BHEL, Tata Motors will aid rally, not ITC, HUL: PN Vijay

Even as people are not expecting too much from the earnings season, there is high expectation that the investment to GDP cycle in India will improve, believes portfolio manager PN Vijay.

“We may hit the 6% growth rate, which is why most people are feeling that we should have 6,000 on the Nifty by the end of the year,” Vijay says.

Also Read: See Sensex at 23000 in 12-18 months: Ambit Cap

In his view, stocks like BHEL and Tata Motors would lead the next leg of the rally and not counters like Lupin, ITC and Hindustan Unilever.

Below is the verbatim transcript of the interview

Q: How many legs do you think this rally has considering that when the market comes down, there isn’t earnings growth that can be factored in even with all the reforms, like the State Electricity Boards, in place? Ultimately, it’s sentiment, at the moment.

A: Big rallies are never about earnings. People do not buy stocks just because they can buy Tata Motors at Rs 270 and sell it at Rs 280. Only traders do that, but not big investors. People are sensing that India is changing and they are betting on riding that bandwagon. The problem in India has been lack of decision making, a precipitous fall in the investment-to-GDP ratio and rather tough current account deficit and fiscal deficit.

If one were to focus on people who create the wealth, which are the businessmen, and people who influence wealth, that is politicians, there is a real feel good factor. Also, the Supreme Court’s decision yesterday is a big thumbs-up. Nowhere in 163 countries, where coal is produced, is there an auction system. CAG put the cat among the pigeons by suggesting something rubbish. All that is playing out, I would say the feel good factor is very much there. People are not expecting too much from earnings but going forward there is high expectation that the investment to GDP cycle in India will improve. We may hit the 6% growth rate, which is why most people are feeling that we should have 6,000 on the Nifty by the end of the year.

Q: What is your view on the recent pricing policy in pharmaceuticals and the negative impact it would have on many of the stocks?

A: The pricing policy has always been there. It is not a free pricing of vital and essential drugs in India under the Drugs Price Control Order (DPCO), so we have to go into details. To some extent, I feel there will be a slight profit compression though I should say that most of the Indian pharmaceutical companies, which are quoted in the Indian stock market get their big margins not from these products but from their exports and from non-price controlled products.

There would be a slight negativism. One needs to see on a case by case basis. Probably, Cipla would be affected a bit more because it is more in life saving drugs etc. But on the whole, one needs to go in details, and across the board, it may not affect the pharmaceutical companies because they have got a very varying business model.

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Q: Which stocks are the likely initial flag bearers of the rally?

A: I am working on the premise that there is game changing happening in India. Unfortunately, the retail is still sulking and not participating, which is typical of most bull markets in India. This is driven by investment, the C+ equation.

The consumption story will not play out incrementally given the fact there is a 6 per cent deficit in the monsoon also. One would have to make very tough choices. It is very easy to pick an ITC; it’s a no-brainer because we had visibility in cash etc. Now you have to delve deep in the muck into public sector banking, private sector banking, auto space, infrastructure, engineering, and then pick up the winner, for e.g. BHEL at Rs 247.

The last time the Sensex was at 18,500, BHEL was at about Rs 450. So, there’s a long way to go. There is no PE destruction or earnings destruction in BHEL. BHEL continues to be an excellent buy. The same is with Tata Motors after the new generation platforms that Jaguar is bringing out. These are all boring stocks but they would lead the next leg of the rally, and surely not Lupin, ITC and Hindustan Unilever.

Q: Many people still believe that a secular bull market rally can be based only on the earnings growth improvement. When do you think the earning cycle will bottom out?

A: That is a wrong macro market theory because earnings follow from improving macros of the economy; earnings are, after all, of companies which work in the economy. People do have different news on this, I admit.

My sense is that this quarter would be a bit of a washout because of demand compression and high interest rates. We are seeing, in effect, lower interest rates filtering through especially the CRR. The State Bank of India’s Chairman said that they have got about Rs 70,000 crore which he doesn’t know what to do with and bulk deposit rates are being cut very sharply. If that peters through the system and improves operating profits of companies, and companies build inventories at slightly low raw material prices, one could see an upward swing of a perceptible nature perhaps in the January to March quarter.

Traditionally, India’s GDP on the industrial side has grown faster in the last quarter except for 2008. So I would imagine that we have to wait a bit longer before we get all those positives. But my sense is that the downgrades will fall sharply.

Q: How would you play the power stocks after the restructuring? In this space, there are a lot of high beta stocks like GVK, GMR, Lanco and lenders like REC, PFC and several state owned banks.

A: I think this is a big reform, much bigger than FDI in civil aviation, and the states are going along with it. I feel I would play for the financiers because they would get the immediate benefit. Among the financiers too, compared to the pure power financers versus the state run banks, I would go for pure financiers at this point in time. I would stick my neck out and say that REC and PFC are two of the best stocks to buy.