Thursday, November 29, 2007

Home Loans.

Home loan disbursements may slow down in 2008


The slowdown in home loan growth would continue in 2007-08, with disbursements expected to grow at only 10 per cent, on the back of a subdued 18 per cent growth in 2006-07.

Besides, the present home loan non-performing asset (NPA) figures of banks understate the extent of delinquency in the sector as loans given in the last three years, which form 71 per cent of the total outstanding home loans, are yet to season, according to a Crisil Research report on mortgage finance.

Mortgage finance by banks and housing finance companies grew 35 per cent on a compounded basis during 2000-01 to 2005-06 to Rs 86,500 crore, boosted by low interest rates and a booming economy.

However, a sustained rise in property prices during 2004-06 along with rising interest rates resulted in a significant slowdown in disbursements in 2006-07, which grew by only 18 per cent year-on-year.

"Considering the current interest rate environment and factoring in possible salary increments for a borrower, we expect disbursements to slow down further to around 10 per cent in 2007-08," said the report.

In 2006-07, the proportion of monthly income being paid out as home loan instalments grew to more than 50 per cent for an average home buyer from around 32 per cent in 2003-04. Property prices needed to decline by at least 15-20 per cent for the affordability of a home loan borrower to improve, said Crisil.

The asset quality of the housing finance portfolio is likely to slide somewhat from the present levels. The number of borrowers considered "riskiest" by the lender, having loans with a maturity of more than 15 years and paying more than 50 per cent of their monthly income as EMIs had increased to 7-8 per cent at the end of March 2006, from 4-5 per cent two years earlier.

The average loan-to-value (LTV) ratio on the total outstanding loans has also gone up to 75 per cent at the end of March 2007 from around 70 per cent as on March 31, 2004.

"This is expected to increase further as the portfolio grows and older loans, contracted at lower LTV, mature. However, loans financed prior to 2006-07 have seen a drop in effective LTV due to rise in property prices. Crisil sees adequate cushion built into the housing portfolios in terms of effective LTVs being higher than documented LTVs," said the report.

The total home loan portfolio at the end of 2006-07 mainly comprised the last three years' disbursements as a majority of the loans taken prior to these periods have been paid off.

"This means we are yet to see the seasoning impact on the portfolio; therefore, we believe that the current figures understate the extent of delinquency in the sector," said the report.

Loans disbursed in the last one year at higher property prices and higher LTVs could see defaults with a substantial fall in the market value of such property. The borrower may have no incentive to repay the loan with the loan principal outstanding surpassing the new property value.

There could also be a risk of default if the rise in EMIs outstrips the growth in salaries. For a 400 basis point increase in interest rates, EMIs on 15-20 year loans taken in 2003-04 would have to go up by 10-26 per cent to fully absorb the impact of hike in interest rates.

"Salaries have risen by 13-14 per cent per annum over the last couple of years due to strong economic conditions. This pace of growth suggests that the temporary mismatch between increase in EMIs and salary increments might get corrected if the interest rate regime stays benign," said the report.

Lenders would have to place greater emphasis on appraisal standards, monitoring and collection systems to check any incipient deterioration in the credit quality of their home loan portfolios.

Saturday, November 10, 2007

Kilitch Drugs.

Kilitch Drugs can double from current level: Irani

Mehraboon Irani, Centrum Broking is of the view that Kilitch Drugs can double from current level.

Irani told CNBC-TV18, "I like Kilitch Drugs because of the new unit, which the company has set up at Himachal Pradesh, which started operations in January and if you look at the numbers over the last two quarters the sharp increase in sales and profit is mainly because of this. Not only contributed in turnover but whole lot of excise benefit and other tax benefit the company gets because of its unit at Himachal Pradesh is very important."

He further added, "The company is presently operating at the new unit at around 25-30% capacity and as the capacity grows the numbers also topline as well as the bottomline should grow. The company presently has equity of around Rs 13.2 crore, promoters own around 70% of that. For the current year, for the first six months the net profit of Rs 5.2 crore I expect to be around Rs 14.5 to 15 crore, which should possibly be more than double when the company operates at nearly 100% capacity and I am looking at the net profit of around Rs 20-30 crore, which gives it an earnings of around Rs 23 to 24 per share for 2008-09. So I think even if we give it a very conservative PE multiple the share should atleast minimum double from here and this would be my script for Diwali."

Disclosures: Analyst holds the above stock.

Market Outlook By Rakesh Jhunjhunwala.

