Next 12 months ‘very painful’; buy these stocks: Dimensions

Valuations for Indian market have gotten out of hand and the next 12 months could be “very painful” for some parts of it, believes Dimensions Consulting’s Ajay Srivastava.

In an interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Srivastava said that economy looked “fundamentally positive” in the wake of reforms undertaken by the government, but the steps will take time to percolate down to earnings.

“Some correction has already happened. More has to happen,” he said. “The investor should reallocate his portfolio away from stocks that have made him profits. Also, don’t make large commitments [to stocks].”

But still, the analyst said pockets of opportunities existed within select stocks and sectors.

He picked out telecom stocks as one that are poised to double in the next two-three years. “After the spectrum auction, their cost of material has become fixed. They will have assured revenue. They can’t be many new players in the market,” he said, adding that the shift in dynamics will cause valuations for these stocks to go from the 2 to 4 times price-to-book they are currently at, to 7 to 10 times.

Metals, minerals and large industrial companies were also stocks he picked out to gain from the increased economic activity that will take place from the coal auctions as well as the broad pick-up in activity.

“The stocks are cheap and under-owned. Pricing has reached extraction cost levels. It’s a bottom or thereabouts for these,” he said.

Latha: That big fall yesterday, you were kind of shaking your head and saying that a bit of a correction was on the cards when we last spoke to you. Is this it? Is this a time that medium and longer term investors can start looking at stocks, buying them or do you think they are going to get better levels?

A: No. There are certain sections of the market which kind of becoming more attractive at this point of time and I would allude to things like industrial metals and you were just talking about telecom stocks etc. Now nobody can say a bottom to the correction, but corrections are a little more late to go purely because of the over-ownership of the private banking stocks which have been really rallied up to a level that does not justify fundamentals.

So, if that kind of a sell-off takes place which continues as of yesterday, yes, market could be wobbly. But the issue here is that you need to re-allocate your portfolios more than once, that is one. Number two is hold your commitment, do not make large commitments and the reason being that apart from international factors, the domestic market is looking very weak at this point of time. And therefore you would tend to be more cautious than aggressive and this is not a correction which you go aggressively buy.

This is a correction you wait out and start, as you discussed last time, keep re-allocating your portfolio away from where you made profits to newer sectors because newer sectors are going to give you better returns like industrial metals, etc compared to the older ones.

Sonia: That is an interesting point. Is this still a long term bull market in your mind or do you think that for the near-term perhaps, the upsides will be restricted now?

A: I do not know long-term means what but yes it is a reasonably positive oriented market at this point of time, except the fact that I keep saying that the valuations have got stretched to the point which did not justify fundamentals. Some corrections have happened. Some more has to happen further more. Purely because it is out of sync with what is in the ground.

So, yes, fundamentally we are positive, good things have happened, the coal auction has happened, the telecom has auction and the latest which is not so publicised is the package for the power producers who were shut down for the last 4-5 years because of gas problem down south. And there are lots of positives building in system. The problem with the government is that while they are longer term positive, in the immediate 12-18 month horizon, there are lots of dark clouds and uncertainties.

And that is what is holding this rally back; one is over-valuation, thanks to liquidity from abroad. The second is, in the immediate future we are not seeing the traction that we had expected to see. So, expectations are being pared down which gives good credence that yes, it is a good bull-run, but the entry-points have to be carefully calibrated. Entry-points have been an issue in this market all the time. So you got to be careful about your entry-point in the market.

In a bull market, the guy who bought at 30,000-29,000 Sensex is wondering what happened to the bull market. The guy who bought at 18,000 is saying: yeah, the bull market is intact. So, entry-point is a relevant point and I still stay that longer term yes, but 12 months are going to be very painful.

Latha: Very painful? So, what you are suggesting for some parts of the market, you can still get lower levels? Your point is well-taken about the government setting right a lot of industrial block or a lot of infrastructure pieces. But will you have the courage to enter any of these? Which parts would you lay the metal stocks, would you play companies like power stocks? Which is the part of the infrastructure that you will enter?

A: Three parts to the market. Metal stock last time also we said yes, it is becoming good entry point, the prices are recovering, the raw-material prices have recovered and so we have really now looked at the bottom of the market. So, it is a good time to get in, is my view that is one.

Number two is largecap industrial stock, yes, it is again people are going to be involved in execution of contracts. If the coal mines have to come in, there are only two or three or four or five companies and lot of downstream companies are going to get a good amount of orders. That is why I said, it is not going to happen in 12 months, but 24 months down the line, these companies are going to gain a lot of order book interaction. So, industrial execution, I would say metals and minerals, I would say are the two safest places one would try to buy into because the valuations are cheap, it is the most neglected part, under-owned part of the market.

Whenever there is a shift of mood, you saw what happened in nationalised bank. The mood shifted, the price sky-rocketed, it has come back to ground again, thank God for that. But, these two sectors should give a good healthy return. And third you spoke about telecom, telecom the pure price-earnings (PE) expansion of price to book is going to double the share price in the next two years.

The raw material cost is now fixed and therefore they behave more like consumer companies which have a price to book of 7-10. These are running their price to book of 2-4. So, I can see lot of value expansion taking place in these companies purely because the uncertainties are over and the cost of raw material are fixed which you cannot actually say to about most of the fast-moving consumer goods (FMCG) companies.

