One has to differentiate themes in infrastructure sector

Suresh Parthasarathy | Updated on February 14, 2011

Mr Akshay Gupta, MD & CEO, Peerless Fund Management Company

Blue-chip IT and non-luxury consumer goods are sectors to place one's bet, says Mr Akshay Gupta, MD & CEO, Peerless Fund Management Company. In an interview with Business Line, Mr Gupta discusses the adverse impact of interest rate hike on certain sectors and how the recent correction offers opportunities to buy in to certain blue chips.

Excerpts from the interview:

Fund managers were bullish about infrastructure stocks even six months ago. In the past two months stocks in the sector corrected steeply despite not participating in the rally. What went wrong with the sector?

Infrastructure as a term is being very broadly used. One has to differentiate between themes such as real estate, power, road, port, power distribution and equipment manufacturers.

My guess is that the high interest rate will impact the sector on the whole. Everyone knows that real estate stocks will get impacted by high interest rate. Stocks in the sector can at best move up by 5-10 per cent. On the contrary, the power deficit will ensure that companies falling under this category perform well. Power and power equipments will be good bets.

Similarly, in the road segment, those companies depending on government for projects will be affected because of political issues, payment delays and scams. But at the same time we are bullish on some of the port stocks.

With headwinds such as higher input costs and hike in interest rate, what is your outlook for the auto sector?

We have always been bullish on the two-wheeler segment, which will continue to drive the auto sector. But the only concern was valuation; price earning multiples of leading players were 25-26 times. We were waiting for a correction and it has happened. Some blue-chip stocks have already corrected 20-25 per cent from their peaks. We were waiting for the correction to reinvest only in two-wheeler stocks and we are not bullish on four-wheelers due to premium valuation.

The advantage in the two-wheeler segment is that fuel consumption and interest escalation will not hit them as hard as it will hit four-wheeler segment. Commercial vehicles will also be affected as the interest rates are fairly high in this segment.The tractor segment will also be affected because of the interest rate are fairly high for the commercial vehicles unless its not give for the priority sector. With further hike being expected, lending rates can only be adverse for this sector.

Will improved sentiments in the US and rupee depreciation benefit the IT sector?

IT stocks have seen correction were happening only in the last two weeks. They were rallying despite the concern on the economy and the scams. The results of blue-chip IT companies were good although mid and small companies' results continue to languish . The correction in IT stocks could be probably due to basket selling by FIIs. If they pull out the money they sell all the stocks in the basket thereby impacting the frontline stocks. If they have 8 per cent exposure to Nifty and reduce the weight to say 5 per cent, it will impact all the stocks in the Nifty basket.

I am bullish on top line IT stocks although they are not cheap by any stretch of imagination. The reason is that I still think that the anticipated growth of two per cent in the developed market will help the IT stocks. We have seen that developed markets have the ability to beat the forecast; if US grows by three per cent it will immensely help IT stocks.Indian IT companies face lesser competition from other countries compared with what sectors such as auto face. So I am bullish on top line stocks and few mid caps.

FMCG stocks are considered bets in uncertain times and inflationary period. But why have some of the frontline stocks in this segment corrected despite reasonable results?

I think the correction was required. The top two companies that are virtual monopolies are valued very high. Their sales and bottom line were growing at 15-20 per cent and it's in line with the market but the stocks have gone up by 70 per cent. So obviously correction had to happen at some point in time. I think non-luxury consumer players will continue to perform. Over next three years consumerism will grow with the growing middle class.

Published on February 14, 2011

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