Speaking to CNBC-TV18, noted market voices, Jagdish Malkani, member of NSE and Pashupati Advani of Advani OTC Dealers, spoke about their top sector bets in 2011.
Here is the verbatim transcript of Jagdish Malkani and Pashupati Advani's interview on CNBC-TV18. Also watch the accompanying videos.
Q: What have you made of the entire Hero Honda termination of the JV? Are you bullish on the stock in the medium-term?
Advani: The stocks went down initially and only after the clarification came in that the stocks came up again. There was a lot of investor resistance from the larger institutional investors to pay huge royalties as a way of getting a discounted price but that seems to be put away. They have now disclosed the policy to a reasonable degree.
Though the stock is okay now, it will be interesting to see how they implement the changes. There is a branding cost to come, new models would cost which Hero will either will develop or take from Honda or a third place. It is going to be interesting to see but there is nothing wrong with the stock. India is still the country of two-wheelers, they are selling faster than they can make them and so, the stock is okay.
Q: The stocks are 'okay' at current prices too?
Advani: It was in this Rs 1,900 to Rs 2,000 range before the deal got announced. The deal had been brewing, it went down for two or three days and now it is back up again to the same level. It is fundamentally doing well, they are producing more cycles, their margins are there and therefore nothing is wrong with the stock.
Q: What have you made of recent worries over inflation and probably the slow down in Asia? There are some global brokerages who have been talking of the West being more attractive. There are talks of a shift of smart money from emerging markets to the US where GDP numbers are getting upgraded. What is your sense in this? Are we not going to see any fly away rally or do you think that pre-budget hopes can still be maintained?
Advani: As a country, we are looking a little bit ahead of itself in terms of valuations compared to the rest of Asia. If money is coming to Asia, it is coming into India even if it comes in slowly. However, we should look at their fundamental facts.
How much came during this year is still a small amount compared to what goes into the US markets. I wouldn't worry about a flow going back to the US even though it is going to affect us in a great degree. But I would be worried if there was a shuddering in Europe.
I expect another shudder about the end of November from Ireland, Portugal or maybe Spain which could happen later on this month. It could some poise to the market and give us a little bit of thinking to do. It will also slow flows but we will get a good January.
Q: What would you be bullish on in terms of sectors, going into the first three months of 2011?
Advani: I am fundamentally very bullish on the commodity sectors – oil, metals and gold. As India gets more affluent, people are going to get eat better, buy more cars, buy more motorcycles and that is going to trickle down into our economy. Therefore, I am also looking at that space of food product and consumables.
Q: There have been some bullish noises about IT as the West appears to be coming out of deep problems and also because the rupee has not been as strong as many of them expected it to be. There is a probable depreciation, given the crude prices; does that make for a kind of a heady mix for IT for now?
Advani: Both, the winner and loser for 2011 are going to be where the dollar is going to be. With crude being above USD 90 per barrel, it hurts us in which case we will depreciate against the dollar. At this kind of levels, I wouldn't be surprised if we see 46-47 even though the whole world thinks we should be seeing 40. A lot of it is going to depend on the dollar, if the dollar continues to get stronger then I would say watch it for the markets.
Q: The other aspects of the fears have been on the banking stocks. We have seen them going from weakness to weakness, a lot of profit taking has happened as well. Would you say that now they have begun to look attractive?
Advani: The banks had a fabulous run up but now their margins are getting shrunk as the cost of deposits is going up. The margins are going to take a little bit of time to come. Those banks who are getting into interesting products like HDFC Bank or Axis Bank have done very well and have been innovative. If the Indian banks also start to get innovative then of course they will continue to go up, if they are not, they will probably languish at these levels or maybe go a little bit down because of the pressure on margins.
Q: Do you like the fertilizers space?
Advani: Yes, I am very comfortable in that space. They have run up quite a lot but I think that the Indian farmer is finally realizing what fertiliser he needs and is taking the boom accordingly. I am very positive on that whole sector.
Q: We have seen some kind of relief coming in terms of sugar prices as well, is that something you would hop on still? How do you see sugar?
Advani: I would look to buying sugar on dips simply because of the policy changes. However, there is going to be a global tightening in sugar prices in 2011. It is definitely one of the sectors that you want to be in. I am very much in favour of consumer sectors and sugar is definitely one of those.
Q: Fundamentally, how is Reliance looking? It is showing some signs of life but do you think it will have the legs to take the index up?
Advani: The issue with Reliance is that they have some treasury stocks under the direct tax code that kicks in presumably in April 2011 and will be negative on the stocks. They obviously will be looking at pairing down that treasury stocks and because of that overhang; it is kind of putting a cap on it.
Though it is fundamentally very good stock, I am also bullish on the price of oil. We are going to be even higher. Reliance, Cairn, ONGC, Oil India – I would run with all these heavyweights as well, it is not just IT and not just Reliance.
