Ashwini Agarwal:
Q: What’s your sense for February, is the worst over?
A: In the short run, you could say so because on purely looking at the money flow, you probably have a situation where refunds from some of the large IPOs that have happened earlier this month, start coming in. Also, I guess in the run up to the budget, people are expecting some sort of investor friendly measures, maybe a tax cut or removal of some of the cesses that we pay on our income taxes. When that happens, you could see a little bit of an up side.
January has been a great month to look back and realize how heady we all were towards the end of last year and what unrealistic expectations and as we view the quarter results that have just come up, the numbers are mostly inline or behind expectations for the Indian companies. There is a growing realization that the US economy is possibly in a shape, which is worse than what all of us were hoping for towards the end of 2007. All the data points that I can see, point to some amount of headwind to grow in India, which is not linked to the US but possibly liked to the base effect of the fact that we have grown so fast for 3-4 years. But you look at sales like auto, cements and it does point to some slowing. It is not a crisis situation, we are not in a de-growth zone but I don’t know how far slower growth expectations are priced, that will continue to hover over the market as a dark shadow in the weeks to come
Q: So even if we don’t go down to below those levels, we will not go up in hurry if we are in a range bound situation or are you saying that the lows of last week could actually be violated?
A: The lows of last week were really poor, I mean you are talking about sub 15,000 on the sensex, you hope that we don’t see those levels again, but if you ask me? I think we will see some amount of upward bias to trading in early February support by the liquidity that’s coming back into the market after the IPO refunds are delivered to the investors and in expectations to the budget, but on a more thematic basis, I think over the next few months, the markets sprinted down as compared to trended up. How much does it grind lower totally depends upon what is the verdict on India’s growth at this point in time, everybody is very confident about growth. My sense is that growth will still be there but it will be slightly less than what all of us are forecasting right now that needs to get priced in.
Q: What is the sense you are getting about how to play this market from here?
A: There are some sectors where valuations cease to matter. What has happened over the last few weeks is going to get people sit up and notice what are the underlined stories, how do you value those stories and what you should pay for them.
Despite the correction seen, I still find it difficult to accept the valuations in some of the sectors. The companies are doing well and will deliver growth in an absolute sense. But what you are paying for this growth is way too much even today.
I expect markets to continue to be volatile and with a downward bias over the next three months or so. Thereafter, we will have to look at things all over again.
Q: What is your sense of the stock listing tomorrow-Future Capital?
A: You have put me in a spot there. I am not able to comment on that stock at all because of confidentiality and conflict reasons.
Q: Which sectors do you expect to have leadership over the next few months?
A: Some of the areas which have started to look good are a lot of beaten down health care names and some of the smaller pharmaceutical companies. These are companies that have taken a lot of pain. Valuations are extremely attractive. These stocks have done nothing over the last two years or so.
These will start coming back gradually but surely. Technology is finally showing some signs of life again. But despite my belief that these are good business models over the long-term, I don't know in the short run if the entire pain is over or not. They are inextricably linked to what happens in the US. So, to that extent, one has to still wait and see whether tech finally breaks out of what it has been doing for the last two-years.
The other area where the interest will be there is steel. It is one commodity, which is still looking fairly interesting from a demand supply perspective globally. Companies have struggled in the latest set of results because of cost issues. But hopefully, with the correction already in place, that is an area where I would continue to feel that there is some more momentum to go.
Consumer stocks, where some growth may be visible, will come back. Banks will continue to do reasonably well because valuations are not too expensive. So, those are some of the sectors that are looking interesting.
Q: You said the froth may not be entirely skimmed from many of the sectors. Three sectors which ran up and have corrected the most are power, oil refining and real estate. Which of these would you rank in order of still containing some froth?
A: Power still has some froth, if you look at the valuations of NTPC and Power Finance Corporation. These are just two examples and we own neither of them.
The issue is that fundamentally great and stable businesses are supposed to trade at reasonable dividend yields with some growth. But these are trading with growth businesses and are being valued on PE and regulated return businesses.
In real estate, there are islands of value. You have to be a little careful. There is potentially some supply-related issue in select areas like Banglore or Delhi. There are some companies which are now very cheap and looking interesting. So, I don’t think it is a sector that has got a lot of room for downside.
But in real estate, if markets go down significantly more than what I anticipate now, you will see the ripple effect on real estate prices as well. So, when you buy real estate stocks, be very clear that what you are buying into is a huge wealth effect. Hypothetically, if markets go down over the next 18 months, you will have a situation where real estate stocks will give you a lot of pain because they will move to deep discounts. Even the NAV will itself move down. So, they are risky stocks per se. That is what all investors have to remember.
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