Sonia: You are saying prices in the metal space have bottomed out. The last we heard, steel prices are still at five year lows and iron ore prices are still plummeting. Do you think that there could be some more on the downside or do you think this is it?

A: We have reached the bottom. I will be honest to say plus, minus 5 percent, I am not a genius in that, but I have a sense to say that you were in the zone where you can start calling a bottom at this point of time. I do not think there is a 20 percent reduction happening in the market.

And, you can already see the basic speculative position in the material market have moved in the last 7-10 days. They are reaching kind one month, three month highs. So, traction is coming, capital is coming, demand is coming and you can beat up a stock up to the point. Now we are reaching extraction cost level pricing. That can go on for some time. Beyond a point we need to get into a positive zone. I would definitely say it is a bottom or there-abouts.

Latha: Now I know you are not a fan of public sector (PSU) banks but these are the guys who are saddled with these industrials, saddled with these metal stocks. Is the worst over for them?

A: The problem with nationalised bank is not that the stock is saddled with something which is metal and manner will recover and so on, the problem is the lack of transparency on the balance sheet. If you know the extent of the problem, you can deal with it. I do not think even the chairmen of the banks today least of all anybody else, analysts, know the problem these people are placing that is one.

Number two is I do not think they have attitude which is flexible enough to take care of the problem. That is the second issue. The third issue is that which keeps happening. The management quality in these banks is not the quality which can go and restructure Rs 5 lakh crore of debts and ensure that we recover in the next three years. So problem is not the loan itself, problem is the execution of loan recovery.

Loan recovery cannot be: ‘sell off everything’. That is not recovery. Recovery is about nursing the company, merging the company. And you saw one large defence contractor company got merged and bought over so, that is a good sign. So, it is not the loan per se. I would say the management quality, the lack of transparency which bothers me with nationalised banks more than the loan per se.

Sonia: Just coming back to the point you made about telecom. Now we have more representation in the Nifty from the telecom space. Idea has just been included in the Nifty. But, these are stocks that have already rallied about 20 percent this year. Do you think most of the juice is out or is it still okay for a long-term investor to get in Bharti 400 and Idea at around these 200 levels?

A: I would still say that there is a lot of traction in this company is to look at 2-3 year perspective and ignore the nonsense which comes out of the company saying, “Oh we have been bludgeoned into paying some serious premium and now this hell will break loose.” That is just political noise that is being made. Ignore everybody else.

This stock will see expansion in valuation parameters. And I said the reason being assured revenues, assured costs, healthy rate of return, lack of new players. There is no new player coming into the market.

Reliance Jio you can say, but I do not take them very seriously at this point of time and believe me, in my discussion with them, neither does any telecom company take them very seriously at this point of time. So, lack of competition, raw material is fixed. You cannot go buy spectrum tomorrow from somebody so you cannot start the new venture, what else do you want in the matrix of a company? It is a phenomenal matrix for the industry which is being built up.

And as I said, I would put my bet on this price is going to be two times in the next 2-3 years. That is the kind of return we are looking at. Yes, first 15 percent is gone. But do not worry, the next big one is coming and if you are looking at doubling your money in 2-3 years, these are the places to be.

Latha: Let me come to the other ancillary companies that gain because of things turning around in metals or in infrastructure, non-banking financial companies (NBFC), CV companies?

A: Today the situation is that the main line companies’ valuation gives you more credence to go into the market than go down the ancillary path. So, if you really want to take the exposure, take the exposure to the prime companies because their value is pretty well in line with what expectations you have to get a healthy return in the market. The stage two will come when you go down the ladder, but stage one right now, you want to be with the guys where the big moolah is going to come in.

 

Unseasonal rains, crude spike key risks for market: Sanger

The market lacks catalysts for a big upmove, and it is hard to call on how long the current phase of correction will last, says Arvind Sanger of Geosphere Capital.

In an interview to CNBC-TV18, Sanger says he is cautiously optimistic as the market heads into the earnings season with muted expectations.

He says he will wait for signs that the economy is benefiting from the positive mood and from the policy measures announced by the government recently. In addition, a pick-up in earnings growth is also needed to revive investor sentiment, he says.

Two key risks for the market at this point are unseasonal rains and a likely spike in crude prices.

Latha: What is the sense you have got of the big Indian fall that we say yesterday, do you think the Nifty has completed its correction, that this is a great buying opportunity?

A: It is always impossible to call the market with that level of precision to say that the sell-off is over. However, the correction is maybe healthy in the overall longer term strength of the market. Let us put the negatives on the table because we can’t just be blind bulls without keeping in mind some of the things that might be negatives.

So, if oil prices are showing signs of resilience and I think oil prices are ahead of themselves somewhat on this Yemen related tensions so they will pullback somewhat but if oil prices are not going to have a further collapse to new lows but may stay lower for a while and then recover from here then that is one less tailwind for the Indian market.

You have had some unseasonal rains so those two factors create some risk that the inflation numbers, the best may not be ahead of us but the best maybe behind us and if that is the case then maybe the Reserve Bank of India (RBI) policy actions may not be quite as much of a tailwind as we are hoping will be coming down the road. So, that is one factor which does change a little bit of speed of the trajectory.

