India in sweet spot; midcaps to do well: Punita Kumar Sinha

In an interview to CNBC-TV18’s Sonia Shenoy and Anuj Singhal, Punita Kumar Sinha of Pacific Paradigm Advisors gave her reading of the current market conditions and road ahead for investors.

Sonia: It has been an interesting week. The market has consolidated. We have seen some selling pressure come into banks etc, but would you still be extremely gung-ho on the market? Would you use this as a buying opportunity?

A: You have to be very careful about your timing and your timeframe. Long-term, India and a lot of emerging markets and economies are probably in the right cycle where a lot of the negatives are sort of getting behind us and things will start to turn. In India, if you look at liquidity, it is currently still tight. Growth is still weak and inflation is still high. Perhaps in the short-term there could be an El-Nino affect as well.

On the short-term, there are still a few risk factors. But longer-term, the cycle is poised to turn. From a long-term investor perspective, India looks like a good place to be in. Particularly from a foreign investor perspective, India looks still relatively attractive compared to many other markets.

Anuj: The other interesting bit this week was that we saw some comeback in IT, pharma and FMCG. So some defensive fervor was back in the market and some cyclicals corrected. Is that just a bit of a near-term correction and would cyclicals again start to outperform at some point or do you think some money would now go to defensives?

A: It is very hard to say what happens in the short-term. However, if you look at what is coming ahead of us over the next several months, we do have a few uncertainties and risk factors ahead of us. A lot of data is coming out, not just from India, but globally this week and that may be mixed.

We are entering the summer months, which typically tend to be quiet from global investors perspective. We are seeing liquidity tight. We are seeing inflation still high. It is very hard to see how Reserve Bank of India would lower or do much with rates. I don’t think they will lower rates. So, nothing has changed short-term. However, there is a lot of expectation that the new government will actually do a lot of reforms and improve things.

The only sort of positive event or catalyst that is looming ahead of us is the Budget. That could be positive or negative depending on how they approach it. So, far the interviews that the finance minister has given, talks about market friendly measures that they would look at. So, that might provide some kind of a catalyst but that is still about six weeks away.

The real issue of growth and fiscal deficit that still needs to be addressed and it is early days to know how growth will be addressed. The cycle is anyway turning and a lot of automatic clearances are happening and a lot of projects that were stuck are beginning to get cleared. The question really is: what else will be done?

My only fear is that I think given that the emphasis will be on growth, may be fiscal consolidation may not happen as fast as people would expect. So, net-net there are not a lot of short-term catalysts but longer-term things are still looking good for India.

Sonia: In the week gone by if you analyse the capital goods earnings that came out most of them were either good or better than what the street was expecting, be it L&T, BHEL, Crompton or Voltas. Do you think from an earnings perspective the sector is turning and is this a good time to still be putting money into capital goods?

A: The capital goods sector as you actually asked me— should you still be in cyclicals or should you be in defensives? I still think that the cyclicals, and these capital goods are part of the cyclicals, on a longer-term perspective is a good place to be in.

However, they have run up so much that there is probably some healthy profit-taking happening and perhaps from a longer-term perspective one could use this as an opportunity to still may be add positions.

However, you have to time your entry carefully given how much they have run up.

Coming to your question on defensives, I think you have a somewhat of a balanced portfolio tilted towards cyclicals but you can’t really be out of quality names given some of the shorter-term risks.

Anuj: What about the global situation because over the last two months we haven’t discussed that all. Every discussion was around election now that’s out of the way how are things looking globally and in terms of global investors view of India has that changed over last two or three months?

A: Yes, the global investor’s view of India has changed over the last two to three months. The strong majority that the BJP has gained in the election has made people feel that there is a stable government and therefore people are beginning to look at India. India has already been one of the best performing markets this year, so that is a signal and lot of money has come from FIIs.

If you look at other economies, US has already done well; valuations are not particularly attractive but it is such a strong economy overall that there is plenty of people who will continue to invest in that market. Europe is still weak and there will be more stimulus coming.

Emerging markets as a whole have not been in favour. China has disappointed in particular. However, we are beginning to see people shifting into value trades versus growth stock and that is actually helping emerging markets. Within emerging markets given that no other country has had such a spate of good news like India. India is in the sweet spot and lots of investors are looking at it. A lot of investors are already over weighted but a lot of new investors might come into India.

