Have exited cap goods, PSU banks; consumption the big theme now: Quant MF’s Sandeep Tandon

We are constructive on real estate as it aligns with economic growth. However, from a market perspective, the easy phase of the bull run in real estate is over.

“We don't have any love and hate relationship with any sector or stock, but we look at when multiple data points are skewed in one direction,” says  Sandeep Tandon, Chief Investment Officer, Quant Mutual Fund.

“That helps us in taking aggressive call whether to exit or whether to rebuild the position or build a new portfolio,” he said.

Right now those indicators are telling Tandon that consumption, infrastructure, metal, cement and power are the areas to look for opportunities. And for that very reason, he has exited capital goods and PSU banks.

Edited excerpts from the interview:

How did you navigate Tuesday’s crash? Did it come as a surprise?

It was an event risk and we had been preparing for it for the last few months. We adopted a cautious approach by pruning high beta portfolio and shifting from illiquid to liquid stocks. We significantly increased our exposure to safer names. This helped and we did not sell any shares in panic on Tuesday.

Also read: Did not sell a single share on Tuesday; buy on dip strategy should work: Quant's Sandeep Tandon

Do you think the market has made peace with this verdict? Have we found the bottom?

It's difficult to pinpoint the bottom. However, based on our analysis, I felt Tuesday was a great buying opportunity. The spike in volatility was a reaction to the unexpected outcome, but it didn't indicate a crisis. Historically, such spikes happen when it's a major crisis. Tuesday was a shock, but not a crisis. Wednesday’s rebound confirms that view. We remain constructive on the market.

What is the real risk you see from a coalition government?

The concern with coalition governments is often about policy continuity. Many of the major partners in the coalition are also focused on development. Policies on infrastructure and capex focus are unlikely to change. The pace might slow down and there may be some tweaking, but the long-term direction should remain the same. Let’s wait for the budget or the first 100 days to see if there are any significant changes.

Also read: No crisis, hard to assess flows into small-caps: Quant MF's Sandeep Tandon on stress test

What reforms were the market counting on and is now worried about?

Everyone has their perspective based on their portfolio. Major reforms needed are in the electoral system, judiciary, labour, farming, and land. Some reforms may be delayed, but the end aim is for unified national policies over time. We are not too worried.

What about PSU stocks, which the market appears most worried about?

In sectors like PSUs, railways, and defense, many have only recently seen euphoria due to momentum, not conviction leads to panic selling when conditions change. Market sentiment shifts with price changes, causing decisions based on fear rather than conviction. We see these as buying opportunities. Despite uncertainties, we remain constructive as a house about India's trajectory.

Fundamentally, have things really changed or is this just a valuation correction?

In our approach, we avoid isolating factors like valuation as we recognise that it doesn't provide complete answers. Instead, we integrate qualitative, quantitative, and behavioral dimensions in our framework for better insights.

Give us an example

For instance, consider defense stocks. While valuations appeared stretched, the underlying thesis of India's defense growth was good This, coupled with strong market sentiment and liquidity, led to euphoric moves. These stocks capitulated on Tuesday, but they are not yet in the neglected zone. Will they correct and consolidate for a while, the answer is yes. But they may not get into the neglected zone anytime soon.

Are there any pockets where you still see valuation excesses?

In the capital goods sector there's been significant investment due to India's capex cycle. As a result, we’ve exited this sector. We see buying opportunities in consumption, especially food-related companies, as rural demand picks up. Larger infrastructure, power, auto, media and metals also present opportunities.

Within consumption, which areas are you focusing on?

We are particularly focused on food companies. As rural stress reduces, food demand is the first to pick up, followed by staples. We are not as aggressive on consumer durable names currently.

The rural economy was hit hard post-COVID, and inflation added to the stress. With the recent good crops, we expect the rural economy to improve, and this should benefit food companies first. The government is also likely to address these issues in the upcoming budget.

Besides consumption, what are you looking at?

I believe larger infra thesis still looks good once the new government is in place. Anything related to infra, be it power, cement, metals, some of those too look good. Many of these stocks are still neglected, with some in a middle ground. We are looking at some auto ancillary companies.

The media sector also appears very attractive. It is trading in an extremely neglected and disliked territory, making it a sector we are very confident about. The challenge, however, is that the media sector has a limited number of stocks and is relatively small.

Additionally, some private sector banks have entered a neglected zone, though not the most disliked. We have increased our exposure to one of these banks after observing some neglect compared to a few months ago. Opportunities like this keep appearing in the market. For instance, Public Sector Units (PSUs) have seen sharp corrections of 20-30%, with some still falling.

If we sense that certain stocks have entered the neglected territory, we will reconsider them. While they may not reach the most disliked zone, even being in the neglected zone makes them worth a second look. We are interested in rebuilding our exposure in such cases but will wait for the right opportunity rather than jumping in just because the market has corrected. We prefer to act when the perfect data points align.

What is your take on public sector banks? Have they peaked?

We have largely exited public sector banks. From September 2021, we built substantial exposure to public sector banks, including SBI, Canara Bank, and others. Historically, our portfolios were skewed towards public sector banks because the opportunities were more. However, last quarter, we exited most of our PSU names because we felt that some private sector names were in a better position. This switch was opportunistic call and data-driven.

What's your perspective on the real estate sector?

We are constructive on real estate as it aligns with economic growth. However, from a market perspective, the easy phase of the bull run in real estate is over. We identified this early and have now pruned our exposure. While we are still in a bull run, it’s a more difficult phase. We are selective and cautious.

What is your take on Adani stocks, especially given the political noise and the Hindenburg report?

Historically, I prefer not to comment on specific stocks other than to provide a general perspective. During the Hindenburg episode in January 2023, India’s risk appetite collapsed sharply, leading us to reduce our exposure not only to Adani stocks but also to other leveraged economy stocks. Despite negative sentiment at that time, one needs to look at the data. For example, Adani Power, which we hold, has shown strong cash flow and EBITDA, making its valuation attractive. We focus on cash flow and not market narratives. If data supports, we will hold these names, and if it changes, we will exit.

Can public perception and sentiment impact the hard cash flows and numbers you talk about?

Events can lead to re-rating or de-rating, impacting sentiment in the short term, possibly for weeks or months. As money managers, we monitor data points closely and make decisions based on these. If data shows an inflection point, we buy or sell accordingly, but we do not let short-term sentiment drive our strategy.