It is a small sector, but look at paper stocks the way they are going up after the AP Paper deal?
It is a classical trade where a strategic investor comes to buy a company and he pays a huge premium over the market price. He pays a non-compete fees to the promoter and then suddenly the investor realises that oh my God, the market was not valuing them properly and it tries to correct. Over a period of time obviously this company's share price will again come down because the market is a trading investor whereas the person who is buying the companies is a strategic investor. There is going to be difference between those two sets of investors.
What about the overall market though? What is the market so upbeat about at 5700 plus levels?
It is a combination of factors which is probably driving the market. It is always difficult to predict the short-term trend in the market, but during the budget time, I was bullish on the market based on the fact that everyone else was so bearish on the market. Very rarely I go right in the short term.
On the global side, in the US there are worries what happens after QE2 ends. There are worries whether the borrowing limit for the government of United States will be raised or not, will that result into disturbance in their market? If we come to Europe, the political issues in Portugal have again brought back the issues of sovereign defaults. The rating downgrades in the European community continue to occur. In Japan, we know what is happening unfortunately.
So if you put all these things together, suddenly you look at India and here the doubt is whether we will grow at 8% or 8.5%. Here the worry is on inflation which is running at 8%, but the growth is at 8% unlike in the UK where growth is at 2% and inflation is at 4%. So somewhere investors have now realised that probably it is worth investing in India where there is concern on the growth, but it is of 0.5% between 8% and 8.5%. There are worries on inflation, but the central bank is trying to do something to control it and the growth is still pretty robust, valuations are reasonable and we have seen over just last couple of days, reasonably good amount of buying on the cash market side as well as futures and options side. So all these things put together, the fundamentals which are there for to be seen and the flows which are improving and the supply which has not yet emerged, all combination has pushed the market up.
Are you surprised with the bout of liquidity Indian markets have experienced in the last 4 or 5 days about the billion dollar plus? That is large by any yardstick.
No, I am not surprised at all because if you see the behaviour of FII investors in 2010, we received one of the highest ever allocations above $30 billion in 2010 and most of the money came in chunks of just 4 months. So this kind of seasonality in terms of flows, where suddenly one set of investors realises that India is looking attractive, there are not many alternatives available and they all pump the money in. So we will have to bear with this kind of chunky investment and especially when fundamentals are with you and valuations are with you, there is no surprise that FII flows are turning around.
Fundamentally, which are the pockets sectorally looking the strongest to you, could it be banks, IT, what would it be?
IT will have to face the heat of the rising rupee. The rupee has appreciated on the back of FII flows and probably some year-end consideration whereas the banks provide a very good opportunity for investment. They are in a sector where regulator is very very solid, the fundamentals are pretty good and in the emerging market parlance, we have seen that banking and financial sector generally grows at a multiple of the GDP growth. So if GDP has to grow, banks and finance have to grow much faster than that. So you have earnings growth as well as potential re-rating and the possibility of what happened in western world in 2008 credit crisis is unlikely to repeat over here. A combination of that makes the banking sector fairly attractive.
I remember your big call for the year 2010 was to buy telecom stocks. What is your big contra call now for the year 2011?
What worked in 2010 was contra telecom call and what did not work was the infrastructure sector, especially related to construction, engineering and capital goods. I still believe this year the infrastructure sector related to construction, capital goods and engineering will probably work out. If we see in the month of February, where six core sector industries' growth numbers have come, they have come fairly positive. This is in contrast to the IIP numbers which are soft. So somewhere probably it is a harbinger to the fact that the core infrastructure sector is reviving.
It is no-brainer that unless until India invests in infrastructure, the solid growth story cannot be sustained. We need to invest in infrastructure. There is no debate about it. So somewhere what we liked was in terms of execution capability and this was partly compounded by the prevailing very tight liquidity, partly compounded by environmental clearances and bureaucracy and lack of immediate execution on the ground. Now the demand is there, the liquidity is easing off, ECB is being made available and hopefully something will happen on the execution side which in turn will make this sector positive from investors' point of view and then suddenly we could see re-rating as well as earnings growth in this sector. So 2011 should be the year of the infrastructure sector.
So let's divide the infra space into two or three large pockets. Within the infra space, what do you like, do you like builders, asset owners or machinery makers?
We will have to create a bottom up analysis over there. There are certain construction companies which have really come down heavily, their order books are not getting converted into actual turnover and their margins are getting squeezed because of cost push inflation. The market has discounted most of the negatives about them and that could be surprise. Not all construction companies will deliver return, but if you choose your construction companies well, certainly there will be opportunity. Similarly, there could be certain asset owners which have been discounted or neglected by the market.
