Here are fundamental trading ideas from Anand Tandon

In an interview to CNBC-TV18’s Prashant Nair and Ekta Batra, Anand Tandon, a Market Expert shared his readings and outlook on market and specific stocks.

Below is the verbatim transcript of the interview.

Prashant: Just to begin with something which is topical, this entire farm loan waiver business. Many in the stock market are interpreting this to be bullish for the rural economy, forget the moral hazard question about banks, etc. but just the fact that farmers don’t have to pay this money back, government will take care of it and they will be able to spend on other things. Does that logic make sense, we have seen this happen before as well, I think 2009 or 2010 going back in time we have seen, has it really provided a boost to consumption, rural consumption in anyway?

A: Rural consumption needs money to flow into the market in some form or the other, whether it is in the farm loan waiver, whether it is through NREGA, or perhaps a higher MSP. I think the moral hazard is not there so long as the government is actually paying for the banks and the banks are not having to incur it.

I think it does of course create some amount of issues in terms of farmers thinking that they can always get a waiver, but in many states we now see that up to Rs 1 lakh is anyway -- for example in the state I now sit in, Telangana Rs 1 lakh you don’t have to pay any interest. So, the amount is permanently with you. So, I think it has pretty much become de facto standard for most states and I am not surprised that we have seen a similar kind of exercise in UP given their poll promise.

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Will it increase demand? Certainly because that amount of money is finally coming back to the market in the hands of the farmers and as I said, it has to be in some form or shape, so, to that extent, demand in the rural sector will certainly increase.

Ekta: The other space which has really been buzzing is a lot of these API manufacturers, Dishman because of a drug from X company, Neuland Labs because it is an API supplier for a drug from Teva, do you think that is the story which is emerging select pharmaceutical stocks maybe API companies which are just suppliers to bigger companies?

A: The story in pharmaceutical is little more desegregated. It is not a sector where everybody does the same thing and valuations also relative to the market have become a little cheaper. Of course the larger companies seem to suffer from the FDA problems but there are many companies out there which don’t have that. So, even among the big companies, we have seen Lupin does not have the kind of problem like that, Torrent Pharmaceutical is doing exceedingly well, though there is an FDA problem in Ipca we can see that their domestic growth is beginning to become fairly robust.

In fact the domestic market itself is providing 13-14 percent growth which is fairly robust for the pharmaceutical sector. So, I think selectively there are opportunities in the pharmaceutical sector, some of the names we have mentioned have done exceedingly well. I am not making any recommendations because the valuations for many of them is fairly steep, but even then I think that is perhaps one of the less pricy sector at this stage.

Prashant: You are positive on IT and pharmaceutical because of low valuations, but is low valuations itself enough for one to be able to make money off some of these stocks unless of course they are at such low valuations that you see very limited downside and hence you are okay buying and just sitting, is that what you are saying?

A: For IT I would argue that that is where we are. For the most, even the frontline companies, they are trading at maybe 12-13 times and with very low expectations of earnings growth. You are looking at single digit earnings growth being factored in and after that they are at 12-13 times. Compared that to the market where for the last three years we have had single digit earnings growth and yet the market trades at 20 times forward earnings.

Of course the fact is that the RoE of the market is far lower, many of these companies still generate upwards of 20 percent RoE. So, overall, because there is no growth and the market is clearly chasing growth, we have a situation where the companies which are struggling with growth are having problems. I think the US market should recover a little better this year and therefore there may be a little better opportunities in terms of growth. H1B will be a problem but again you are basically forcing the companies to go up the curve in terms of quality of manpower that they look to hire.

I am not saying that there are no challenges in the sector, I think product companies have done reasonably well, some of the BPOs have done reasonably well. This quarter, earnings may be a bit of a challenge because of the currency. Clearly one did not anticipate the kind of strength that the rupee has shown and you may have to factor that in. However, over the next one year or two year timeframe, I think this is probably a good time to be looking at IT.