'Valuation in mid-caps are attractive'

Anand Tandon, Gryffon Investment Advisors says that the market may give up a bit of its gains because the overall sentiment has become very sanguine. But he adds that other positives in terms of oil prices, interest rates, global politics may push the markets to a new high.

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

What do you make of the way the market has moved after a very strong start today?

The level that we are trading at, it is always difficult to assume that the markets will actually make a one-way move. It has already had a very robust build up into the result season on expectations that the results will be good. So the fact is that the results are good will not necessarily lead the market to a new breakout, at least at this stage.

I think it will take a while for the market to digest the result as they come in and then perhaps look for the next direction. So though the Infosys results were definitely pleasant and buoyant, for the moment, I am not particularly surprised because one was expecting to see good results. They have again indicated that their business momentum is even more robust than they had earlier anticipated. This is certainly good news for the sector as a whole. 

How would you approach technology now?

Don't forget from the last quarter uptil now, most of the other topline IT companies have not done as much as Infosys has done. So Infosys, to a large extent, already leads the pack and has been a strong outperformer for most of the last quarter. So it shouldn't be very surprising if it does rest for a while before it makes any fresh move up.

But to a large extent, I would imagine that many of the smaller companies will show a much more dramatic increase in numbers simply because the environment is extremely friendly. I think you are beginning to see that in the price movements.

What do you expect to see through the earning season now? Will it continue to be this sluggish or do you think there might be a more vicious bout of profit booking?

Don't forget that there is still new money that is waiting to come in, especially in the midcap sector. There are new funds, which have been announced both locally as well as globally. While you don't expect them to come in via the market immediately, the fact is that they will provide some kind of floor if the market were to correct from hereon.

So for the moment, at least in the midcap space, you are likely to see some level of at least stability, if not momentum. On the largecaps, obviously the margin of safety is a little less because many of them are trading at higher than their earlier peaks or are very near to the earlier peak. Therefore in terms of valuations, they will need to show much better results and perhaps earning surprises before they can develop a new momentum.   

How, according to you, DLF might come in this time? Can it do a lot to excite the real estate space from here on?

Certainly the second part of your statement is likely to be true. If they do come out with an issue, it is not likely to be cheap. It will definitely put some more legs behind many of the other listed real estate companies.

The big trigger for real estate will still be when Sebi allows foreign funds, which are waiting in the wings to actually start making the investments. There are issues in terms of what that will do to inflation and affordability of land over the near term. But once that is sorted out, then that is still a space, which is under represented in the market and is therefore likely to attract a lot more investments going forward.

What do you track and like in the midcap IT space because today we have seen stocks like iGate and Mphasis perform very well. Do you track any of these?

In a broad sense, since the order books are overflowing and the indications are that the possible slowdown in the US may actually lead to a little more momentum on the outsourcing, most of the companies, which are in that space are likely to report good numbers.

Yes, we do have positions in Mphasis, along with some of the other companies, which have slightly different model; for example in the BPO space or a company like Zensar. These are companies, which we think are doing reasonably well and are likely to provide significant surprises in earnings. The caveat remains, as I mentioned, the people who listen to us would have positions in some of these companies.

Broadly, are you finding more stories to buy within the midcap space now? And do you think by the end of this earning season maybe they would have caught up with the performance of the frontliners?

Quite possibly, yes. Unless the market reverses its direction, I think the valuation in the midcap is more attractive than in the largecap space. Also, the risk factor or the fear factor that was there for the midcaps has, to some extent, waned because the momentum in the market has taken away the risk premium that was being attached to them.

Consequently, I would not be surprised if the valuation gap between the largecap and the midcap narrows significantly over the next few weeks. And certainly I think in terms of the valuation by itself, the midcap is definitely cheaper right now and by a wide margin.  

What do you think about the entire commodity universe and what the metals might have to report this time?

If one had to break it up into ferrous and non-ferrous, then both of them are likely to do quite well with the exception of something like alumina. But by and large, steel prices have been reasonably firm and indications say that at least for the near term fears of China trying to create panic in the international markets are not likely to pan out.

Therefore steel prices will continue to remain reasonably robust, which means that the quarterly numbers for both this quarter and next quarter are likely to be quite good. We have already seen some of the steel stocks rally in anticipation of that, so I don't know whether that will necessarily provide a new trigger for prices to go up from here. But at the same time, they are not likely to have any reason for it to fall. Pretty much the same goes for some of the other non-ferrous metals as well.

Do you see this market retracing before it attempts a new high or do you think it is just consolidating for the news and maybe later this month it might scale a new peak and carry on from there?

I wouldn't be surprised, if it does give up a bit of its gains because the overall sentiment has certainly changed and become very sanguine. This is always a kind of dangerous sign, but at the same time, the market environment has also changed for the better in terms of oil prices, interest rates, global politics and all of that.

So from that point of view, there is perhaps a case to be made for new high. As I said, whether it will happen in this month or not, I am not so sure. So I would still remain generally invested to a large extent. 

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