Bull mkt intact but see short-term correction: HDFC Sec

Below is the transcript of the interview on CNBC-TV18.

Latha: You have to speak on insurance first because the highest gainer is Max India, 9 percent higher, Reliance Capital 4 percent higher, Exide 3.3 percent higher and a bunch of big boys as well. Even stocks like Punjab National Bank (PNB), anything with that ‘I’ of insurance in it, would you buy any of them?

A: It is like this, structurally speaking insurance is a great opportunity to be in. There is tonnes and tonnes of long-term value to be created, any opening up of the sector - 26 going to 49 and will it become possible or not so we always knew there were going to be hurdles doing that in terms of political consensus. The more that consensus seems to get into sharper focus, the more there will be excitement.

In terms of meaningful size, quite a few of the private sector insurance players -- one in general, one in life, which belongs to my group so I will not comment on any of my group stocks but in general -- I think there is more than sufficient critical mass in many of the private life insurance players at least for people to get excited as this event gets closer in terms of 49 percent stake being allowed to foreign insurance companies.

The big daddy there is obviously ICICI Prudential life insurance and I think the last rumours -- I don’t know whether they are facts but of a stake sell imply at least a 2-3 percent higher imputed value to the ICICI Bank stock and maybe there is a trade of 2-3 percent coming up but I think there are bigger things than the trade. This is clearly a sector, which is going to create value if 49 percent comes through.

Sonia: This has dragged a lot of emerging market currencies including our own and there is a fear of higher risk aversion of equities because of that, what is your own sense?

A: Certainly a speed-breaker, I don’t think it upsets the cart. There will be some outflows as dollar appreciates and you will see -- so the big thesis that we have that this is the next big bull market isn’t materially impacted but the weaker hands will surely have a rethink some short-term money flows might go out. I think the euro is at a 12-year low or something, the dollar index is up some 20 percent in two years.

However, the big picture on India being the place to invest will go through these challenges. This is how bull markets play out, they test your patience, they test your conviction, every once in a while there is a little bit of drift.

So our larger sense here and let me give you more general purpose answer to your question, if you expect a straight-line appreciation in Indian markets to play out and God knows we have had almost a vertical straight-line for at least a couple of times in the last six-eight months that is not going to happen. I suspect we will drift for a little longer and in a little wider range than what most people would be comfortable with. That is the beauty of a good bull market. It gives you chance.

Latha: The positive news for the moment is behind us, the Budget is over, two rate cuts are behind us, at the most you may get one more in the near-term, given that what can be the downside for this market? You are saying that it will only drift so what is the downside?

A: By drift I mean that it is going to drift in a range and the range could be little wider than what will be comforting for many people and I like that about any market especially a bull market. A lot of the people who were left on the sidelines when the move was too fast over May and the rest of last year, it will give them some opportunities to re-enter. That is the constructive view.

If the event flows between now and let us say the next six months do not inspire -- so what do you have in the pipe, you have monsoon coming up, you have Q4 earnings coming up, you have a lot of policy action coming up, you have political developments coming up, some 30 percent or 28-29 percent of Lok Sabha seats equivalent is going to go for state polls between now and the next 18 months.

So a lot of -- it has never been a straight-line in any bull market. So you will get these hiccups to go through. Will the hiccups ever translate into a breakdown of the thesis is the challenge and so far the indication is that the thesis isn’t breaking down. So you had a little bit of a stumble in the Delhi election so if you were a big bull of the Modi trade, so you have had that stumble, you have had an embarrassment in Kashmir and so on but I think this is part and parcel of real life.

Sonia: You have been very positive on this wind energy sector and we have seen that Inox Wind IPO as well come through. Would you continue to back names like Suzlon given the run up that these names have seen?

A: One doesn’t back Suzlon because it has run up, one backs Suzlon because there is a story here and like the India story it is going to take a while to play out.

Sonia: How much of it has already played out?

