The Hindu Business Line : ‘No visible signs of derailment in growth’

Mr Sanjay Sinha, CIO, SBI Mutual feels that it may be difficult to identify undervalued stocks in the present market conditions. In an interview with moneycontrol, Mr Sinha also shares his views on a few sectors and discus ses the contrarian strategies adopted by some of the funds from the SBI house.

Excerpts from the interview:

How do you map the markets from here till the end of January 2008?

The markets may have to be seen from the perspective of the three factors — liquidity, valuations and events. In terms of liquidity, I think we now have a situation where the foreign institutional flow and the domestic flow to the markets are evenly poised and opt for different directions.

In the month of November, we saw FIIs being negative and for the month of December, even though they appear to be net positive in the cash market, one should see that number in conjunction with the incremental figures in the F&O segment. The combination of FII participation in spot and the futures is actually negative for the month of December also. So this means that we have largely been seeing the positive flow arising from domestic participation in the market.

In terms of valuations, if I have to look at the scenario from now to the next few months and not necessarily limited to January, I think three things that you need to look at would be growth, interest rate scenario and whether there are pockets of valuations available in the market. In terms of growth I think we are on track, there are no visible factors that can derail growth.

In terms of interest rates, I think have a scenario where rates have now more or less plateaued. Incidentally, after a long time, we have now seen the Reserve Bank of India engaging in open market operations to probably infuse liquidity.

I think this indicates that between now and the end of January, when they will come out with their policy, there should not be any significant policy move as far as the interest rates are concerned.

In terms of pockets of valuation, I think in today’s market where India stands, it would be very difficult for anybody to find undervalued stocks except probably in the oil and gas sector. We all know that it has been attractively valued but out of favour because of the government regulatory overhang.

In terms of events, I think the big event was the Fed meet and that’s over. The next Fed meet is at the end of January. So between now and then, I think what is going to drive, in terms of event, would be politics, both national as well as global. I think nothing negative is likely on the political front.

What are the pockets of value in the oil and gas space?

The gas and the allied sector is more a play on growth and the opportunity is very visible now. We are very close to the point where the available gas reserves will now be transported. So there is scope for execution and translating that into revenue streams for the gas companies.

In the case of the oil refining and marketing companies, if you look at the total market cap of these companies in relation to the size of assets which they own, they are definitely attractively valued. However, as long as the regulatory overhang does not clear, the companies will not be able to unlock the value.

We’ve seen a comeback in the last couple of days in pharma stocks in the mid-cap space. You are not very convinced about pharmaceuticals as a leading space, are you?

Yes, in fact our call has been that generics as a driver for the pharmaceutical sector has ceased to be a factor that you would look at as an opportunity. The opportunity would mostly lie in the CRAM space. One will actually find that most of the mid-cap companies in the pharmaceutical sector actually participate in the CRAM space.

The second thing that is also true is that in the rally that we’ve seen in the current calendar year, and also in most of last year, pharmaceutical stocks have actually not performed at all. There have been some developments in the company that have been value accretive and directed towards higher growth there. So stock-specific play within the pharmaceutical sector may make a comeback now, driven more by the fact that the sector has not so far participated in the market.

In two of your funds, in your contra fund and your commodity fund, what would you be buying right now?

In the contra fund, we are overweight on the ferrous space and have actually increased our position in the last couple of months. We have taken a view that over the next 12 months, metals as a sector will be attractive. We have an exposure to the financial services space and that’s where we continue to hold our position in the contra fund.

We believe that as far as the IT sector is concerned, there is reason to probably be a little cautious in terms of how this sector will pan out, given the rupee appreciation. We believe that if the US economy is actually going to slip, from a low-growth scenario to a recession scenario, then the dollar may become weak. But if that does not happen, then I think this is the time to start raising exposure to the IT sector, which is precisely what we have done in the contra fund. Rather than become aggressive and pick up IT in a big way, we have initiated a modest exposure to the IT space in a contra fund.

In addition to that, we have also now, in both the commodity fund and the contra fund, initiated exposure to the fertiliser and chemical space.

Here, as you would know, the market-cap is not very large. Yet, it gives you some exposure to that space and that is one of the new sectors that we have moved into in the contra fund.