Realty stocks to be volatile; HDIL, DLF top bets: PN Vijay

With the finance minister Chidambaram trying to unlock some of the procedures and policies, Portfolio Manager PN Vijay believes that 49% FDI in insurance will not be as negatively perceived as retail.

Although he is unsure when this will come into effect, he feels it will be very positive for the sentiment. "Long-term insurance money coming into risk assets or even more money coming into long-term insurance is very positive for markets, both debt and equity," he said. While Vijay has been hesitant to play realty stocks, he is of the opinion that those companies, which are balance sheet-driven, can be considered. “Companies like HDIL and DLF, which are making energetic steps to shred assets and reduce debt could be interesting. But one would have to be prepared for some volatility but if one were to stick his neck out then buy these two stocks HDIL and DLF and keep quiet for 18 months. He should get something like 40-50 per cent return,” he advises. Among the cement stocks, Vijay prefers Heidelberg Cement and India Cement. Below is the verbatim transcript of the interview Q: Over the last 48 hours, there have been some positives for the real estate space in terms of banks being asked to lend loans as well as cues for the life insurance space trying to give them a shot in the arm with lower taxes and more investment opportunities. Is all this adding up to more positive news for the Nifty today itself. Will you see a spring in the step? A: It is possible that these are extremely important sectors to attack. Incidentally, the SGX Nifty is above the Nifty future in absolute values. That's something you have to bear in mind, so the number is a bit misleading. You have to compare it with our Monday closing. Let me put it in a proper perspective, long-term insurance money coming into risk assets or even more money coming into long-term insurance is very positive for markets, both debt and equity. To that extent, Mr. Chidambaram is trying to unlock some of the procedures and policies, and probably even get to 49% FDI in insurance. FDI, of course, requires parliament approval. But I think it won't be as negatively perceived as retail. It's more like aviation. These are extremely positive. I do not know how immediate it will be but it will be very positive for the sentiment. The second is real estate. State Bank of India's Chairman said he has Rs 70,000 crore of idle cash. We are keeping on trying to finance the consumer but it's important that the real estate developers have to get out of their logjam, and for that, they need some holding finance. So if we are able to get that going through some instrument, which also protects the banks, that will be a win-win. We do not want a situation where real estate starts doing well and banks starts reporting NPA. But the biggest thing going on in Delhi right now, according to me, is the infrastructure development fund. It's got the cabinet support; that doesn't require any parliamentary approval. If you look at the growth of any India company, whether it is Reliance or Gujarat Ambuja or Grasim or even Tata Motors, they grew up on IDBI, ICICI, IFCI's ten year money. That just got disappeared in a wave of reforms and we have no long-term lenders. We need to create institutions, which do not have an asset liability mismatch and lend long-term money. Today willy-nilly, the commercial banks who have got a deposit profile of 12-18 months are lending ten-year money and getting themselves into consortiums. This is the first time the government is seriously looking at a huge corpus for long-term funding. People in Delhi are extremely bullish about this long-term infrastructure fund, which will raise money overseas and in India. It might be a sea change for India's capital goods and infrastructure sector. Q: The two other impending market friendly moves could be the Shome Committee going soft on general anti-avoidance rules (GAAR) as well as the Kelkar recommendations for the fiscal strategy. Do you think the government can actually go through with both of these recommendations? How will it affect market sentiment? A: Shome Committee has made some very practical recommendations. The first thing Mr Chidambaram did after his appointment as finance minister was to appoint the Shome Committee and told them to submit the report by September 30; they have done that. They are saying that GAAR should be postponed. Two, GAAR should not be applied across the board, and third, GAAR should not be applied where there are tax treaties and introspective taxes should be used only to set right certain things and not settle scores. If the government accepts it, and my sense is government is in the mood to accept it, otherwise why appoint this committee? In the market when you get some sort of rumour, the market goes up but a lot of money does come in when the fact actually happens. When Shome Committee recommendations get incorporated in to the statute through Income Tax rules then that will be hugely positive. Mr Kelkar and all the other members have done their job. But I think nothing much of that will get implemented immediately. All that should be done but the government is still struggling with Rs 5 diesel price out to sell it down and the LPG differential pricing and the FDI in retail. So, there is a lot of action in the political sphere. I don't think Kelkar Committee, though it could be a mission statement, is implementable in the present scheme of things immediately. _PAGEBREAK_ Q: That is worrisome; ultimately we will come face to face with fiscal deficit that will be yawning by the time we come to February and if we do not meet with the reality? A: Not really. I think the media likes to exaggerate the political media much more than the business media. If we get a strong rupee and slightly soft crude prices, I do not think we will overshoot 5.2 per cent by more than 2.2 bps. I think the PSU disinvestment; the spectrum sale etc, the surplus land, a lot of this is coming in. The fiscal situation may not be so bad unless the rupee dollar goes out of shape. Q: Would you be a buyer of real estate stocks at this juncture? A: I have been asked this question in the last two years and I have said 'no'. Now I am veering around to, maybe and only the good ones. When I say good ones, what do I mean? The balance sheet driven; one thing is the environment being superb, that government is supportive, banks are lending but if your balance sheet is so laden with debt, for that to filter through, would be tough. In that environment companies like HDIL, and to some extent, DLF, which is making energetic steps to shred assets and reduce debt could be interesting. These are also very popular stocks. But one would have to be prepared for some volatility but if one were to stick his neck out then buy these two stocks HDIL and DLF and keep quiet for 18 months. He should get something like 40-50 per cent return. Q: Which one from the cement lot do you prefer? A: The cement party has been rolling inspite of bull and bear market. Almost all the leading stocks are at 52-week high. So in cement, one needs to dwell a bit deeper, the early picking, the low hanging fruit, as they say, is done with. I like two stocks where the pedigree is high; one is Heidelberg Cement. Heidelberg is the old Mysore Cement of the Birlas, which was taken over by the European major. They are getting into a very large capacity expansion. Apart from that, the capacity is much more modern in technology so the cost per tonne of production will be a lot less. For a long-term player, Heidelberg will be a great midcap idea. India Cement used to be talked about as the same being in the major ones. It's now gone into a midcap, after a long time, India Cement is seeing a spurt of activity and it is sweetly placed because southern markets generally command better pricing especially the Kerala market etc. These two stocks are ideal for people who still have the appetite for cement. I am mildly bullish because it's such a domestic industry, it doesn't have any international play involved through exports-imports etc. So I would go for two midcaps of stellar management like the multinational Heidelberg and the Chennai based player India Cement. Q: Would you start putting in your money in infrastructure space for long haul? A: I would not venture out into those companies just on news and macro flow because the balance sheets are much stretched. If one wants to translate government action in infrastructure into stock picking, I would go for the Power Finance Corporation (PFC), Rural Electrification Corporation (REC). I think there, there is very little political controversy. Most of the electricity boards have already taken steps to increase tariffs etc and that is very doable. Here, the benefits for PFC and REC are huge. The market has already recognized it and they are very safe plays even by absolute standards if you see the NPA levels, the cost of funding, the NIM levels, all the levels that we normally use, are excellent. So I would go a bit cautiously on playing reform related stocks now. Playing FDI in retail is one thing; but playing something that the government will build more roads and will put long-term funding, buying a company with debt equity of 3.2 or something, is rather risky. With the present government opening up domestic liberalization, I would go for PFC and REC.