Sandip Sabharwal, CEO – PMS, Prabhudas Lilladher Group talk s to Puneet Wadhwa on the outlook for the markets, expectations from the June 2012 quarter results of India Inc and how should one re-balance their portolio given all this. Edited excerpts:


The markets have not been able to sustain at higher levels given the weak domestic and global cues. What has been your investment strategy in such a scenario? Are you sitting on cash, or have you deployed aggressively towards defensives?

Stock markets continue to trade at cheap valuations and with India being the biggest beneficiary of commodity price correction, the downside risks have reduced further. The only risk at this stage is a continuation of the risk-off trade for some more time that can possibly keep prices subdued. However, positive policy action from the government at this stage could lead to a huge out-performance coming through from India due to its low external linkages.

We are fully invested at this stage with overweight position on private sector banks, non-banking finance companies (NBFCs) and on selective capital goods companies. In my view, defensives are hugely overpriced at this stage and do not offer much value to investors.

What would be your advice to a new investor given the current economic condition? Should one allocate more towards debt now, or can one look at equity? Which sectors, according to you, still offer some value from a medium-term perspective?

I believe that the downward move that started in early 2008 is now on the verge of coming to an end. Valuations are attractive, profitability pressures are reducing and we are at the peak of the interest rate cycle. Under these circumstances, long-term investors in equities at this stage should be able to make returns that are significantly higher than the long-term average over the next three – four years. Sectors like financials, capital goods, and selective auto companies offer value in the large-cap segment.

The BSE Mid-cap index has given a return of nearly 18% in the first half of 2012 (H1CY12), as compared to a 12% rise in the Sensex. Do you think that this outperformance will continue in H2CY12 also? Why / why not?

The out-performance is likely to continue given the fact that the valuations of mid-caps are at a record discount to the large-caps. The downside risk to a majority of the mid-cap companies has reduced significantly as margin & interest rate pressures have peaked.

Are there any sectors / themes that you would like to highlight where the current valuations and the outlook seem attractive?

In the mid-caps space, I am positive on airlines (except Kingfisher), as I believe that given the woes of Air India and Kingfisher, capacity addition will be constrained over the next two years and will be positive for the rest of the industry.

Besides this, as a theme, the digitisation of television signals offers a strong investment thesis across the broadcasting and access provider universe. There is an opportunity for labour intensive industries like textiles and leather to take advantage of the rupee fall versus the Chinese Yuan and make an impact in some of these segments.

What are your expectations from the upcoming results season? Do you think that the markets have factored in the worst? Are there any specific companies that can disappoint given the margin pressures and how the rupee has panned out?

The results season should be a subdued one with broad expectations of a 10% growth in earnings. Markets seem to have already factored in the slowdown and expectations are running low. There is unlikely to be significant margin pressure due to the rupee fall as global commodities have fallen more than the fall in the rupee. The companies that have not followed proper hedging policies might be hit on this front.

So, how should one play the commodity space, especially precious metals?

I believe that the precious metals space is the most over-owned space globally. Fear has driven people to gold and other precious metals. In a deflationary scenario, it is difficult to see how these metal prices are going to hold up. Actual consumption has collapsed and the prices have just been supported by investment demand. As such, I expect a significant correction in precious metals and we could be trading more near the peak of the cycle in these commodities.