The other thing is the earnings outlook for the Q4. We continue to wait for some upturn in earnings which causes upside surprises because that is what investors eventually are buying is an earnings story and an earnings stream and that remains somewhat missing in action in terms of a meaningful upturn in the earnings cycle. I know we are all requiring being patient and looking medium or long-term but at some point here the medium and long-term is now and so there is some digestion about the fact that fiscal Q4 earnings are not going to be the turning point. So, those are couple of issues and some recent data on cement, on power consumption, some of these factors have been somewhat disappointing.

On the other hand we have seen some oil demand growth look positive and a couple of other data points look positive. So, we are still struggling with clear signs that the economy is not withstanding the new official gross domestic product (GDP) numbers, we are looking for clear signs that the economy is benefitting from the build up of the optimism and some of the positive steps that this government has taken over the last few quarters.

Sonia: Do you think that this is still a corrective phase in a big bull market or has the trend changed for the near-term?

A: I think it is a corrective phase in the longer term bull market but how long this corrective phase lasts is always much easier to tell in the rearview mirror than it is looking forward. We are going into the earnings seasons with much more muted expectations. So, that should not be a big negative. However, other global macro factors whether it is oil prices or domestic factors in terms of inflation or other signs of economic cycle starting to turn are going to be important as well as continued positive actions by this government to create confidence.

One of the things that have been disappointing is that we heard a lot about infrastructure spending but National Highways Authority of India (NHAI), amount of projects that are awarded on road construction still remains disappointing. So, we are looking for some things to jumpstart the recovery cycle and the longer we wait and the more things are missing in action the more the risk grows that maybe some impatient investors might head for the exit. So, these things unfortunately at some point go beyond fundamentals and go into psychology and it is always hard to tell where this psychological resistance point or the breaking point might come to either cause a bigger washout or to cause the market to hold at this level.

So, I am kind of cautiously optimistic but holding my discipline on buying things when they sell-off to levels where we think they are attractive on a long-term basis but recognising we are not going to pick the bottom on an absolute basis and we just need to be conscious of the fact that this market at this stage doesn’t look like it is going to run away from us. In terms of a big bull move from here is going to require some India specific economic catalysts and I don’t see anything on the horizon that is going to cause market to run away on the upside very quickly.

See Nifty reversing; buy 8,500 Call Option: Religare Sec

Manoj Murlidharan of Religare Securities in an interview to CNBC-TV18 spoke about the outlook for the market and the March series.

Sonia: It’s slightly tricky for the Nifty in the last many days and today is expiry as well, what is the approach you have on the index?

A: We have close to 94 odd lakh in terms of open interest which is yet to roll in and the Bank Nifty around 6.8 odd lakh. We feel it would the Bank Nifty that will dictate the expiry, but the spot level on Nifty 8,472 would be the weighted average price of the net Put writing which has happened in 85 Strike, we believe that might hold.

For the first half, obviously we are opening gap down and I feel in the second half we should see the Nifty reverse back and possible closing of 8,530 to 8,550 on spot. Therefore, the best strategy is to buy 8,500 Call Option.

JP Morgan’s 6 sentiment indicators bulls need to be wary of

Equity market sentiment indicators are beginning to suggest some caution, says brokerage house JP Morgan.

“Our money flow indicator suggests increased interest in export oriented sectors and defensives over the last month. Cyclical sectors and commodities saw outflows,” says the JP Morgan note to clients.

Other indicators that bulls would be worried about: (Extracts from the note)

* Insiders turned net sellers over the month.

* Delivery volumes reduced.

* EMBI (Emerging Markets Bond Index) spreads widened.

* In the Domestic Rates markets, the Yield curve remains inverted, as the short end is pricing in the year-end seasonality,” says the note.

On the positive side, India’s vulnerability to Fed tightening has diminished, feels the brokerage.

And yet, India remains vulnerable to any upheaval in global markets because of high exposure to Indian equities by FIIs.

(Extract from the note)

“Indian equities have been an outsized beneficiary of easy global liquidity and soft global growth.

Consequently FIIs now own 21% of Indian Equities vs. 14% pre-global financial crisis.

Also, the extent of overweight positions on Indian Equities that Emerging Market investors are currently running is at an all time high – 12% vs. the benchmark weight of 7.7%.”

Buy on dips; earnings to stabilise soon: DSP Blackrock

There are too many factors in the short-term to predict the near-term trajectory, is the word coming in from Anup Maheshwari, executive vice-president and head of equities at DSP Blackrock Investment Managers.

The first quarter is usually a little soft for the midcaps, but they come back in the subsequent quarters, he says. But earnings overall have been disappointing in the last few quarters, he adds. However, he believes that earnings will normalize soon and it is a buy on dips market.

In telecom, he says the sector is yet to see pricing power. He is waiting for revenue per minute (RPM) to increase in telecom to justify capex in auctions.

Maheshwari also expects the government to start spending aggressively from next month.

Latha: For starters how do you expect the market, we have been talking about consolidation, we are already about seven percent down, do you think the market now looks ripe for a 10 percent cut?

A: Difficult to call the short-term, to be honest, but obviously there has been some disappointment around earnings. That has been the case for a bit. If I went back to September, October and if we were to have the discussions that earnings are going to be downgraded by 7-8 percent who would have thought the markets would even be at this level today. But the fact is there has been a bit of disappointment. On the other side, the government seems to be progressing quite well. So it is a bit of a mixed picture. And then of course, you have to throw in a bit of what is happening globally. So, there are just too many factors acting in the short run, so it becomes difficult to really… It is pointless frankly to try and predict the immediate near-term market of the market. But the fact is normally first quarter of the year we have seen has tended to be a little soft, particularly for midcaps but as the year progresses they do tend to come back. And, overall, we are still progressing with the view that eventually earnings will normalise after seven years of sub-par earnings. And as that process comes to this market, it continues to be just a buy-on-decline market.