Sonia: I don’t know if you track some these sectors closely but in the week gone by we saw a lot of the money go into some of these railway companies, defence companies and it seem like the government is actually looking to sort of improve the problems there, find some sort of solutions there, would you put money in these sectors?

A: Railway is an interesting sector because in previous bull markets also, railway stocks have come in and out of favour and somehow they have never really lived up to the expectation. The railway spending has never really filtered to the companies themselves in a significant manner. They are very smallcap for the most part and illiquid. If you look at the projects which are stuck, first of all most of the projects, which are stuck, I read some where 70 percent of them are private sector and then amongst the public sector lot of it is railways.

So, lot of the projects that might get cleared could actually benefit the railway segment given that’s where a lot of projects are stuck. If the focus is on execution as we expect this government to do then the railway sector could benefit. Which companies within that one has to look at carefully but I do think that perhaps some allocation to that sector may be a good idea but with a cautionary view that in the past economic cycle and in the past bull markets they have come into favour and then got out of favour.

Anuj: From here on what kind of market rally can we expect not over two or three months period but over one or two year period. What kind of returns can investors expect now?

A: I still think midcaps and smallcaps will do better if growth picks because typically that’s the cycle that these do well in and growth is really what the government will focus on and not so much of fiscal consolidation from whatever we have heard from them so far. Midcaps could still give you good returns. I can’t give you a number because there are so many different stocks and investors can make good money in this next cycle but you have to be careful on timing.

Overall, market is such a broad sort of index and it has so many sectors that this is the time to stock-specific really not just focusing on index per se. The index will probably just perform inline with the index earnings. You really have to pick stocks in this environment.

Jindal Steel, Monnet Ispat asked to pay power dues

The district administration has asked  Jindal Steel and Power (JSPL) and  Monnet Ispat and Energy to pay power dues to the tune of over Rs 200 crore in a week, failing which their assets will be attached to recover the amount.

Revenue recovery certificates (RCRs) have been issued to JSPL and Monnet Ispat for payment of electricity dues amounting to Rs 216.77 crore. The certificates have been issued under Chhattisgarh Electricity Duty Act, 1949, said

Rajat Bansal, Raigarh Sub-Divisional Magistrate (SDM) today. The order to issue certificates was given by Raigarh Collector Mukesh Bansal on the direction of Chhattisgarh’s Chief Power Inspector P K Majumdar, he said.

JSPL has to pay Rs 175.74 crore towards electricity dues (which include interest), while the pending amount for Monnet Ispat was Rs 41.03 crore, the SDM said.

He said the dues, related to their facilities here in Chhattisgarh, had been pending for nearly seven years.

In case the companies fail to pay the outstanding sum by June 6, their assets will be attached to recover the amount, Rajat Bansal said.

When contacted, JSPL Executive Director Pankaj Gautam said the company had not yet received the order and came to know about it through media.

The officials of Monnet could not be contacted for comments.

Jindal Steel stock price

On May 13, 2014, Jindal Steel & Power closed at Rs 246.05, up Rs 3.45, or 1.42 percent. The 52-week high of the share was Rs 316.30 and the 52-week low was Rs 181.55.

The company’s trailing 12-month (TTM) EPS was at Rs 14.12 per share as per the quarter ended March 2014. The stock’s price-to-earnings (P/E) ratio was 17.43. The latest book value of the company is Rs 149.07 per share. At current value, the price-to-book value of the company is 1.65.

Ex-Goldman director Gupta loses bid to stay out of prison

Former Goldman Sachs Group Inc director Rajat Gupta will begin serving a two-year prison term on June 17 after a US federal appeals court rejected his bid to stay free while he appeals his insider trading conviction.

In a brief order on Friday, the 2nd US Circuit Court of Appeals in New York rejected a request by Gupta, a former global managing director of consulting firm McKinsey & Co, to delay his surrender and remain free on bail.

Gupta, 65, was convicted in June 2012 of feeding tips from Goldman board meetings to longtime friend Raj Rajaratnam, founder of the Galleon Group hedge fund firm.

Evidence included a September 2008 phone call, just before Goldman announced a USD 5 billion investment from Warren Buffett’s Berkshire Hathaway Inc, in which Rajaratnam was heard telling a trader that he learned from a source, who prosecutors said was Gupta, that “something good might happen to Goldman.”

