Indian equity market is undervalued: Sunil Jain
Sunil Jain, Vice President (equity research), Nirmal Bang Securities spoke to Puneet Wadhwa on FIIs and outlook on various sectors.
Do you think India is still an attractive investment destination compared to other emerging markets given its set of macro-economic problems?
India is definitely an attractive destination for equity investment. The basic fundamentals of our economy are intact. The problems relating to high fiscal deficit, high inflation, crude oil prices and lower international demand are related to financial turmoil in developed nations in some way or the other. The only internal problem, which I can see, is the slow decision making process of the government and lower growth in agriculture production over the years. If the correct policy frame works are put in place, the investments will follow. Indian equity market is undervalued as compared to its historical valuations and there is a reasonable growth expectation as well. If we do not see any major turmoil from the international market, specifically Europe, the Nifty may appreciate 10 per cent by the FY13-end. Tracking this growth, we feel the foreign funds are also likely to be positive in the remaining year.
Foreign institutional investors (FIIs) have invested around Rs 8,092 crore in the first 17 days of July, data suggests. This is a lot of money to get absorbed by a bunch of stocks even if we consider the selling by the DIIs. So, where is this money going since the index hasn't moved much?
Part of the money invested is going in to arbitrage, which is visible from Stock Future sales of over Rs 3000 crore in July. The FIIs are gaining on two counts: first rate difference between Stock and future and second is the appreciation of rupee. And balance purchase is defiantly a fresh investment with positive view on Indian economy. We are not able to see the impact of the same mainly on account of corresponding sale by the DII.
What are you advising your clients at the current juncture? If you had to recommend a portfolio strategy, how much exposure would you recommend to equities?
We are advising our clients to be stock specific and invest in high performing quality stocks with reasonable valuation. In a portfolio of investable fund, one should have investment in equity varying from 30 – 60 per cent depending on the risk profile and need of the investor.
Which sectors / companies which would you advocate most exposure to given the road ahead for the economy and the valuations these stocks are available at?
Instead of sectors, we would be more stock specific. In financial sector we recommend ICICI Bank, IndusInd Bank, LIC Housing Finance, Development Credit Bank, Bajaj Finance. Glenmark Pharma, Alembic Pharma and Cadila Healthcare in the pharma space; in the IT sector, we recommend Infosys and Hexaware Larsen and Tubro and Reliance Infra in the infrastructure pack. Invest in these stocks from a year’s perspective.
But the infrastructure space is still grappling with a whole lot of problems?
More than the interest rate, I feel problem for infrastructure and power sectors are lack of policy supporting fresh investments. If there is a clear policy on land acquisition, fuel supply and power purchase, then power sector which has a huge supply shortage, can easily become an attractive investment destination. Other infrastructure sectors like port, railway, logistic, irrigation, urban infra all need proper policy support to revive their business.
What is your interpretation of the recent statement by RIL regarding the KG-D6 field? Should one stay away from RIL, power and fertiliser sector stocks for the next few years?
It is more of a pressure tactic to insist government to take decision. We feel the dependent sectors like fertiliser and power, which are getting gas from KG-D6 block are already feeling the heat and are likely to continue to suffer in near term. The government will take appropriate stapes to revive the production of the field.
We have seen two opposite ends of a pole when it comes to the June quarter results of information technology (IT) heavyweights. Do you think that it was about time that the second-rung companies like Tech Mahindra, MindTree etc took over the baton?
We feel that the underperformance of Infosys result is on account of business transformation process which the company is going through to focus more on high-end work. Once this process gets over, Infosys will emerge stronger and will again start performing which will give good returns. Overall, the environment for IT companies continues to remain challenging. Mindtree has definitely shown good performance in recent past and is likely to outperform the overall IT sector.
HDFC Bank impressed yet again with its numbers? Do you expect the other frontline private sector banks to report a similar performance? What is the road ahead for the banking sector?
The biggest problem for banking sector continues to be its asset quality. And up till now we were not seeing peak out of non-performing assets (NPAs) or restructuring of loan. Going ahead, if the monsoons disappoint, we may see a rise in the agri sector NPAs. ICICI Bank, IndusInd Bank, Development Credit Bank and ING Vysya Bank look comparatively better placed on assets quality and growth. We are cautious on the PSUs.