Sonia: So when you say buy-on-declines what are you looking at? I mean is now the right time to buy? Or do you think that one could get better opportunities once the earnings season is out of the way?

A: We are always very loath to say this is the right time, there is no one perfect day in the year that it is worth buying or at any point in time. The important thing is it is a phase, so what we are encouraging still for a lot of retail investors is a systematic investment format of investing and you still buy right through this type of market range, it does not really change much. So, the point is, as long as your markets are in a zone where valuations are still tolerable, where equities continues to look better than most other asset classes, where the upside looks fairly reasonable, you keep owning the asset class and keep adding to it if you have the ability to. And that is the sort of zone we are still in.

Latha: We did see some bit of green shoots. Maybe I am just clinging on to straws, the advance tax numbers were not bad, as well we saw a little bit of turn around in the four wheelers. Will Q4 therefore be an improvement to Q3?

A: I doubt, not dramatically, Q3 of course, we have to take into account was a bit of a one-off also because of a lot of inventory losses because of the initial reduction in crude prices. So, you had in certain sectors particularly oil and gas some very unusual numbers which will all reverse in this quarter. So, there will that normalisation. So, it will not be worse than Q3 in that sense, but it is definitely not in the mode of suggesting a big pick up either. That is something that now seems to get more pushed into the second half of net year. But next year will still be better than what we have seen in the current financial year.

Sonia: One of the stand-out performers has been the telecom stocks and now that the auctions are finally done and out of the way, it looks like the overhang is out. Of course they will secure spectrum for the next couple of decades. So there is that positive as well. Would you buy any of telecom names now?

A: We are looking at the sector again, we have struggled with the view on the sector because every now and then there is big dollop of capital expenditure (capex) that needs to be done. It alters your return ratios totally and we have not seen enough of pricing power in the sector yet. So the current discussion or analysis is more around they will actually manage to start taking RPMs up, exhibit some degree of pricing-power by reducing discounts for them, the market and if they do that, then to some extent they off-set the big capex that they have done to acquire or to continue with their spectrum. So, what is going to be very critical is to see if the pricing-power of the sector or not; if it does not, then the sector continues to lag because ROEs are very low in this sector. But if they do manage to get pricing-power, then that is a big leverage factor as well. So, on balance we are inclined to be a little more positive now.

Barclays +ve on $: ‘See 64.5 for rupee, 1 for euro by Dec’

After touching the 100 level, the US dollar has retraced back to about 97. Barclays Barclays’ head of forex for Asia-Pacific Mitul Kotecha said in light of the Fed’s dovish stance, it may continue to take a pause in the very near term but maintained its medium term outlook to be strong.

While stating that the rupee (currently at about 62.2, after logging seven days of straight gains) may continue to “capitalize” on some of the dollar’s near term weakness, he added that such upside would be limited. “The rupee has gone about as far as it can go.” Kotecha said. He expected the rupee to slide back to 63.8 by June and 64.5 by end of the year.

The dollar’s expected medium term strength will also take a toll on the euro (currently at 1.0935). “Our June forecast is 1.05 for euro-dollar and parity by end of the year.”

. Latha: Do you think the dollar index has seen the bottom for now and that we should expect it to climb back, what are your ranges for the dollar index as well as for the euro-dollar for the next couple of months?

A: We see the dollar at the moment having retraced and paused on the back of the relatively dovish Fed statement last week and I think the overnight data in terms of the inflation, which came in over the first monthly increase in US consumer price index (CPI) in three months has given a dollar a little bit of support overnight but we don’t see the dollar extending gains in the coming weeks.

If anything I think the Fed’s more dovish stance last week has put a bit of a break on the dollar for now. Medium-term we still remain bullish on the dollar but I think for now it appears to be pausing.

Sonia: What about the rupee then, it has been seven straight days of gains for the rupee, what is your own prognosis?

A: Rupee has been capitalising on this dollar consolidation and I think that will probably continue in the near-term but again I don’t look here for the dollar to weaken much further from these levels. So I think again the implication is that the rupee’s upside from here now looks very limited. I think it has probably gone as far as it can go in the very near-term.

Latha: It can strengthen as far as it can go, so you expect 63 per dollar sometime in April or May?

A: Currently we are forecasting dollar-rupee to move higher in the coming months and we haven’t changed that. At this stage, we were forecasting 64.5/USD by the end of the year. So we do see — our current forecast to dollar/INR for instance is 63.8/USD by end of Q2.

Latha: You are referring to the calendar year?

A: Yes. End of Q2 means end of June 2015.

Latha: I wanted your numbers as well for euro/dollar and the dollar index. You don’t see too much of weakening in the dollar, so do you see it go back above 100, what are the levels by June 30 – December 31?

A: If you we look at the technical levels, we do see resistance on euro/dollar around 1.1035 levels and then 1.11. We would be looking to sell into these sort of levels and again we don’t expect euro to make much more headway from these sort of levels.

Latha: Does it go back to 105 which we saw it touched sometime in this quarter, next few months?

A: For euro/dollar we are expecting further depreciation. Our forecast at the moment is 1.08 for the end of Q2 again end the June and parity remains our forecast by the end of this year.