What is your view on NBFCs? Do you like NBFC stocks? If yes, which NBFC business to your mind looks attractive?
I think it is difficult to kind of go on this sector as a subset of banking and financial services sector. We have seen many NBFCs blowing out in the past because of aggressive business practices. Experience has taught us that you have to invest in companies which are very very conservative. If they are showing fast growth, it probably is coming at the cost of NPAs in future and try to avoid them. Go for companies which have gone through the cycle and who are very very conservative. Within that space you have various businesses which are niche and which gives solid return on equity like two wheeler financing, like rural financing. So there are hosts of NBFCs which are available, but only one factor which investor is to keep in mind that they should be conservative and not aggressive risk takers. If they are growing too fast, be suspicious about it.
Many of the midcap names have been witnessing high delivery base buying. Would you say that the midcaps in the near term or rather in the long term have more upside vis-a-vis the large caps?
If we see the performance of midcap indices over large cap indices, on a longer term basis midcaps have done far better than large cap and small caps have done better than midcaps. However, this performance comes at a reasonably high cost in terms of very few winners which actually make this happen and there are as many losses. So when you are buying into midcap stocks, try to be as diversified as possible rather than concentrated. While it make sense to be concentrated, but in the hindsight only people can figure out which are the winners and which are the losers. For an average investors it is far better to have a diversified portfolio in midcaps rather than concentrated bet.
The second thing, time to buy midcap is when everyone else is selling and when midcaps are available at a discount to the large cap, which is the current situation. Today the midcaps are available at reasonable discount to large caps of about 28% to 30% and this is the time to add madcap. Do not be an aggressive buyer. Buy when markets are falling rather than when the markets are rising, but this is the time and the increase in the delivery of midcap shares is kind of showing that smart money is already accumulating midcaps stocks while the market is focussed on large caps, it is time to go for the next winners and that is available in the midcap space.
Are there any individual pockets that you may have identified in the midcap space?
I cannot comment on a stock basis, but I think the companies where the management has a good track record, they are not too much dependent upon debt and who are generating free cash flow and who are giving generous dividend. If you apply the standard sets of principal you will find enough opportunities within the infrastructure space and other related space.
Tell us the sectors?
I think in construction companies it is worth paying to be contra. In capital goods and engineering it is worth paying to be contra. In technology space if you can find the niche companies which are focused on certain segments of business and which are available at, let's say, less than ten times forward earning, I think they are worth investing right now.
In your new avatar as the President of Axis Bank, are you telling your HNI clients to still buy ICICI Pru Mutual Funds or now the option is open to buy other mutual funds also?
It is a tough question, but obviously as a distributor of products, we are open to all mutual funds. ICICI Prudential Mutual Fund will be always there in my heart, but as a professional I have to work with my brains and will be open to all the manufacturers whosoever is the best for our client, we have to sell that.
Broadly speaking for the year 2011, would you buy companies which are commodity owners or would you buy companies which are commodity consumers?
I will be more biased towards commodity consumers. We will see fair amount of volatility in commodity stocks and even if they make money, the market will not give as much value to them. So if you can move towards the commodity consumers I think that cycle is going to play out well and which is where I am saying that one should focus now on the infrastructure sector. They have taken the worst hit in terms of liquidity, in terms of cost push, in terms of execution delay, in terms of demand restrictions. Now probably all these things are about to turn. Demand is there, execution delays are going to get resolved, liquidity is coming back and hopefully cost push inflation except for salaries and wages may also come under control. Put all these things together, commodity consumers probably are a little bit more biased toward commodities.
One sector which surprised everyone on the upside for the year gone by was the entire consumption space. Your thoughts on that?
I think consumption has done extremely well, because of the fiscal incentives provided by the government during the 2008 crisis. Thereafter it was supported by the farm loan waiver and the rural side NREGS on the rural side. It was also related to pay commission hike to the government employees and then overall private salaries also jumped up significantly. We have seen one of the situations where monetary policy was loose, fiscal policy was loose, it resulted into consumption stocks doing well and today consumption stocks are available at a very very high valuation. Partly this valuation is also reflecting the limited flow which is available in these companies. Putting things together, yes, on a longer-term basis, the consumption sector looks good, but valuation looks expensive.
Source: http://economictimes.indiatimes.com/opinion/interviews/2011-should-be-the-year-of-infrastructure-sector-nilesh-shah-axis-bank/articleshow/7824291.cms
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