Your house has traditionally been very renowned for picking great multibaggers — broader market stocks which do phenomenally well over cycles and especially in a bull market. How are you analysing the broader market universe right now?
The broader markets have become hostage to several events which possibly are a little beyond our control. There has been an overwhelming flow of FII money and it has come in with ferocity. The markets have given thumbs up to that and possibly have gone up in line with that. That itself is going to cause a lot of movements in the market. Everybody is extrapolating that this kind of money flow possibly will continue for some time to come and I think that is being a little too optimistic.
Also, the low interest rates have been taken for granted, based on the assurance from the US Fed. But the way the commodity cycle is getting overheated, inflation is bound to disrupt this party and that also is not being factored in at the moment. That will cause a lot of volatility in the market. We will probably be seeing extreme movements and in the near term, markets can correct slightly as the intensity of the FII flows will arrest any major correction in the market.
Markets can give very modest returns over the next one year or so. It will depend on how this fiscal deficit plays out and how much of that will lead to a strong GDP growth for next two to three years. That is also going to be the moot point in the entire analysis. It is going to be a pick-and-choose market. Of course, there is going to be some themes also but markets are going to move broadly on a selective basis.
What is your stand on PSUs?
PSU as a theme has been more event-based rather than purely on the fundamentals. It is very difficult to get the same kind of confidence that you get in the private sector and more so because the disinvestment threat will always remain unless the disinvestment becomes a strategic disinvestment and that is where the entire PSU sector has started buzzing, speculating on the privatisation candidates.
Having said that, within the PSU pack, SBI without any doubt looks the pick of the lot. BEL, which always has posted a very decent performance looks good. Dredging Corporation looks pretty good in the medium term. It is difficult to sustain these stocks on a longer term basis unless there is a very clear cut visibility in terms of what the government intends to do with them.
What is your stand on the larger PSU banks – SBI, BoB, Canara Bank? Some of the big marquee investors seem to have accumulated these stocks and funds are active in them or even in the smaller the lesser quality ones. Does it make sense to look there for value?
We have always seen that when there is an economic recovery, bad loans start becoming something which possibly were written off in the books. They start coming into the books and the recovery improves. This theme played out very well between 2001 and 2004 and that is when we saw a golden period of the PSU banks. Most of the analysts in the market on a macro basis expect that. A sustainable economic recovery is also under way at the moment and that possibly could get reflected in the recovery of the bad loans of most of the banks and most of the PSBs because that is where the problems were.
Based on that theme, the PSU banks certainly look reasonably good. But it is better to stay with some of the front line PSU banks like SBI and maybe Bank of Baroda. PNB also will look good and Canara Bank also may come. But it is best to play with the top bank which is SBI.
I understand Prabhudas Lilladher recently conducted a conference of mid-sized NBFCs — a BFSI conference. Any company or any commentary from any of the management over there which stands out for you?
Post the IL&FS fiasco, the confidence in NBFCs had considerably diminished and the main concern for everyone was the source of funding and commercial papers which was once a short-term measure that was being used very grossly by NBFCs to fund even their long-term assets. All those mismatches in terms of the cash flows all came to the fore and a lot of liquidity issues also had come up in the last one-and-a-half years.
The confidence that is coming into the economy is going to percolate down to the NBFCs also. NBFCs have a very robust system whereby their last mile connection and their flexibility to structure deals as per the consumer requirements is better than that of any banks and also the PSU banks. All this put together, we are seeing an increased interest in some of these NBFCs and more so the mid-sized ones and in a micro finance.
Overall, on a selective basis, midcap banks will possibly look good and not just NBFCs, Even something like IDFC First will possibly look interesting even from the current levels. So mid-sized NBFCs and banks possibly are attracting attention for these reasons.
What are your thoughts on the metal rally? Do you see more juice in these stocks?
One has to consider the kind of stimulus that has been given, not to forget that 20% of the entire dollar currency was printed last year itself. This kind of money printing has been done not only by the US alone. Most of the governments have done that, especially the European governments and even the Japanese and Chinese. A super commodity cycle is playing out and I do not think that it will get away in a hurry.
This commodity cycle is going to be much more bullish and we will see commodities rallying even from the current level. This is not to say it will go one way. Today, a part of stainless steel futures is down in China and a lot will also depend upon economic recovery. But by and large, this kind of money which is there in the market is chasing all kinds of assets, commodities included.
So taking that into account, the commodity cycle looks pretty good, especially the metal space and more so steel and copper. Both these commodities possibly will play out very well in the current year and possibly even next year. I can see a one, one-and-a-half-year rally in commodities. Now how much of that is getting priced in already is very difficult to say because the prices have shot up quite a bit in a very short term.
In my opinion, though some of the stocks have run up quite a bit, they still hold a good potential in the long run. Jindal Steel, JSW Steel, SAIL and even Tata Steel hold good potential and the entire steel pack possibly will see a good run on an overall basis.
Copper is another commodity that can play out in a very big way and a part of the bullishness is already reflected in their prices. It would continue for the next eight to 12 months.
