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In an interview to CNBC-TV18, Vikas Pershad of Veda Investments said that financials are likely to continue outperforming in 2011.
His preferred sectors in 2011 are consumers and infra. Pershad is underweight on real estate and utilities. He advises to stay focus on Bharti Airtel and avoid Reliance Communication.
Pershad’s multibagger idea for 2011 is Jai Balaji Industries as it is expected to give 40-50% return from current levels. He is also long on Sterlite Industries.
“Indian commodities stocks not appealing compared to global companies,” he elaborated.
Q: What is your outlook for 2011 - will the Indian markets give better returns than they did in 2010 or will even a 15% be a tall task?
A: Starting with India and going more globally, I would be surprised if we saw the returns in 2011 being much higher than 15-20% that we saw this year. There are certain sectors that will outperform. If you look at the banking index that is up around 30% this year, while the major indices are up somewhere between 17-20%, the outperformance should continue though the magnitude might not.
There are pockets of continued strength and growth within India coming from the Indian consumer, especially on the rural side. Banks will continue to grow, the auto sector will continue to grow but overall, the India story has now been discovered. A lot of FII flows came into India, especially in Q3 of this year. I would be surprised if those continued.
I am buying more in North America, Japan and in Western Europe than I have in India. Part of it is the valuation reason. Also, the level of risk appetite for India has declined somewhat relative to where it was three-four months ago. I think the Indian economy is on track to grow, the Indian growth story remains intact but it would be unfair to expect returns in excess of what we saw this year.
Q: One school of thought is that the underperformers of 2010 will probably stage some sort of a comeback in 2011. Would you bet on underperforming sector stocks like infrastructure, telecom or the odd Punj Lloyd or Aban Offshore?
A: I tend not to take that view that underperformers in one year are likely to outperform in another year. It is very company specific. Among some of the companies that you mentioned Punj Lloyd - I have never liked that stock or I have never been comfortable with the fundamentals of that company.
Reliance Infrastructure has not really done their work so I am wary of that name. Perhaps, if you are going to be in the telecom sector, focus on companies that are very well run and that have very competent management team. The name everybody talks about is Bharti.
I would stay away from Reliance Communications; I just don’t think there is considerable upside with Rcomm. Now, in the short-term, you can see that company go up 10-15%. If you look at Rcomm in May, the stock was around Rs 135-140-150, close to where it is now and it had a nice run up. At the time I was covering my short. But again at this price, I don’t get very excited about the telecom sector, so its very stock specific.
There is no need to be in every sector in India with so many listed companies with such high growth potential. Be careful, be selective as there is plenty of value out there.
Q: Then tell us how one should be selective in this market? Give us one multibagger idea for 2011?
A: On the coal side I like Jai Balaji Group. I spent time with the management team, spent time on that sector and that’s one that could appreciate significantly in the coming year.
Q: What is your target price for Jai Balaji and what are the reasons that you favor the stock?
A: My interest in the company is based on the assets that they have. Coal India was a big IPO, made a lot of money on the first day. I don’t see significant price appreciation from hereon. When I look at a company, especially in the midcap side, I look for multiple ways to win. The valuation is decent and the assets that they have are good.
The management team is competent and they are in the sector that I like. Coal demand is going to grow faster than it has in recent years and the potential upside even from these prices is north of 40-50% over the next nine-12 months. That is the kind of upside I look for in midcap companies and that’s what I find here.
Q: Which stocks will you bet on in the commodity space?
A: Even though I know it is not a very exciting pick for many, I am long Sterlite. The ADR from a little over USD 14 just a few weeks ago it is now approaching USD 17. I remain confident holding that at this price. I am hedged quite tightly with options on that one. I know the sector has underperformed this year but for the most part I am long commodities in Western Europe and the US, not so much in India.
Though there is value across India, with the ability to invest in different markets around the world long and short. Fortunately, I have the flexibility to invest in sectors in the countries where the best value is present. In India, the value is in the Indian banking sector which I don’t see anywhere else in the world. The value I see on the consumer side I see no where in the world except perhaps Latin America.
Those are the sectors where the investors should focus. The Indian commodity names are just not as appealing as the listed commodity names in North America, Australia and Canada. Valuation wise, if you look at the management team, if you look at the corporate governance and the transparency, I get little less comfort in investing in those names in India.
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