Correction seen, but Nifty to hold 8200; like pharma: Ambit

The market is running out of positive catalysts and there are more of downside risks over the next couple of quarters says Pramod Gubbi, Director-Institutional Sales, Ambit Capital. However, he does not see the Nifty falling below 8200 in the event of a correction, though he warns that individual stocks may fall sharply.

In an interview to CNBC-TV18, Gubbi says the possibility of a rate hike by the US Federal Reserve has already been discounted. Even otherwise, a rate hike is unlikely to act as a negative trigger for global markets, he says.

Gubbi is bullish on the pharma sector, and expects the Sensex to rise to 34,000 by the end of this calendar.

He does not see earnings growth recovering before the second half of next fiscal.

Latha: Give us some clarity on how you see the slightly near-term, I don’t mean today and tomorrow, but for the quarter do you think the gains are over for this market and we would be in a longish consolidation phase, what is the range of that consolidation for the Nifty?

A: I would think so. We are pretty much running out of catalyst. The last catalyst was the Budget and we had a very surprise rate cut. We could potentially see another rate cut next month but outside of that we are running out of all positive catalysts, in fact heading into what looks quite a dire earnings season. However, every channel check that our guys on the ground do or any corporate that we hear, situation on the ground seems quite dire as far as demand is concerned and that is likely show up in pretty much weak earnings season and that is not going to help the markets in terms of further triggers to hold up. Therefore, to that extent I would assume the risk to the market from hereon, at least from quarter or perhaps even two quarters standpoint could be to the downside with a potential rate cut, the only positive trigger on the horizon.

Sonia: What could the extent of this pullback be, the Nifty has already lost about 5 percent from that top of 9,000 that we hit last month. Is there much more downside to this market in the near-term?

A: At the market level we may be looking at closer to the bottom but if you look at this correction, it has been largely restricted to some of largecap index names and some cyclical names. We haven’t seen a major correction in some of the quality names. Even the quality midcaps continue to trade at reasonably higher valuations.

Our sense is there will be a time because I don’t think even in quality names we will be able to escape this sort of a demand destruction that we are seeing on the ground. So, to that extent we might see some correction in those names that have held up which may not reflect entirely at the index level.

However, that will be an interesting standpoint whether this quarter or the next quarter’s results which will crack open some of these highly valued stocks, that will be an interesting time to look at these names and that is what we are recommending investor do to – hang on for right now and wait for that correction and then start adding to those quality names.

Latha: Should one worry about the US rate hike at all, is there going to be even a wobble for either Indian bonds or for Indian equities?

A: I think in some ways there is enough visibility now given the sort of expectations that have been built up ahead of the recent Fed meet and the reasonably clear guidance that the Fed has given in terms of what it expects from US fundamentals and what it takes for those fundamentals to change so that they can implement a meaningful rate hike. You might see the beginning of a rate hike. I think that is more or less factored in but a series of rate hike or a meaningful rate hike over a the course of the next 9-18 months is something that is unlikely to be a negative catalyst as far as we see. Maybe over the short-term or a few days after the first rate hike you might see some sort of volatility but unlikely for that to be a meaningful negative catalyst for global markets be it bond markets or equity markets, at least that sort of out of the horizon for now.

GMR says QIP to cut debt, terms coal bids as not aggressive

A number of developments have taken place for GMR Infra  over the past few months. The company has opened a Rs 1400-crore qualified institutional placement (QIP) issue, recently upped its stake in the Delhi Airport and was also in the news for what some analysts said was “aggressive” bidding in the coal auction.

CNBC-TV18’s Latha Venkatesh and Sonia Shenoy spoke with GMR Group CFO Madhu Terdal over each of the developments.

Sonia: If you can just start off by telling us how much you will have to shell out for this stake [in DIAL]? Have you been able to tie up the funds at this point?

A: I would like to make a disclaimer because we are in the process of our rights issue. Rights issue has opened yesterday so I will be constrained by the declarations that we have made in the letter of offer (LOF). Legally we are prohibited from talking something more than that so within that constraint whatever is possible I will be there. I would also like to caution that everybody should be guided by what has been appeared in the LOF as well as the corrigendum’s what we are publishing and not by what I am saying.

The Malaysia Airports Holdings Berhad (MAHB) stake we have acquired yesterday and we have paid USD 79 million of the stake of 10 percent. However, it in no way represents the true value of Delhi Airport because let they are not be construed in a different way but there were some shareholder’s rights and obligations between the shareholders.

It is not that the Malaysian Airport holding has exited because Malaysian Airport has been our partner in Delhi airport, Hyderabad airport, in Maldives they have been a partner. They have been our trusted partner always. However, GMR wants to consolidate our shareholdings in our Airport business.

Latha: You wanted to buy back?

A: We wanted to buyback so we have acquired that the entire financing has been in place and the money will be paid. It has been already organised by a bank and the money will be paid once the Airport Authority of India gives its approval.

Sonia: By when you think?

A: It should take about 2-3 weeks time.

Latha: Is the airport making money so should we therefore expect that what will come to your profit & loss (P&L) will be higher than what it was in the previous quarter?

A: GMR Airport’s limited will be acquiring this stake. So GMR Airport currently holds 54 percent in Delhi International Airport so our stake will go to 64 percent. So there is no money coming up into the company but we will be consolidating our own share. It will happen as and when the Delhi Airport declares dividends obviously we will be entitled for the higher dividend .