Q: 2010 has been a stellar year for the entire auto space. Do you expect such a terrific run in 2011 as well and between two-wheelers and CV, what is your preferred pick now?
Advani: Two-wheelers are definitely here to stay, we are seeing tremendous move towards rural. We have got this NREGA scheme going which is creating a lot of wealth in the rural areas and the first sign of wealth is buying home appliances and two-wheelers.
There is a big push and all the two-wheeler companies are very bullish about their prospect and without a doubt that is the way to go. It is then pull CVs and four-wheelers also as people upgrade, the only thing is we need are better and faster roads and for that we depend on a minister who is doing very hard but finding great difficulties in implementing plans.
Q: What about the aviation minister? There is some news on JetLite getting about some tax relief. Is the space you like?
Advani: The airline industry is always a tough industry because there is never enough and then there is too much. We saw these prices getting squeezed because of fewer flights. The reason is that both Mumbai and Delhi have curtailed the number of flights that arrive between the two. It is causing problems but the industry is still growing and people are travelling more. The latest trend is to shift to railway because the prices of airfare have gone out of hand. Therefore, now the next push will be on the railway sector.
Q: Your thoughts on Hero Honda and the big move that it has seen, it has recovered all the losses that it has seen in the last one month.
Malkani: Obviously, a huge relief after the pronouncements of the royalty issues, that was really what was troubling the market. Now, the management has come out saying if anything the royalty numbers will be lower upto 2014. So, that was a crucial element for hammering down the stock and therefore the upsurge. But I think there is large element of short covering in this.
I am still kind of skeptical about this whole story. There are issues of corporate governance etc, how the management is getting stocks on the cheap as it were and how the minority shareholders are going to partake of this, how the company is going to ramp up in the absence of technological back up. I would start getting wary of the whole space. But if at all my favourite would still be Bajaj Auto.
Q: Will you be wary of just the two wheeler space or even other stocks like Maruti M&M, the entire auto sector because of the way its run up?
Malkani: That is also true. But the two-wheeler in particular has had a golden run. But it is largely fueled by lower interest rates which are no longer reality; another big 100 pound gorilla in the pack, that is Honda itself, not to be under estimated, we have seen what they have done in the scooter market. So, more competition, raw material prices surely going up rather fast. So, all that starting to board more than a little trouble in months and years to come.
Q: Banking space got cheered on Thursday post RBI's move to inject liquidity into the system, a lot of banks rallied quite a bit, but today many of them have succumbed back to profit booking. Is there a fundamental concern in the banking space that the investor should have for the next couple of quarters?
Malkani: I think the reaction is a bit over done, but to be fair it had been overdone on the upside also. Clearly, the interest rates and especially the short-run ones as we know are going up rather fast, you can see all kinds of activity happening in the short-term, sub one year, 18 month debt market, they are getting a lot more aggressive that itself as someone was telling me, it is like slow form of diabetes as it were for the entire economy and entire stock market for sure.
Banking sector, the net interest margins (NIMs) will start getting squeezed, whatever our bankers may say. Moreso the PSU pack, one has to watch that 10-year bond yield very closely and as that goes up and bond portfolios go for a bit of toss there is lot of concern of all that. But I would also say there is some amount of sector rotation happening, if the market is to stay reasonably buoyant, money is coming out from the banks. Lot of profits are being taken and getting back into resource stocks like ONGC, RIL etc and possibly in months and weeks to come the metal and commodity pack.
Q: You have liked MOIL. How are you seeing it now?
Malkani: I think the euphoria post listing was little overdone. Of course it is semi monopoly and it's a play on steel which is a buoyant sector etc. But all that was build into the price. I think around this Rs 450 is more than a fair price. The initial euphoria was again institutions that were left out etc, part of the portfolio. But it's certainly no Coal India, its not comparable.
Q: Sugar, last week there was lot of positive news, export quota going up by the government etc, is that a space you like, any specific stocks that you have earmarked for yourself?
Malkani: Sugar abroad is on an absolute tear. This afternoon raw sugar, which is more of a the barometer of the market, had cross 33 cents and was within kissing distance of its all time high which was reached in 2007 rise and whites had crossed that all time high of 810 or 815. More pertinently here, good news is that price ex-factory, UP has crossed Rs 30 per kg and in the South it's lower because they pay a lower cane price.
There is lots of good news; there is that ethanol price at Rs 27. There are some incentives that were given by some minister Mr Pawar the other day of 5 lakh tonne export, OGL there is relief on the levy sugar etc so overall lots of good news.
Shree Renuka Sugars is the one that I really plugged for because it's an international play, it's more a Brazilian company than an Indian company. They have round the year cane availability. I think that is the stock to really play out on this huge upsurge in international sugar prices.
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