Anand Tandon, Gryffon Investment Advisors thinks that even though the numbers of Reliance Industries have been marginally below expectations, the stock has a kind of momentum of its own, unlike the others and Reliance is likely to hold its own.
He expects to see a strong pressure on the interest rates on the way up. He feels that the Reserve Bank of India has to intervene as the government borrowing is not helping and this worry is being reflected in the markets.
Until and unless there is a major revision upwards in earnings, he thinks that the markets are pretty much in a fair value range right now.
Excerpts from CNBC-TV18's exclusive interview with Anand Tandon:
First take us through the results, which are out today. What do you make of Ranbaxy, Ambuja, Reliance, the three biggies?
The numbers of Reliance Industries have been marginally below expectations, but I think that the stock has a kind of momentum of its own, unlike the others, which have put out sterling performances and seen the stock getting crashed. I think that Reliance will hold its own.
Ambuja has been along with the rest of the cement pack and it has been along with the expected lines and within analyst estimates by a wide margin. For Ranbaxy Laboratories, unfortunately I am a little behind the curve. I do not track it. In terms of the sectors, if you look at the results season, so far it has been fairly positive.
How have you read the global cues that have given us this leg up today?
I think that is perhaps a little less bullish than the rest of the market seems to be taking it as of now. I think it was more or less known that the Fed has kind of eased off a bit on its hawkish stance.
It was clear from the last statement. It was not expected that they will make any kind of hawkish statement because right now the urgency seems to be to try and keep the economic growth momentum going and the numbers that are coming in are not showing that kind of a strong growth as was in the US. Therefore, it was pretty much along expected lines.
What about the bank stocks? What would you do with the banking sector right now because the results are in? They are soft at least at the net level, but that was expected, would you buy them for valuations or think that the sector will continue to under perform?
The second part of the question is the easier part in my view. I think that they will continue to underperform. The reason for this is the interest rates scenario in India, which is far from being played out yet. I think we will continue to see interest rates going up.
The fact that the RBI is allowing banks or is contemplating allowing banks to transfer more into the held to maturity segment, and not to the marked-to-market as aggressively as they had to in the past, itself is an indication that the RBI's policy will be implemented from the next year on.
Also if we have to look at the kind of growth that we are looking at in terms of credit, we have seen more than 30 per cent growth in the credit for more than two years. The deposit ratios are not picking up that well. So that again tells you that you have to look at the rising interest rates.
The rising interest rates to my mind equate to the poor lending scenario, higher NPAs will follow. Just like we have a situation where banks were trading at a half book value before the interest rates started to fall and then they got re-rated to a book value a little higher.
Now I think the best way you can expect to trade is at a book value and you will probably see them coming down. This is now for a generic bank that I am talking about.
There will be exceptions where you will be able to sustain growth rates not just from the lending, but also from the fee based activity and so on, which is pretty much the domain of the private sector banks in today's context.
Again in terms of valuations, they are far from cheap. So public sector banks are trading at a book value around that level and as I said, the book value will start to deteriorate from here on. Overall the under performance of banks will probably continue.
From the clutch of numbers that you have seen, how will the first quarter go down in terms of earnings and at 10,000-10,300?
We are looking at an earnings growth, which was in the range of Rs 660-700 for the current year, an earnings estimate. I think by and large, most of the earnings at least for some of the key sectors are likely to be better than that.
The market now has to however worry about what is going to be the outlook for the next quarter and the quarter after.
Because it was well known IIP numbers or if you look at any of the statistics that you get, whether it is in the form of cement or auto or any of the others, there is no question that the economy so far has been very strong.
There was no reason to assume that this quarter numbers will be poor. Going forward however, the case may not be the same, now there is a PLR of more 11 per cent for most of the banks.
I would expect to see a strong pressure on interest rates on the way up. The RBI has to intervene; the government borrowing is not helping. So if there is even a slight slackening of international money flows into the country, interest rates could tend to move really sharply.
Even otherwise as they go up, I think we may find where consumption growth starts to slacken off, that is a point where you will really start worrying about the markets. I think what you are seeing in the market today is that worry getting reflected. So until and unless we see a major revision upwards in earnings, I would think that the markets are pretty much in a fair value range right now.
