Here's why you should shun SBI, DLF, Tata Steel now

In an interview to CNBC-TV18 portfolio manager PN Vijay shared reading and outlook on stocks across various sectors. 

Given the concerns on asset quality, one should avoid buying State Bank of India (SBI) at current levels, he suggested. One should wait for another quarter to pass by to see how restructuring of state electricity board debts helps the bank to write back provisions, he added. Continuing his bearish tone, Vijay advised to stay away from real estate stocks including DLF. "Deal with Lodha is good, but it is still a tip of the ocean. There are concerns in this stocks relating to unsold inventory, held up projects and high debt. This is surely not for somebody to put conviction in and buy." Post Q1 earnings telecom player Bharti is at about five year low. So, one can opt for bargain hunting strategy. Those already invested n the stock could average out or start picking at it at Rs 260. Further, he recommended betting on coal as a commodity and consider picking Coal India. "In this troubled market where commodities are all under pressure, coal could be something that you could look at with greater confidence," he elaborated. Below is the edited transcript of Vijay’s interview with CNBC-TV18 Q: The markets were disappointed with State Bank of India’s (SBI) asset quality, would you buy this stock around Rs 1,800-1,900 level or do you think the asset quality issues might drag it even lower during the year? A: I would wait to watch one more quarter from SBI because there is a positive for SBI in the sense that the net interest margins are very robust. They have been working hard on their loan portfolios. They have moved away from their corporate government lending practice to the retail where the margins are higher and delinquencies are a lot less. So, that is paying off. That is a positive and since they have a huge loan book, their profits would keep going up. The asset quality one thought would not depreciate to the extent that it did actually. One expected some slippage given the very bad index of industrial production (IIP) situation, but not to this extent. They seem to be fairly exposed to troublesome sectors like airlines and infrastructure etc. So they have to work it out. There is no point in jumping in or hoping that the asset quality would improve. One needs to see the next quarter to see whether restructuring of state electricity board debts, which is almost done and which may get effective from September, how does it impact. The PSU banks may see a huge write back of their provisions because of the funding of the electricity boards by the twelfth five year plan. If that happens, there would be a big positive trigger for SBI but until that, the asset quality issues are a bit too large for one to buy at this level. Q: Where do you see DLF stabilize at now that deal with Lodha has done? A: Deal with Lodha is good, but it is still a tip of the ocean. All that it does is it gets DLF out of one of its best assets I thought the company had in their books. It reduces their debt by about 10% or so. DLF is too big a company for it to march ahead just because there is an event of debt reduction. The whole industry has to go up. Unfortunately in India except for a few malls most of the other malls in India have huge vacant space. It is all very troublesome for DLF in terms of unsold inventory, held up projects and high debt. While chartists may recommend a quick go in and go out, it surely not something for somebody to put its conviction in and buy. So right now, we are not touching the sector at all including DLF. Q: Would you buy Bharti at Rs 250-260 or do you think there is longer-term derating of the stock which is going on, it may not be prudent to catch the falling knife yet? A: Now that Bharti has fallen to Rs 260, it is a very good buy for the long-term. This is because if you look at the so called bad numbers closely, they have gone into a strategy of intense price cutting to keep their very large market share intact. One can question the policy, but that is a reason and to some extent, debt due to the Zain acquisition and the 3G spectrum auction. Those are controllable because quite a lot of that is in that is in Bharti, but in a special purpose vehicle in the Netherlands. Going forward, I see the following scenario in telecom in the next two years, firstly there would be natural growth and that growth would not be a plain vanilla but in value added like broadband, internet and television. So, Bharti is well entrenched there. Secondly, I am seeing a major consolidation in the sector. It is impossible that people can survive too long in the sector. After the 2G auction; I feel we may have only 3 or at the most 4 players left in India after 12 months, which means that Bharti and Idea will get their pricing power back. From all these counts, Bharti is about 5-year low. It calls for bargain hunting and if one already had some stock, we could average out or one could start pecking at it at Rs 260 levels. Q: Give us a quick work on Coal India and how you see that stock stabilize post earnings? A: Coal India should be good because I don’t know how the earnings are so complicated with so much of e-auction and fixed pricing etc. But going forward, lot of blocks are being released for them from other producers who are not coal producers like NTPC etc. They have got their act together also and they have got now this pressure to deliver on a fixed basis. The demand for coal is humongous in India and I don’t see that reducing for a long time. Coal India has withstood several problems in the market. The only problem for Coal India, it is also a bit of a trading stock. People tend to sell it off when it comes to about Rs 355-360, pick it up again at Rs 310. So, it needs to breakout of that for a decisive move. But in this troubled market where commodities are all under pressure, coal could be something that you could look at with greater confidence. Q: Would you buy Tata Steel at Rs 390? A: I don’t think so. It is a very difficult question more difficult than a DLF for example. I heard you say a very interesting thing that bottomed out cyclicals and 0.8 of price to book etc, this is fantastic for a blue-chip like Tata Steel. There are enough fundamental arguments to go and take a long haul. The only question is when will all this happen? We have seen a bit of a rally in commodities hoping for a QE3 but commodities are still under very great pressure because of China supposed hard landing and problems in India. One cannot make out a call and say Tata Steel has hit the bottom. It might go a little bit more. One may as well wait a little bit to see how the internals work out, they do have a debt problem too. One will have to see what is the pricing on their input cost, how are steel prices stabilizing. In all fairness to the steel industry, it is nowhere as volatile as the base metals because steel is quite a lot domestic demand driven. From all that point of view, it is a mixed bag, 5 plus, 5 minus I would say. But given these very volatile conditions, it is possible that the knee-jerk reaction could be quite negative. We may get a quick fall and at that stage one could go back to the trading desk and see whether something can be done. In a nutshell right now, I will avoid Tata Steel. Q: What is your expectation of the inflation figure today given the fact that crude has also surged so much and how much of a market reaction are you expecting? A: Anything below 7.1% or something would be very nice for the market. Anything above 7.6% or something would put off people. The market has sort of given up on the RBI. It has expected a lot last month, but now they are feeling okay with this type of thing and RBI is saying that only that much we can do. The attention is on Chidambaram. He needs to deliver. Two days after he took over, Chidambaram made a very big statement that all this etc-etc, there seems to be some activity in Delhi people going in and out of buildings every few hours and we need to see. This parliament session has not been too bad for the Congress party. In the next ten days, there should be a lot of effort on fiscal consolidation. If that happens many good things will happen. RBI will go into a limbo and the action will shift to north block in Delhi.