A: The healing has just been committed. The parallels to be drawn between India and Suzlon are actually staggering. The healing has been committed, new money is on the table and now the action must begin.

So, there will be some hiccups and doubts with respect to whether the action is sustainable, whether the money will come in. So, the divestment of Senvion, let us get specific here, the money which is coming in from the Dilip Shanghvi family, both of these transactions have been announced. There are legal and regulatory hurdles to be overcomed, so, the money has to come in and then the business has to take off.

The regulatory environment meanwhile for wind energy investment in India has dramatically changed over the last six months which is why I suspect Inox is going public and god knows they are a very good business.

So, it does not take away anything from Suzlon to say that Inox is a very capable and competitive player in the space. However, there is going to be enough space – a country which was down to less than a 1000 megawatts of wind energy investments per annum could well go back to 2000-4000 megawatt, maybe 5000 megawatt for all you know. So, look at the opportunity there and these two are the big players and Suzlon can clearly rest back its market share and pump volumes that you and I would be very surprised to see.

Latha: MCX is another stock that you are very positive on. Even that has seen fairly decent gains; a lot of juice left?

A: Of course. The entire space of exchanges has only one listed player right now. So, it is very difficult to take a call. So, the dot coms, the new age businesses like the Flipkart’s and what have you of the world, so you are seeing a little bit of it in Just Dial or maybe even Naukri.

So, my point here is that this is a brand new industry which is coming up. We need this sector or this set of companies. So, whether it is the NSE, whether it is the BSE, whether it is the NCDEX – yesterday we met the folks at MCX-SX where MCX holds a stake and SX offers interest rate derivatives for trading currency futures and so on.

I think this is a space which is closely and intimately linked to the economic and policy evolution of this country and there is going to be space for all these exchanges at some point of time to get listed. So, that is the big picture.

Now, with the Securities and Exchange Board of India (Sebi), Forward Markets Commission (FMC) merger which has been announced in the Budget, a lot of these regulatory tailwinds are now going to help these guys and which is what you saw during or just after the Budget presentation when the announcement came through, MCX ran up. It is not because we were bullish on it or ran some kind of an informed view on the company. We would like to believe that we created the vision but let us be humble here.

The business of exchanges is very interesting. It is almost like a holy grail of equity value creation; you don’t need capital to run or grow this business, there is non-linearity in terms of opportunity and there is operating leverage in the working. So, at higher volumes you don’t necessarily have higher costs.

Sonia: Another space which you have been bullish on is the non-banking financial companies (NBFC) space. So, you were talking about names like Shriram Transport which will benefit from the rate cycle moving, etc Chola Finance as well. Take us through those and what about these other names like LIC Housing that have seen stupendous rally up until now, what do you do with them?

A: There is a fundamental difference in character across NBFCs when you look at the kind of segments they work in. So, the housing finance companies are trading at crazy valuations and with justification because there are multiple years of growth happening there, they are just going drive on fourth gear for as long as you can imagine. It is not easy running such a business for sure but the opportunity afforded to them and the kind of stability which is embedded in their businesses calls for that kind of premium.

So, we have a couple of housing finance companies in the group which are trading at a premium and I will not comment on them at all. However, the point is an LIC Housing Finance and then a discovery such as a Dewan Housing, a discovery such as a Repco Home Finance – these are great value creators because they were in a sweet spot in the NBFC business.

On the other hand, let us say commercial vehicle (CV) financers like Shriram Transport or Chola for example, both these companies are intimately linked with the CV cycle and the CV cycle as we know by definition is cyclical. So, the space is cyclical and they both went through a slowdown in disbursements, in book growth and also in terms of rising non-performing assets (NPAs) when the cycle was against them.

Now, they are both very well poised to capitalise on the up tick in the cycle. Will the cycle come back tomorrow? Will it take six months? I think jury is out on that. I think it should take at least six more months but then investors will spot value here. Both these businesses are very focused businesses. They have identified segments in which they want to work, they don’t want to go out of those segments and they are wonderful managements.