BEL best proxy on defence sector, see FDI reforms: Merrill

Market is not any longer cheap at these levels, and could get still dearer this year with sentiment on India turning positive, says Bank of America Merrill Lynch’s Jyotivardan Jaipuria. He sees Sensex valuations increasing to around 18 times forward earnings from 15.5 times at present as corporate earnings growth picks up.

BoAML has a year-end target of 27,000 for the Sensex.

Jaipuria is bullish on autos, cement, capital goods, banks and oil & gas. He is wary of sectors like technology, barring a few companies.

He expects the new government to liberalise foreign direct investment norms across sectors. Merrill Lynch rates  Bharat Electronics  as one of the best plays on the defence sector should the FDI cap be relaxed.

Latha: Let’s start with the micros first, we just had information, our reporter breaking the news that commerce ministry has cleared a Department of Industrial Policy & Promotion (DIPP) note which argued in favour of 100 percent foreign direct investment (FDI) in defence. You have some of those stocks in your list. Is this going to make a seminal difference in this year, you see some money coming in if its law?

A: More than whether it will make a difference in this year, this is like the signal that the government is going to send because we will see lot more of liberalisation of the FDI, so the signal would be that we are open for business, we are going to encourage industry to come in, we are going to encourage foreigners to come into Indian industry. I think that is a critical message because in the first few weeks of the government people are looking at what is the game plan, what is the future roadmap and announcements like this will create lot of optimism.

Sonia: I was going through your note where you have a buy call on BEL and you suggest that that could be the best proxy to play defence sector. Apart from BEL are there any other stocks, you don’t generally talk stocks but is there anything else on your radar that would be the best way to play this theme?

A: We are not allowed to talk stock but there will be supplies to defence sector which will benefit, so lot of people who are into capital goods and who supply to the defence sector would benefit from this.

Latha: For a slightly larger canvas, like you said you are expecting FDI related announcements. What are the sectors on your radar?

A: I guess they will go step by step and so many sectors would turn up but the general impression which they gave when they came in was 49 percent would become sort of an automatic limit in lots of sectors except a few where they will specifically say that 49 percent is not allowed. So, that would be a sea change from what we have today and it would mean a lot of liberalisation coming through. I think FDI is going to be a one leg of their whole plan to kick start the economy, the other leg is going to be the domestic projects and how they can accelerate the approvals so that they start picking soon. I think we will see two pronged approach both trying to attract foreign investment as well as domestic investment.

 

Have raised $530 mn India-focused fund: Sequoia Capital

Sequoia Capital, best known for its early-stage investments in companies such as Google Inc , has raised USD 530 million for its fourth India-focused fund, the US venture capital fund said in a statement on Friday.

Although intended to focus on India, the fund will also look for opportunities in Southeast Asia, and will invest primarily in technology, consumer and healthcare sectors, Sequoia said.

With the new fund, the total capital committed to Sequoia’s India-focused investments will be around USD 2 billion, it said in the statement. The US fund’s strategy in India includes seed, venture and growth investments.

Sequoia Capital is invested in more than 75 companies including  Just Dial  , handset maker Micromax Informatics Ltd, and Vasan Eye Care Ltd.

The new fund comes amid surging interest by foreign investors in India, fuelled by expectations that the new Narendra Modi government will help kickstart economic growth with new economic and fiscal reforms.

Just Dial stock price

On May 30, 2014, at 11:09 hrs Just Dial was quoting at Rs 1378.85, down Rs 49, or 3.43 percent. The 52-week high of the share was Rs 1774.35 and the 52-week low was Rs 530.00.

The company’s trailing 12-month (TTM) EPS was at Rs 17.18 per share as per the quarter ended March 2014. The stock’s price-to-earnings (P/E) ratio was 80.26. The latest book value of the company is Rs 77.85 per share. At current value, the price-to-book value of the company is 17.71.

BRICS nations to launch a bank; to start lending in 2016

The five BRICS nations will likely agree to fund their USD 100 billion development effort equally, giving them the same rights in a new multilateral bank that could start lending in two years, a senior Brazilian government official told Reuters on Thursday.