Latha: Is the Delhi Airport making money for the subsidiary company itself?

A: Till last year, yes, it is making a profit but this year already the regulatory authority has come out with a draft paper which is under discussion. So I will not be able to precisely say that whether it will, but this year for March 2015 definitely we will be making profit.

Sonia: Would you look at buying the other 10 percent stake that is owned by Fraport?

A: It will be a business decision as I told you I will not be able to comment more something which we have not done or which we have not disclosed. So I will be constrained by that.

Sonia: Let us talk about the other issue you just won the Talabira-1 coal block, it was a very aggressive bid, a negative bid of Rs 478 per tonne. What is the capacity of that block and is it enough to fulfill your own requirement or would you need to procure from some other sources? A:

I do not know why you are describing it has very aggressive.

Latha: Because you have to pay Rs 478 and you have to mine the coal without getting compensated.

A: That is right, but if you see all the peers who have bid in, if Rs 378 is the loyalty which we are paying it. Out of the Rs 478 Rs 100 will be pass through Rs 378 is what we cannot pass through and there will be a mining cost of the extent of around Rs 250 to Rs 300. So to that extent we will not be able to pass through to the consumers.

Latha: So Rs 600 you can not pass through?

A: we will not be able to pass through. If you really look at our other competitors, if this translates to around 43 paisa per megawatt. If you look at other competitors the next lowest is around 57 paisa and remaining are 72 or 96 paisa. So out of the 6 mines if you could do a cost benefit analysis ours is the least cost at 43 paisa we have won that.

What is important is that the way in which this has got only around 11-12 million tonne. But the strategy is that we did not want to have a larger mine which we will not be able to dispatch full power because the full transmission lines between north and south are not completely operational it will take 12-18 months.

Our strategy was to take a mine with least capital cost and with the least cost that is possible and run through the full capacity for the next 2 years by then our second bid the Ganeshpur mine which has got about 118 million tonne that we will be able to use it for the next 20-25 years. So the strategy was a combination of a short and a small mine and with a larger mine so that our initial capex as well as the operating cost will be to the barest minimum.

Latha: You already signed power purchase agreement (PPAs) for this power project for which you are using the Talabira coal?

A: As it is we do have some short-term PPAs indeed in anticipation of this much ahead we had already signed some short-term PPAs. However, we will be now entering into the medium-term PPA.

Latha: What is the pricing in that PPA?

A: It would be in the range of around Rs 3.10 to Rs 3.30.

Latha: With this 43 paise, which you have to forego you will still be in the green in these two PPAs?

A: The shorter PPAs are not actual correct measurement to measure because once we are eligible to apply for medium-term PPAs we will be now — because still I have got a full fuel supply — I was not eligible. We were doing a short-term PPAs. Now we will be eligible for medium-term PPAs. I believe that the medium-term PPAs will be in the range of minimum Rs 3.20 to 3.50.

Latha: That is where the confusion is coming in the new PPAs that you will enter into it will be by an open bidding process right. So how will the government be able to ensure that you are passing the 43 paise ? If it is a competitive bid how is the government working it out?

A: Overall the cost will be still less and there will be lot of changes in terms of logistic. People can swap mines at a later date.

Latha: Are you planning to swap?

A: It is too early to come out with the entire strategy. The best thing that has happened is one is it has given the assurance of the full coal supply that is one number. Number two it has entitled to apply for the medium as well as the long-term PPAs and thirdly most importantly going forward it is giving you flexibility how we improve the efficiency. We have to wait for the full strategy to fold out. But suffice it I can say that from our current economics which we have been able to convince our lenders also the economic is working out extremely good.

Latha: You will be in the green?

A: We will be in the green, may not be in the first year. First year it will be difficult for us.

Latha: Your new PPAs have to be above Rs 3?

A: Absolutely correct.

Latha: Finally we understand that of the 16 power projects 8 are operational and that you are looking to sell off some of them? Should we expect an announcement in a quarter or so?

A: As I told you I will not be able to earn more details on that but I can say that as you have been saying that we have been following an asset light model whether it is divestment or acquisition, capital model. Cash flow generation is our motto and de-leveraging is our motto.

The main purpose which you had really invited me for on the rights issue actually we have just announced yesterday, since our rights issue has opened for a Rs 1,400 crore. We are not supposed to be making any open advertisement on solicitor that is not the intention but I just want to tell the facts how we are using this money for de-leveraging.

We have been informed by our promoter that is GMR Holdings that they have tied up full Rs 1,250 crore complete financing and they have already started pumping in the money as advance subscription fee. In fact they have already put in two stages Rs Rs 214 as well as Rs 327 crore already that money has already been put in to the rights issue in advance subscription money. So this right issue will be open till April 8 th and after that we will be able to freely talk more on that.

Sonia: What is the dilution that you are looking at?

A: There will be no dilution it will be a rights issue so everybody will be there.

Latha: What about the earnings per share (EPS) dilution?

A: Extra share I will have to workout. Maybe at Rs 15 we will be doing Rs 1,400 crore, I am not able to recall. Important point is the entire money promoters have already declared in the prospectus that they are not only subscribing to the entire quota but also additional anything unsubscribed is there then they will be subscribe in that event their shareholding may improve and more importantly out of Rs 1,400 more than Rs 1,200 crore will be uiltised to reduce the leverage at the holding company. So that is the main purpose of it.

