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India outperforms, but nervousness still exists: PN Vijay
September, 06th 2011

According to PN Vijay, portfolio manager, there is a need to feel nervous about the current market scenario. We have virtual capitulation in Europe. For conservative indices like the CAC and DAX to fall without a bottom is very serious he said in an exclusive interview to CNBC-TV18. However, he believes that the Indian market is holding on strongly. In the last 10 days, we have out performed global markets, but the nervousness is there he added.

Vijay goes on to say that he is feeling positive about the global delinking that emerging markets are experiencing from developed markets. The correlation between India and developed markets is now down to 0.3 in 2011 he said. However, he adds that if developed economies go into recession, global markets will stall.

For the month, Vijay is looking forward to big events in the global and domestic scenario which will shape the course of the market.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: What are your thoughts on the Land Acquisition Bill, the shape its been put forward and what impact do you see on real estate or infrastructure companies?

A: The Land Acquisition Bill is quite a thing in the sense its increasing the compensation to be paid to farmers and others manifold, apart from the multiplier which is given in the Act itself.

My sense is it will not be passed in the present form. It might have some radical changes in the numbers at least, if not the extent. If it comes through in the present form, it will immediately make real estate prices go up pretty substantially. Land costs are a very high percentage of real estate development in urban areas and that costs will have to be passed on by the real estate developers. One study which I saw said that we could probably get a 20-25% increase in the cost of apartments and flats in major cities if this were to become law.

Q: The bill did also talk about how the government would step in when it was towards a public purpose such as infrastructure. Are you clear about what the implications are for infrastructure companies that have suffered quite a bit with regards to environmental clearances over the past two years?

A: Public purpose doesnt interfere with environmental laws. This public purpose law is there in most advanced countries. In fact, Eisenhower passed the law in the mid-50s in the US and that led to the huge boom of highways which changed the pattern of US life.

We have been crying for a public purpose clause because important highways, power projects and metro projects are held up by one or two litigants who sit on the property, go to court and then finally sell it at a huge price. Now with this much more efficient, much better drafted public purpose clause, that would go through and that would surely reduce the time of implementation of a highway or a logistics or a freight corridor project because my sense is if this projects take about four years or so, two years is spent in just clearing the place for work to start, so that will come down dramatically.

Q: How are you feeling about the market and the kind of gains it has tried to make for itself over the last few days?

A: I am pretty nervous about this market because for once it looks as if the chartists are bit more bullish than the fundamental analysts. The reason is there has been virtual capitulation in Europe. What we saw yesterday in Europe was absolute capitulation; for conservative indices like the CAC and DAX to fall without a bottom is very serious. It looks like the developed markets have factored in a recession scenario.

However, India is standing up very bravely and very smartly. In the last 10 days, we have out performed global markets, but the nervousness is there. I will give one interesting statistic - the correlation between India and developed markets is now down to 0.3 in 2011. Emerging markets overall to developed markets down to 0.4 from 0.85 levels in 2010. So there is delinking which has taken place right in front of us that is a positive. But on the other hand, if the developed economies which still represent a big market go into a recession, then the markets are not going anywhere.

So there are three important data points to look for. One is Obamas speech to both houses of Congress on Thursday. Then you have follow-up on the Merkel-Sarkozy summit later on in September, and Ben Bernankes big event in the end of September for a possible QE3. So these are three data points which one hopes would change sentiment and growth paradigm in the developed markets. We also have from our side our own credit policy. So, very big fundamental events are coming up which have potential to change the course of things. But as of now, one is feeling quite nervous.

Q: We were just talking about Reliance . Fundamentally how would you approach that stock?

A: Fundamentally, the situation has improved significantly for Reliance in the last three months. The big thing of course is the cabinet approving the BP joint venture. BP has said that theyll be able to bring back the KG 6 output to very good levels in the next two-three years. So at this is length, there is a very strong fundamental bottom to the stock.

Another thing is shale gas. I think Reliance has been the first to see shale gas exploitation opportunities globally. Its been a hard grind for them because shale is very difficult to explore unlike other types of basal gases. But I think their success is there and its contributing quite a lot to the gas production in 2011-12 and succeeding years. So I think the difficult days for Reliance are over. Market is sensing that and so I think Reliance would be a pretty good out performer in the next 24 months.

Q: What about ONGC ? That stock has come down all the way to Rs 255. What is the buzz in Delhi about the FPO price?

A: I dont know about the price, but there is more confidence that the FPO will go through and to some extent, that confidence is leading to a bit of a sell off on the stock. Savvy people are realizing that after what happened in Coal India, if the government gets its pricing right, it can be a winner.

So we might get some very attractive pricing on ONGC and at that time the government may have to make some long term commitments on the subsidy, which is not bad for you and me. So I think my own sense is that we would get a discount of about 20% on the ONGC issue and that has the potential to reward the moribund IPO-FPO market.

Q: We saw some bounce yesterday in many of the construction companies like IVRCL and Nagarjuna . Do you think these are dead cat bounces or do you think it would be a sensible trade to try and find out some value out here?

A: What we saw yesterday was value buying probably triggered by what we talked about just now that is the new Land Acquisition Bill. The Bill will reduce the delays in execution and to some extent, the growing feeling that industry pressure on government may work and there could be a pause in interest rates. So on both these big black cats for infrastructure, project execution and interest rate, the view is a bit more optimistic. So people are trying to average out their loss positions on the likes of IVRCL and Nagarjuna Construction.

Also interestingly there is a point that a technical chartist friend of mine made that Reliance has a very major correlation to the small cap index. So whenever you see Reliance bouncing, you will see the small cap index bouncing because the same type of people buy Reliance and also small cap. So probably it is long awaited entry of retailers into the market.

Q: How would you approach technology; not just the top four guys but the ones outside the index, the mid cap lot?

A: One is not so sure about midcap IT at all. Any pressure on margins and pressure on contracts, the resilience of these guys is pretty suspect; an odd Hexaware maybe an exception.

I am not that negative about IT as the market is. There is readjustment of portfolios and the IT stocks were over owned and Reliance was under owned and that readjustment is contributing. But whatever indicators you see, we had a data point saying that 2.5 lakh people are going to be hired by the industry in the coming year, which is about 20% more than the 2 lakh they were hiring. These numbers are very impressive. Even looking and talking to campus people, IT people have slotted themselves above the consumer goods people.

This shows that the IT industry at least internally is not that pessimistic about US growth, about US service sector growth, about US manufacturing growth, their costs, and their bench as analysts are. But who knows what lies ahead. So I am cautiously optimistic about the IT majors.

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