Capitalization of the bank was one of the main sticking points in the sometimes tortuous negotiations among the emerging powers to create a joint lender to finance infrastructure projects in developing nations.

The new bank would symbolize the growing influence of emerging economies in the global financial architecture long dominated by the United States and Europe through the International Monetary Fund and World Bank.

Negotiations to create the lender have dragged on for two years, with some members growing weary of China’s desire to have a bigger stake in the bank by putting in more capital. But this hurdle is being overcome.

“The majority wants an equal sharing of the capital and there is no other specific proposal on the table,” said the official, who is directly involved in the negotiations. “This is not going to be a problem.”

Leaders of Brazil, Russia, India, China and South Africa are expected to sign a treaty to launch the bank officially when they meet at a BRICS summit in the northern Brazilian city of Fortaleza on July 15.

The bank, which will have start-up capital of USD 50 billion, will have to be ratified by the countries’ legislatures and could begin lending in two years, said the official, who requested anonymity because he was not authorized to speak publicly.

Of that start-up capital, the countries will put in a total of USD 10 billion in cash and USD 40 billion in guarantees, which will be used to raise capital on international markets.

The new development bank would help cover growing demand for project financing that has not been fully met by global multilaterals, which for years have been heavily criticized for meddling in the domestic policies of sovereign borrowers.

“The bank will look into the finances of borrowers, but never intervene in their economic affairs,” said the official. “Any country can join the bank with a USD 100,000 share. The idea is to provide them loans at a lower cost than what they would individually get in markets.”

The BRICS will also decide if the bank will be based in New Delhi, Shanghai, Johannesburg or Moscow. Brazil will not offer headquarters because of upcoming presidential elections that could delay negotiations, the official said.

Later, the group will have to choose an executive “with experience in the financial sector” to lead the bank in a five-year presidency that will rotate among the founding members.

In five years the bank’s capital should double to USD 100 billion through capitalization from funding members, debt emissions or contributions from new members. The BRICS will hold a minimum of 55 percent of the bank’s shares.

Upgrade Nifty target to 8400; bullish on PSUs: Macquarie

The recent bull run has given Macquarie Securities all the confidence it needed to upgrade Nifty target to 8400 from 7200. Rakesh Arora of Macquarie Securities expects the market to re-rate from hereon. He adds that the 8400 Nifty target is not factoring in earnings growth.

On the back of the previous government kickstarting various projects over the last 15 months and the new government taking it ahead, with all the ministers in Narendra Modi’s cabinet talking about growth from Day 1, there is a lot of expectation from this government. Finance minister Arun Jaitley has also spoken about curbing inflation and fiscal deficit in a meaningful way.

Based on the assumption that the new government is able to walk the talk, Arora sees recovery in the domestic economy and he is bullish on all the sectors that are levered to the domestic economy – cyclicals such as cement, etc. He further adds that the valuations of cyclical stocks are currently trading at a 15 percent discount when compared to defensives. He expects cyclicals to outperform defensives by 10-15 percent.

According to him, India is one of the best performing emerging markets and FIIs are looking to increase their exposure to the Indian market.

He says sectors such as cement have been under a lot of pressure, but from a demand perspective it has bottomed out. The only problem facing the sector is that investors are factoring in a quick recovery and that is already in the price. He advises investors to buy midcap cement companies on every dip. He says cement frontliners such as ACC , Ambuja ,  UltraTech are not very attractive at the moment.

On the auto sector, he believes there is a lot of pent up demand, which can unfold when confidence comes back. He believes that leaders like Maruti will continue to grow.

He is bullish on infrastructure stocks such as L&T , IRB ,  NTPC and Power Grid . He sees a lot of value in large cap infra and power companies. He is also positive on PSUs.

Latha: What exactly are you telling your investors, are you looking at this market gaining substantially over the next 12 months, are numbers like 8500-9000 floating?

A: Our official target is 8400 so obviously we are very positive on the market. What we are saying is that previous government in its last 15 months period had already kick started lot of reforms and was pushing for investment cycle to pick up. So there is a good tailwind for the new government to follow-up on and whatever sound bites we are getting from the new ministers like the telecom minister yesterday giving interview, within 10 minutes he used the word growth almost 30 times. Finance minister is talking about balance between inflation and growth.