GMR Infra stock price

On March 25, 2015, at 12:29 hrs GMR Infrastructure was quoting at Rs 15.40, up Rs 0.05, or 0.33 percent. The 52-week high of the share was Rs 38.30 and the 52-week low was Rs 14.65.

The company’s trailing 12-month (TTM) EPS was at Rs 0.23 per share as per the quarter ended December 2014. The stock’s price-to-earnings (P/E) ratio was 66.96. The latest book value of the company is Rs 16.45 per share. At current value, the price-to-book value of the company is 0.94

India medium-term outlook strong; see near-term pause: JPM

After the kind of run-up Indian equities have seen in the past several months, one shouldn’t be surprised they have going into a sort of consolidation, believes JPMorgan global head of research Joyce Chang.

Speaking to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Joyce said that even as she preferred developed markets over emerging markets – “simply because we have taken down the EM growth forecast in so many countries,” – investors would focus on India’s medium-term growth story.

On her stock preference, Joyce said JPM had a mix of both defensives as well as cyclicals.

Latha: Let us start with the US Fed itself. The Fed did say that it is prepared to get more patient. What are you factoring in terms of a rate hike? Do we get one in 2015? If yes, when and how many?

A: We think that you will see Fed rate hike start between June & September this year but the big surprise from the last meeting was the change in the interest rate outlook that they lowered the dots not just for this year but also for 2016 and 2017.

So, that is what the market has been responding to. The fact that the interest rates will be much lower, that it will still be lower over a longer term horizon. There are fewer fears that this could be a repeat of the Fed taper tantrum that we saw in 2013.

Latha: With global financial markets wobbling the way they did in May 2013, do you think this rate hike has any potential to wobble markets at all? If it does, which are the asset markets that as an investor you would watch out for?

A: I think it is very different from 2013 in the following sense: you now have negative yields in much of Europe and in Asia. In our estimate, about 16 percent of the world government bond index is now negative yield. So, the fears in 2013 would be that you would see interest rate rises occurring simultaneously.

We have central banks with very divergent monetary policies right now and I think the signal from the Fed is that they are concerned about the strength of the dollar. They have lowered the dots going out through 2017, so we do see the 10-year US treasury yields rising to two and a half percent by the end of the year. That will have more impact on bonds but you have bond yields now close to an all time low whereas global equity valuations are almost close to an all time high.

Sonia: That they are. In 2015, which equity markets will you prefer generally? Developed markets or emerging markets?

A: I think the developed market equities will be preferred over emerging equities this year, simply because we have taken down the emerging markets’ growth forecast in so many countries. If you look at the Brazil, Russia, India and China (BRIC) countries, India is the growth story that stands out, but you have a deep recession in Russia, a recession in Brazil and a slowdown in China. I think there is more momentum in place for European equities this year.

We do see recovery going closer to two percent by the end of the year. We are also seeing continued strength on the US equities side as well as we see growth approaching three percent by the end of the year in the United States. So, I think developed markets and the higher dividend stocks will out perform this year on the developed market side.

But I am not panicked about bond outflows. With negative yields in so much of the world right now, money will stay in bond markets as well. And they have gravitated to US treasuries, that has tempered the pace of US treasury yields rising.

Sonia: So you expect more momentum in European equities this year; that is interesting. What are the top three or five asset markets? Which would they be in your list?

A: European equities and US equities do stand out. We do see selective opportunities in emerging markets equities as well and we have had a medium-term very positive view on India for example. But also in the credit markets, high yield credit has made a very strong recovery since the beginning of the year and we see credit markets holding in very well.

We are still seeing more inflows going into bond markets compared to equity market so I am not overly concerned that you are going to see a rapid bond market sell-off, but the valuations in high grade credit are more difficult right now because you have had a very strong rally over five years in those markets.

Latha: Now let me come back to the topic because we are more interested in Indian equities. They have corrected about seven percent from recent highs, will gains from equity markets be flat this year? I mean we did 30 percent last year, will this compare very poorly in 2015?

A: I don’t think that one should be surprised that there is some consolidation that is going on in India after such a strong rally. The same thing has happened in the US equity market as well. We still see positive medium-term prospects over the next two years particularly if we continue to see rates come down, the fiscal stimulus take hold and the growth numbers continue to hold up well in India.

So, you are overweight on a medium-term horizon but you see that you are probably going to stay in this range for right now. The same is true on the foreign exchange (FX) side. You have a 14 percent appreciation of the India rupee at trade-weighted terms recently. So, we see a period for more consolidation given how strong the rally has been.

Latha: Since you are positive on India in the slightly medium-term, what about the churn within Indian equities? Will you prefer rate-sensitives? Actually how many rate cuts do you expect at all? Is there a rate trade left?

A: I think the rate cut has already happened. Some of the recent inflation numbers that have come out, there is still some concern how much of the cyclical versus structural with respect to food inflation, so my expectation is not that you see more immediate rate cuts necessarily playing out that quickly in India. I think investors will be more focused on the medium-term story in India. The investment in infrastructure, they will be more focused on how the government continues to implement reforms.

Markets were very encouraged to see the passage of reforms last Friday in certain areas. So I think that investors are comfortable taking a medium term view that India has quite a tremendous opportunity right now. Lower oil prices, more reform oriented agenda in place.

