The Hindu Business Line : Time to get into secular high-growth stocks’

Mr Nandan Chakraborty, Head of Research, Enam Financial Consultants, feels the market currently offers a very good switch opportunity. “Market valuations are not expensive any more. It’s time to get into secul ar high-growth stocks and get out of low-quality stocks,” says Mr Chakraborty.

According to him, investors should be ready to buy infrastructure and telecom stocks on a further downside. He expects that an eventual fall in the dollar versus the rupee would affect the margins of IT companies, though volumes will remai n strong.

Edited excerpts from CNBC-TV18’s exclusive interview with Mr Nandan Chakraborty:

Are you looking at this market phase as an opportunity or is there worse to come?

It’s a very good switch opportunity. I’ll explain. The effects of external/macro events are normally back-ended. Where it’s a domestic or a very specific event, the effect is usually front-ended.

You have the CDO (collateralised debt obligations) problem in the US and then the yen issue. Usually these are macro events that have back-ended effects. So, we are somewhere in the middle of those. The front-end has already passed and there’s still more slaughter to come in that sense.

On the other hand, the political scene in India will have a lot of front-ended effects. We are in a stage where we are in the beginning of the front-ended effect of one and the middle-ended effect of the other.

So where do we go from here? I really don’t want to comment on the political scene. . As far as the global scene is concerned, the thing to remember is that the fundamental problem of liquidity surge has not gone away, as there is an imbalance of fundamentals between the US and the East. Now to solve the problem in the US (which is a local problem actually), the US will be forced to increase its own liquidity and if you look at M3 growth in the US over the last four-fiveyears, today we are at the trough of the US monetary base and it is just rounding up. So, imagine what will happen when US liquidity adds to OPEC liquidity and Chinese and eastern liquidity and so on. So, the surge of liquidity will continue.

However, in the initial period, there is a flight to safety. So what happens is that the dollar goes up and the entire emerging markets pie shrinks. So there is a counter-trend to the main trend, which is why this is a very tricky period.

Now why do I say switch? There will be certain effects in this stage. One, the dollar sort of goes up because of a flight to safety. So IT stocks and export-related stocks may do better.

Second, value stocks which have fallen a lot and are more or less flat — the sub-10 PE sort of stocks. Neither are they going to fall too much further nor are they going to rise.

So what you must do is actually sell them and accumulate the money for high-quality growth stocks. Let us say the biggest companies in engineering, the biggest companies in telecom that are high-quality growth stocks and not that much affected by internal politics.

So, when these high-growth, high-quality stocks fall, those are the ones you should have the money to buy. I know this sounds a bit contrary. But this is what I recommend, which is why I said it is a good time to switch.

At this point, how comfortable are you with valuations for frontline telecom, engineering stocks? Is this a good time to buy them or would you wait a bit?

I would wait a bit. As far as engineering is concerned one must remember that , the Election Commission has this sort of arrangement with political parties that no new project announcements can be made in the last 12 months before elections.

That is why you will hear news of huge orders for a lot of engineering companies, if the elections were to happen in, say, mid to September 2009.

From now till August 2008, there will be a little bit of gap, but execution will continue. So, the EPS growth of engineering companies will continue, but fresh order flows do not happen at that stage as all of them get bunched up now. So the news flow in engineering will only increase from now onwards if the elections are to be held in 2008.

So, have adequate cash to buy telecom, engineering stocks as these are not related to politics in the longer-term. The type of infrastructure growth that we’ve had is unprecedented and phenomenal and it will last for the next seven years at least. So you will have outstanding opportunity to buy these for a secular run.

You spoke about selling some of the single-digit PE or low PE stocks, were you talking about metals primarily or other kind of stocks?

No, I’m not talking about specific sectors. Now metals are going to be volatile because of international reasons. There is the first stage, which is flight to safety, and then the second stage is to figure out the fundamentals, and so on. So, metals will be volatile and most metals are actually quite cheap right now.

Look at the kind of stocks you have in your portfolio and how much they’ve fallen or risen and you will find that some of the low PE stocks actually have remained more or less stable. So, just check out what you have in your portfolio and make a call on individual-stock basis.

How do you approach technology stocks now? The entire space has seen a fair amount of correction ever since they declared their first quarter results.

I think technology on a secular basis will be an uphill climb because of the exchange rate. On volume growth there is not too much to worry about but the margin growth is a problem. So, I would recommend not to be overexposed to IT.

What about banks as there are low and high PE stocks in both the private and public sectors?

The next two-threemonths is a good time to accumulate secular plays such as banking, engineering. But then, one must make a call on specific days, just see how it all pans out because you have a combination of one front-ended effect, which is local politics, and a middle-ended effect, which is the global scene. So, don’t rush into or buy stocks because the market starts going up suddenly one day. Wait a little while.

What would you do with the most volatile of the lot, such as the entire real-estate space?

In real-estate there are niche players that have a different business model from the rest of the realty companies.

Look out for those that have business models which are different from the rest of the realty universe. Those are the ones to get into.

Essentially what you seem to be saying now is look to buy but don’t buy everything just yet because there could be some more downside. How much more downside do you think there could be to this market? Do you expect 5-7 per cent more?

On a valuation basis, we are not expensive anymore. I was on a road show in the US, three weeks ago, before this entire crash. The general consensus of the long-only funds was that India has a great future and it is a safe haven compared to the rest of the world.

On the other hand, some of the short-term players were getting out of India at that time because of relative valuations. Now that stance would have switched and people would eventually find India to be relatively far safer than the rest of the world. But that will take some time. It is safer because of our relative fundamentals as well as on a valuation basis.

So I would say, wait a while and get into secular, high-growth stocks as they crack out. But then, as you need the money to buy such stocks, get out of stocks that are low in quality.

More Stories on : Interview | Stock Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page