So those are comforting words. While it is too early to judge the government but the thought process is in the right direction. So we think that India is headed to go back to that around 7 percent plus GDP growth in two-three years time and markets will continue to rerate factoring in that possibility as and when the confidence starts to improve further from here on.

Latha: For that 8400 level that you are looking at, what may be the vanguards, the leaders of the rally?

A: Clearly the focus this time is on recovery in the domestic economy and sectors which are levered to domestic economy are the ones which are likely to benefit the most and that is why you see industrials, financials and cyclicals like cement etc gaining, in this whole rally they have been the major gainers. And we think this trend will continue because if I look at the valuations of defensives versus cyclicals, cyclicals have not yet reached even the average levels seen over the last 10 years. So there is still a 15 percent discount to where normally they should trade with respect to defensives. So 10-15 percent outperformance is given and probably if things do pickup on the investment cycle as what we are thinking, these guys can go at a premium or even par to that average. So cyclicals is the place to stay and defensive will take a backseat at least for the next few months.

Sonia: You also have the Global Autos India Tour, tell us about that because auto is a space that has seen significant amount of wealth generation in the past couple of years. What is the sense that you are getting about that sector?

A: So clearly when people are saying that there is huge amount of pent up demand which can unfold once there is confidence and spending comes back and leaders like Maruti are saying that they will be able to hold their market share gains even in a growing market, they have enough product launches lined up and overall there is hope right now that things will start to move up significantly. So the good part is that most of these companies have already cut costs and are looking much leaner and fitter given that downturn. So when there is a pickup in demand and top line starts to grow, you will see a big operating leverage kick in and earnings growth can top 30-40 percent compared to estimates of 15-16 percent we have right now for most of these companies and market per se.

Latha: One word on what your audience at the conference telling you, what is the mood like, what are people looking for and awaiting for from the new government?

A: The mood is very buoyant and this is the first conference post the election and it was planned to be so, we have almost 150 clients who have registered. So you can say that there is enough interest in the Indian market. Bulk of them are FII clients and the amount of people who wanted to register in the last 15 days actually jumped up quite a bit. So India is one of the best performing emerging markets and FIIs are looking at it very positively. They want to take some exposure. After this rally the focus has come back to bottoms up stock picking and focus has come back to what could be a blue skies scenario, what could be the potential growth in these companies and that is the main focus area. So we have around 60 companies lined up. Good mix and we think that over the next two days we will have lot of good ideas coming out.

Indian mkt to double in 5 yrs if reforms come through: F&C

The market is well aware of the fact that the new government has no magic wand to fix India’s economic mess in a short span of time. Jeff Chowdhry of F&C Investments reiterated this view saying that, one needs to give the government time to deliver on its promises, which cannot be done in two weeks.

In an interview to CNBC-TV18, he said, “Rome was not built in a day and effective execution of reforms in India could take years.” However, he expects the Indian equity market to double in next five years if reforms come through.

Chowdhry expects government to ease long-standing issue like power supply and sees more investments in these beaten-down sectors if infrastructure and power reforms are introduced.

According to him, Arun Jaitley is a good choice for the position of Finance Minister.

The Indian equity market has had a good run in last six months, yet Chowdhry doesn’t find valuations too expensive at the current levels. He sees potential for it to move to much higher in the next three-five years. He further added, long only funds are still not completely invested in India yet.

Meanwhile, he is not selling any stocks now and does not see great value in stocks now as compared to six-nine months ago. F&C Investments bought  L&T in September and continues to hold it. PSU stocks like  ONGC have run up a lot, hence he is not buying them. Also, he recommends investors to wait for implementation of reforms before buying infra structure and PSU stocks.

Sonia: Is the Indian market looking too expensive now?

A: No, it is a simple answer to that. I don’t think the market is too expensive. We have had situations in the past when the market has been more highly valued. We should also look at what happened in Japan last year when there was expectation of reform and infrastructure spending, the market rallied very significantly. So I would not be selling this market simply because there is a perception that the market is expensive because in my opinion, it isn’t expensive at this point in time.

Infosys drops 6% on Srinivas exit; brokers say new CEO key

Infosys   shares were down by 6 percent or Rs 190 to Rs 2977 in early trade Thursday, reacting to the resignation of the company’s President BG Srinivas Wednesday evening. The fall in share of Rs 190 also included a dividend payout of Rs 43 per share effective today.

