has happened in the past. The FCCB ones are the ones which are dangerous because wherever there is foreign borrowing you don’t have that ability to control the banks and you can't just pass on the load. So leave those aside. Aside from that I think there are lots of opportunities there.
The other dichotomy is again the valuation gap that has opened up between the large cap and the not so large cap. I know it is bad to say that you could actually be buying midcap but businesses are small before they become big and the markets always tend to lag. If you can find good businesses and I think there are several which are still delivering very high returns.
In terms of the capital that they employ and the kind of growth rates that they are looking at. I think you will find that there are opportunities to be making money as an investor not necessarily as a trader. Don't forget the fact that we have had a 25% drop in the currency essentially means that a whole lot of companies who are under threat for Chinese imports have a lot more breathing space. It is not going to – in many of the cases now we are actually quite competitive if not even in a position to export to China.
So those industries are small but they should be something that an investor should look for. Q: What about the stocks you were speaking about in terms of debt laden ones which, given the Indian situation, would only be restructured and perhaps go on to do much better. What would your buys be in that space? There are so many debt laden stocks, so many of them decimated by the market punished which would you pick from the rubble?
A: It is difficult to put names right now in a scenario like we are right now. We have already started seeing a lot of the infrastructure names getting restructured and now that we have the regulators also saying that for e.g. in power you can raise prices. All the finance companies in power had fallen off quite sharply on the assumption that there will be NPAs, of course there will be NPAs but when did that even deter prices from going up at least in terms of stock prices. So I would think that that’s one area especially power distribution etc which looks interesting from valuation point of view.
_PAGEBREAK_
Public sector bank which is trading at half book value is not something that is going to go under. While we could argue that the book value is being reflected correctly, my argument would be that if it is reflected correctly it is still trading at book value and as the numbers turn. Hopefully at some stage there will be some way of recovering some of these losses. This is because if you are for e.g. lending to power sector or any of those kind of things aside from things like Kingfisher which may vanish but if you are lending to power sector companies, the likelihood is that the NPA will come back.
You will have the cycle turning to your benefit as well as the asset getting recovered. So I think the potential loss from there is very low. Let me clarify that the way I look at the market is where is the chance of it falling the least and then the upside is something that you have to wait for a lot of people to figure out that what you got into was correct. I am not a momentum investor so many of my views would reflect that kind of approach. Q: Between BHEL and Bharti both have been plagued by regulatory issues and where the potential earnings growth looks a little bleak at least at this point in time. Would you buy anything with either a 3-5 year time horizon?
A: BHEL is a pure play of the industry. So you have to try and time the cycle of the industry rather than anything to do with BHEL. I don’t think the management itself can do much.
Bharti, on the other hand, has an active management and therefore if you are looking at a situation where they could emerge from the woods even if the market remains somewhat subdued then I would place my bet on Bharti. But neither of those two stocks are necessarily looking to be in something which is very promising at this stage. Q: You saw the earlier downturn from 1997 to 2003 whenever that was and at that time while we looked at FMCG valuations and called them crazy, they just got crazier the next year and even crazier the next year. So while everyone recognizes that valuations are high for several of the FMCG stocks currently, would you say that this trend could continue for another couple of years?
A: It is not likely in my view to continue for the next couple of years, I mean will they fall off. Unlikely, will they continue to stay perhaps at where they are but not grow if the market were to grow. I think that’s a much more likely scenario. My argument has been always that if work well in an inflationary scenario.
At some stage inflation has to follow-up. As the inflation comes off especially on the commodity side we will find that their ability to create any kind of pricing will come under some kind of stress. The other thing is that the valuation currently is lower than as you said in the past it was higher – but that was because more of the fact that they were MNCs.
They apparently had a pedigree which was better than some of the Indian companies, at least that sheen has taken off now because MNCs can also back the small shareholder and to that extent. Therefore, I do not expect those kind of crazy valuations to come back again. Q: If we do get some more quantitative easing or any sort of easing of monetary policy by the Fed come next week, what kind of upside do you expect to see in global commodities? In-turn do you think that there could be further potential in commodity stocks in our own markets as well?
A: I think the only area in commodity where you will now have a kind of bull market at least in my view is in the agriculture side. Gold is little more tricky because gold is more a bet on the fact that fiat currency will one day die. That’s a doomsday scenario. I do not know how to play it. So we leave that aside for the moment.
Other than insurance I do not think that gold is something that you can take a bet on. On the agri side you will continue to see inflationary impact, I think given the slowdown that one is witnessing in China and the fact that we now got a five year bull run where lot of capacity has come on stream. It is unlikely that we will see the same prices that you have seen a couple of years ago. Broadly the commodity cycle for the metals, not so bullish, agri is still there, gold depends on what view you take when the monetary collapse will happen if at all.