Global flows again eye emerging markets

Anand Tandon of Gryffon Investment Advisors thinks too much is being read out of the Nalco and Neyveli divestments issue. "A lot more needs to be done on more fundamental basis, than just selling some PSU stocks," he says.

Discussing the sectors that he is positive about, Tandon says oil related services and real estate are good, because the demand for companies falling in this sector will increase and sustain for a long time. He is also bullish on the FMCG sector.

Excerpts from CNBC-TV18's exclusive interview with Anand Tandon:

How have you read the news on Neyveli Lignite Corporation and Nalco divestments and does it change anything, particularly with the numbers that Neyveli reported?

I do not think it changes much. All it does is bring some more float in the market. It does not signal any kind of divestment, other than some sale of stock.

I think too much is being read in terms of saying that 'look a sale of PSU stock is the only way that the government can signal that it is following a liberalisation policy.'

A lot more needs to be done on more fundamental basis, than just selling some PSU stocks. To me frankly, it is really not that big deal.

How do you map the market now?

The pullback has been as sharp as the fall preceeding that. So obviously it means that in terms of global flows, the jitters are out right now.

The US Fed now seems to be indicating that they may not be following that kind of a hawkish stance as they were indicating earlier. That being said, some of the fears like rising interest rate will remain, at least in the domestic market.

We have begun to see interest rates hardening much beyond, perhaps what the RBI would like to see. There are early signs that the credit growth has slowed down a bit, which is a bit of a concern right now.

Right now, what dominates is the global flows and they seem to be back towards the emerging markets.

Any concerns on excesses happening in the midcap space?

I think it's a little early to talk about excesses. Midcap and smallcap indices fell a lot more during correction. It was therefore natural that value would have emerged there faster than it did in the largecap companies.

I am not at all surprised to see that the bounce has happened first in the midcap. As the foreign funds come in, we would expect to see if the market has to sustain its changed direction and if the largecaps will start to rally as well.

On the largecap, do you think we have come back to what would seem as a reasonably fair valuation ground or do you find compelling reasons to buy stocks at these prices?

I do not think we could actually justify from the current years earnings, beyond this level.

Again, you could always stretch the argument and talk a couple of years out; a lot of things would change, so it depends on your timeframe.

On the current year earnings, I would imagine for most sectors, valuations are reasonable. You could find trading opportunities and there would be some sectors, which may surprise on the upside.

Any relative sectors, which look undervalued at this point, frontliners specific?

I think the market tends to value whatever is known at any given point of time. I think what you have to look for is where the surprises can be. Obviously, as always, the surprises are usually in places, where prices can harden much more than one expects.

For example cement is a space, where the expectation can be beaten on the upside, unless it tends to increase price expectations, only linearly whereas actual price moves do not necessarily happen that way.

Some of the commodities could again do the same, but I think commodity is already overstretched. Therefore, they may not reach new peaks, but one could be wrong there again.

Those are the kinds of sectors, where there could be huge surprises. Barring that of course, there is a secular growth story, which is again some of the pharma, auto axillaries, the IT companies and so on. But those are not going to offer

any surprises and that is where the market will be more or less, pricing.

Do you think the news that is doing the round on Mylan picking up a stake in Matrix Laboratories is possible? What could it do to the stock?

Yes, it is possible. Many of the Indian companies have large capacities now and therefore it would be useful for production for international generic players. But in terms of price, whatever was reported in the newspapers was obviously attractive given the current price that the stock is trading at. But I have no way of estimating the price.

How do you look at the financials in the light of the apprehensions on interest rates?

Theoretically, rising interest rates scenario should be good for the banks because they should be able to price their loans faster than their liabilities go up. So far, I do not think many of the banks have managed to achieve that.

Also, the duration on their bond books are too long. Even now, many of them are with three-four year durations on their portfolios, which is quite scary in a rising interest rate scenario. Even though they have moved a lot of it to the maturity category, that still means their provisions have to go up.

Second, on the liability side we find that the interest rates are also moving up fast and with new instruments, instruments from mutual funds coming in, the rates there are not cheap. For those banks, which are able to maintain a higher NIM, the future is alright.

What do you do with a sector like sugar that fell off very hard and then had a pullback in the last one-week or so?

I think it is one of those sectors, where the price can surprise on the upside. When it comes to commodities, the moves are very strong on either direction. I think at this stage, it is quite possible that sugar will actually go up strongly from where it is.

Do you expect it to be the same set of stocks or sectors that will lead the market up now; capital goods and autos behind it?

One will have to keep in mind that rising interest rates beyond a point of time will start hurting the consumer sentiment. For example, FMCG is more likely to do well than some of the discretionary kind of sectors.

With inflation coming in and the volume growth sustaining, FMCG companies are more likely to expand margins and to show much higher bottomline growth. The discretionary spend will get curtailed.

Any thoughts on aviation?

It is a high growth sector with lot of margin pressures and because of the fact that most of it is variable cost and there is no great leverage, one gets as you grow in size. At the moment, it does not seem to be a sector, where one has found the way of operating a low cost airline and making money on it.

Jet Airways is slightly better placed there, but the acquisition was ill priced and ill timed. Again, you may find that it will go through some heavy weather as it tries to grapple with the increasing cost.

Within the midcap space, are there sectors that you can pick out for value stories or is it very stock specific?

If you set aside the first top 80 companies of the country, which are worth more than a billion dollars, I would imagine most of the others fall in midcap. There are varieties of stocks there.

I think there are sectors like oil related services and real estate, which is still a story that will take a while to spin itself out. Oil related shipping, offshore vessels, all these are stocks, where demand is continuing to grow and is likely to sustain for a long while.

FMGG is another area that we are reasonably bullish on. There are a lot of stocks and sectors to pick from. The only thing that you have to watch out for is that you do not get into irrational exuberance and try and chase the momentum necessarily at these times.

Any disclosures you would like to make?

Our views will reflect the positions that our clients and we will have.

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