Srinivas was tipped as a strong contender to succeed SD Shibulal as CEO of the company shortly.

This is the first time the stock is trading below Rs 3000 in more than eight months.

Srinivas’s exit–the 10th senior executive resignation since June last year–is likely to be a drag on the company’s shares in the near term, feel brokerages. Infosys shares have risen over 31 percent since founder N R Narayana Murthy’s return in a executive role in June 2013. Still, the stock has lagged the sector benchmark CNX IT Index, and rivals like TCS, HCL Tech and Tech Mahindra by a significant margin.

A snapshot of what brokerages are saying on the latest high profile exit from the company:

JP Morgan

Notwithstanding the spate of senior management exits in the past year since Mr. Murthy’s return, this development is very surprising and disappointing to us since we have considered Mr. Srinivas to be the clearest front-runner in the CEO race. We believe this substantially increases the chances that Infosys might prefer an outsider to take over as the next CEO (after Mr. Shibulal steps down in January 2015). We see more uncertainty ahead, which only protracts the recovery for Infosys.

Goldman Sachs:

Infy’s attrition levels have averaged 22.4 percent (annualized) in the past three quarters, per the company, suggesting significant pressure across the entire employee pyramid; We believe Infy’s high attrition levels and many senior management departures could partially impact decision making and execution in some parts of the business in the medium term.

Barclays:

We believe the CEO selection process could lead to further churn within the company, which would likely weigh on the stock in the near term. A speedy decision for selecting the new CEO would be the first positive step to allay investor concerns on succession. The probability of an external candidate may indicate that the company’s problems are more deep seated than earlier thought and that an external person is required to bring significant changes within the organization.

Nomura: We view the management exits at Infosys negatively and continue to prefer HCL Tech, Tech Mahindra. It looks like the next CEO in all likelihood will be an external candidate, in our view. An early announcement about the next CEO would be a key catalyst to reduce uncertainty in the stock.

Can India’s new finance minister deliver?

India’s newly appointed Finance Minister, Arjun Jaitley, has drawn a mixed response from investors amid concerns about his scant background in economics and a potential clash with the central bank over interest rates.

Earlier this week, Jaitley was named head of both India’s finance and defense ministries in the new administration of Prime Minister Narendra Modi. Jaitley, 61, a prominent corporate lawyer and former commerce minister, is said to be a close confidante of Modi.

“A few things that people associate with the name Arjun Jaitley: he’s the right hand man of Modi so presumably he will pursue a pro-reform agenda, but he doesn’t have a background in economics. That’s a concern for the markets,” said Nizam Idris, managing director and head of strategy, fixed income and currencies at Macquarie.

Jaitley is inheriting an economy that’s growing at its slowest pace in a decade and battling persistently high inflation and twin budget and current account deficits.

Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan at Credit Agricole said while Jaitley may not have extensive experience in managing public finances, he comes across as a strong leader.

“I focus more on the kinds of policies he`s looking to pursue. So far the comments have been balanced between fiscal stability, price stability and growth,” he said.

His budget that will be presented in July will be closely watched for further clarity on his vision for Asia’s third largest economy.

“On the budget, the challenge will be to find sources of revenue. Given his background on investment he will likely focus on privatization because in a slow growing economy it’s difficult to get enough revenue from taxation,” Kowalczyk said.

Potential collision course

Kowalczyk’s main concern is a potential clash between Jaitley and the central bank where Governor Raghuram Rajan has made inflation targeting the corner stone of Indian monetary policy.

“Before becoming finance minister, Jaitley said he would focus on attracting foreign investment and facilitating domestic investors through a lower cost of borrowing – that puts him on a collision course with central bank,” said Kowalczyk.

Past finance ministers “have successfully pressured the central bank. In emerging markets, it’s difficult for a central banker to withstand strong government pressure,” he said.

A perceived divergence in the institutions’ policy objectives could negative impact the Indian rupee which was recentlystabilized though improved policy making by the finance ministry and central bank, Kowalczyk noted.

Idris agreed the relationship the market should keep its eye on the relationship between Jaitley and Rajan.

“Jaitley made the right move in meeting with Rajan as soon as he was appointed – that may have soothed market concerns for now,” he said.