So, take a medium-term view on India rather than feeling that they can only take a three month view which is something that we have heard from investors previously that it is more tactical. I think they are more comfortable taking a medium term view on investing in India’s outlook.

Sonia: On that note, what are the sectors that you would prefer? Would you prefer infotech and pharma stocks or will you have a mix of defensives and cyclicals in your portfolio now?

A: We really do have a mix of both right now in our recommendations. As you pointed out you had such a big rally last year that I am not surprised there is a bit of consolidation yield right now. But, on the rate side, I see a landmark agreement that has occurred between the Ministry of Finance and the central banks on bringing rates lower over time and I think that is going to provide the bigger boost to India’s growth momentum over the longer term.

Sonia: You touched upon the way crude prices have started moving lower again. What is your own assessment? Do you expect much lower levels in the due course of the year?

A: I think you could see, crude prices touch a little bit lower. They may have been kept artificially higher by the winter which was very severe in the US, a bit like the first quarter of last year.

You have lower US gross domestic product (GDP) numbers, higher commodity prices, you could see commodity prices go a little bit lower. But we have commodity prices staying at a rather USD 58, mid-50s range by the end of the year. I do think that you are going to see commodity prices stay in this range over the next two to three years. We do not see a move back to USD 70 or USD 80 forthcoming over the near term.

Latha: If time permitting, we will come back to commodities. But coming back to India, we have seen price-to-earnings (PE) expansion so far, we have not seen earnings growth. In which particular quarter do you see the earnings inflection coming into India?

A: Well, I think this is the part of the global trend that we have been seeing. It is that the capital expenditure (capex) has been much lower, we have seen the demand side pick up, the fiscal stimulus take a set but on the supply side and the capex and the investment side, it’s been slower to gain momentum. So that is what we are waiting for and many of these reforms, I do not think the will necessarily occur overnight.

I think it will be over a two year period that you have the right framework in place. And these reforms gradually getting some momentum also through the political system here, higher growth numbers, a boost from the lower commodity prices, so I am not so sure that you can time exactly when you see some of those capex effects take place. So, I think investors now are very comfortable taking a two to three year view on the framework they see for India had, whereas two years ago the questions were vastly different.

The questions were whether India could lose investment grade rating. But what we are seeing now if I look at the bond side is that you have already hit the cap for foreign investors who are looking at the government bonds, you are no that far from the cap for corporate bonds. So, the foreign interest in India has remained very strong and are fairly optimistic about just the direction that they see the government moving in over the medium term horizon.

Latha: And the other big positive that we eluded to has been this commodities down cycle. You spoke about crude, what about the commodities bear cycle itself? Does it stay in bear-mode? When do you see commodity prices even crawl up? Will that happen in 12 months?

A: At the beginning of the year, there had fears that commodity prices could go into the USD 30s. We have seen many of those fears are passed. We have seen commodity prices stable, rise around the current levels. But I do think that given some of the advances that have been made on the US production side and the lower cost of production, that you could see this range hold for the next two years.

So, emerging markets countries have to plan on staying in this range, rather than thinking we are going back to a USD 100 for commodity prices. That is good for India, about 60 percent of its imports are oil. So, it has had one of the biggest benefits offered. Along with that, government that has laid out a framework that the markets, you have confidence in and the return of capital flows as well to India.

Buy every correction; see uptick in MHCV, like banks: UTIMF

With the macroeconomic situation favouring India and the political mandate in favour, every correction is a good buying opportunity, says Swati Kulkarni, vice-president and fund manager, UTI MF.

She believes valuations of banking stocks continue to be supportive and the sector is likely to outperform. From a growth perspective, private sector banks are better placed in terms of capital adequacy, but from a valuation point of view, large public sector banks may gain more.

She also sees initial signs of a pick-up in medium-to-heavy commercial vehicles (MHCV) segment in the auto space.

Anuj: What is your call now on the market? We have seen a big surge and a decent correction now, do you think it is a good time to make an entry again in the market?

A: 3-4 percent here and there, we cannot time the market that well but given the fact that you have macro on your side, you have a political mandate on your side and also in the Budget what you were expecting that the spend on the construction side – the first step to come from the government is also supposed to be there and we are also seeing the ease of business that is being worked out. So from all this perspective, the results of these are likely to be expected over the next two-three years not immediately as we know but the market always expects ahead of time and hence the corrections are a good time to enter.

Ekta: If you had to be most bullish on one particular sector from current levels though it might be even pharmaceuticals, which has seen a strong run up, which one would it be for you to possibly assess the best returns from current levels by the end of this year?

A: It is a difficult question because being a portfolio manager, we tend to take a diversified approach but if you still want me to give an answer I would say that some of the banks which have corrected maybe from a one-year perspective as we expect the credit growth to pick up, first initially by the step by the government and then the private sector coming into the same space. I think banking is somewhere the valuations are still supportive and that could be the sector, which would outperform in next one year’s time or so.

Ekta: Would that be private or public or just any sort of valuation play on the banking space?

A: We are looking at from a growth perspective and when it comes to growth, I think private sector banks are better placed in terms of capital adequacy and also in terms of their overall approach towards lapping on to the growth. So from that perspective the growth can be still seen in the private space but from a valuation perspective perhaps there is the large public sector undertaking (PSUs) where you have a better capital adequacy, the gains could be there than the typical private sector banks which have already run up in terms of these expectations.