Give us one word on the cement pack, the results have been good, but how much of the good news you recon is in the price for ACC, Gujarat Ambuja Cements, India Cements, particularly because they have been market out performers?
As the results come in, there is a greater belief, but I still think that if one looks at the portfolio of many of the mutual funds for example, one will find that cement is not actually a high weightage as a part of the portfolio, which clearly indicates that there are a lot of disbelievers out there.
The analyst's estimates are far lower than the actual numbers that are coming out so far. I think that the estimates will rise again if one were to look at it on a purely macro level.
For example yesterday's deal, if one is looking at buying a company at around $100-110 enterprise value, one is looking at the EBITDA in the range of something like $16-17. So EV/EBITDA is also becoming a lot more reasonable.
So the question is if consumption growth continues, the prices will remain firm and the companies will get rerated even from here. If consumption growth were to slow down, then obviously one is looking at the stock prices not necessarily having much more room to head from here.
But all said and done, as I said the visibility of earnings is still strong in this sector. So on a relative basis, it would be an out performer in my view.
How have midcap technology stocks gone down; NIIT Technologies, Hexaware Technologies and even 3i Infotech?
I think that the technology companies are doing pretty much what would happen whenever a situation arises, whether it is an overflow of orders from the large companies to the small companies.
But after Infosys Technologies results; where they were able to surprise the market, the question that needs to be answered is if the large caps can surprise on the upside, why to waste time and try to figure out what is going to happen in some of the smaller companies.
They are not that expensive, so probably one is safer at a stage in the market to just be in the larger companies where the visibility is clear and where their ability to withstand any shocks, especially in terms of costs is also a lot better.
Given again the situation where we apparently now have a shortage of manpower, easily one needs to have companies, which are marked in names because they will be able to attract the best new talent that is coming into the market.
The smaller companies will probably find it difficult to manage their cost side even though they maybe able to get topline growth. So in terms of safety as well as performance, I think for the time being, one is probably better off in the larger companies.
Given an inflationary kind of an outlook that we are sitting in, FMCG could be one sector where you could look at fairly strong estimates, which could be higher than analyst estimates.
Cement has been a sector on which we have been bullish and as the numbers pan out, the bullishness is justified that the numbers are way ahead of what the analysts are expecting. Some of the metal stocks had that potential but given the volatility that we are witnessing in the international market on the metal space, it is unlikely that it will translate into very strong earnings growth going forward.
The IT sector again, with the Infosys guidance being out of turn and the fact that the rupee has fallen quite sharply, should be one sector, which will obviously continue to outperform reasonably well. So there is a wide mix of sectors out there.
There are also those, which are a lot more defensive in terms of capital goods and so on, where the order books are clear and even in case the consumer demand slows down, they are unlikely to go away at least in the next one or two years. So there are fairly good sectors where the earnings can be expected to remain and sustain and those are the sectors, which I think will somewhat outperform.
One word on autos and how have you read the pressure that is coming to them in these past few days?
I think that the market has two different phases. The results that are coming in and are likely to come in will be reasonably strong. Bajaj Auto was reasonably buoyant in terms of what we think is the outlook. However, the markets have not been too kind to many of the auto stocks and that again reflects the fact that the market is looking forward and saying that is one sector, which is extremely sensitive to the possibilities of interest rate hikes because the demand can slow down.
So though we haven't seen any evidence of a demand slow down, yet the derating of the sector clearly indicates that the market is more worried than the companies are at this stage.
What do you expect from Satyam Computer Services, given what you have seen from the other big boys and what do you think of the stock at about Rs 690?
I do not know whether the stock will be able to do too much more given that some of the other companies that have come out with good numbers have immediately fallen off after the announcement of the results. But I would imagine that a fairly good set of numbers would be coming through from Satyam Computer Services and I would not be surprised if the management talks give out a fairly good and strong guidance.
You have spoken earlier about the fact that you do not see a valuation story on any of these Nifty stocks. Given the earnings and what you have seen do you see that argument appearing for any sector or space at all?
The surprises can only be in a few sectors where essentially we are looking at prices being the determining factor. The volume growth is known especially if you are factoring in a 9 per cent GDP growth for most industries. So the question would be that where would the operating margins increase likely and in my view, the operating margin increase will come from pricing upwards and not because of cost controls.For more such reports, log on to www.moneycontrol.com