Market Outlook By Rakesh Jhunjhunwala


Trader and investor Rakesh Jhunjhunwala said the space and speed of the rally has surprised everyone. He is a bit circumspect at these levels because credit conditions in America are not very good and Asian markets are deteriorating at a fast speed.

Excerpts from CNBC-TV18's exclusive interview with Rakesh Jhunjhunwala:

Q: Last year, you were telling everybody that 15% is great and that we should not expect 50% every year. We have done that again. Are you a bit surprised?

A: I would say I am surprised to some extent by at least the gain of the last one-month. The space and speed has surprised all of us.

Q: Do you think we can do an on core, third time lucky with 50% again or is that being too optimistic?

A: It is time to reflect, we have had a rise from 3,000 to 19,000-20,000. I do not think economic conditions in America are very good. Asian markets there are deteriorating at a fast speed. It is an economy, which is drunk on credit. The credit markets are value effected, so I will not be circumspect at these levels.

We have had such a humongous gain from 3,000 to 19,000-20,000. I think markets are going to consolidate around these levels and would feel more comfortable as an investor.

Q: Would you be cautious here or do you see much higher levels even next year on this base?

A: What makes me uncomfortable is the divergence in valuations. You cannot have Infosys making a 52-week low as their earnings have not come down and they are still growing 15-20%. It is one of India’s best performing investments in time to come. You cannot sustain this kind of divergence in valuations, where you keep giving value to momentum, and you lose all value to value. That would be the first sign of an indication, may be it could happen in a week, ten days, or maybe we are in it. May be it could not happen in the next three months and we could go 20% higher, but I think this is the first indication and we have to be very cautious in this market.

Q: When you say you are cautious, are you cautious because of the excesses that have happened? Is it why you are calling for a correction or have you in the medium-term too become circumspect?

A: There are two-three things internationally especially in America where we are facing large uncertainty. We don’t know how this uncertainty will pan out, what value will the dollar lose, and what disorder it can cause to financial markets. I am extremely bearish on US financial markets and think the sub-prime problem is going to be far larger than what people are imagining. There is a paradigm shift in India. The bull market is very much alive. The factors driving this secular bull market are very much alive and kicking, I have no doubt about it. I am hopeful that five years later we are going to be far higher than where we are today. But the fact remains that we at 19,000 are at 19 times 2009 earnings. There is vast divergence in the valuations of the Sensex or Nifty, you have very narrow group of stocks gaining.

Q: Undeservedly are you saying?

A: I will reserve my opinion there. The fact remains that in a true bull market you cannot have quality stocks going to 52-week lows. You can have stocks with no operating income, whose valuations are 100-200 times earnings. The narrowness of the rise, the uncertainty that we are facing, and the speed of the rise, is why I feel the markets need to pause. They need to take a breath and that will give it strength for the long-term rise.

Q: When you speak about a correction, are you speaking about a major sell-off or just about a 10-15% correction? We have seen three of those this year and we are still up 50%.

A: There is a difference between opinion and the empirical evidence of what the screen is telling us. In the last 15-20 days, flows from abroad have considerably slowed down. World markets after the second Fed cut are showing some kind of resistance and weakness. The market is losing breadth and is facing resistance at higher levels. The market should pause and correct, it is more than opinion, as that is what the screen is telling us. We have not had any correction right from 3,000 to 20,000. We have had very severe corrections but they have been related to prices, there has not been any timewise correction. What will really test people’s belief in this market and country will be when the market corrects not so much valuewise but corrects valuewise and timewise. I can’t believe we are going to have a ride from 3,000-40,000-50,000 where investors’ conviction and patience are not going to be tested.

Q: You see this as a likely scenario. Is 16,000 not inconceivable or are you looking at that big a correction?

A: Our last rise was from 14,000 to 20,000, so surely we could carry a 50-60% rise. Things internationally are going to turn far ugly than what people have anticipated. I don’t know valuewise, but timewise we are going in for a good correction. The sheer momentum with which any stock that has some kind of story build around it goes up at unbelievable volumes. I feel the market is ignoring a lot of stocks, these are the first signs of danger. For the whole rise, the market is going to test us timewise and valuewise.

Q: Are you getting the first sense of euphoria creeping into the screen after those 20-25% blowouts that you have seen in the last few weeks?

A: Absolutely, blowing into all kind of stocks. There are some bull and cock story scrips that are seeing tremendous volumes, unbelievable price rises, and nobody wants to talk any sense there. Somebody guesses, spread some story, and advises a buy and investors just go and buy. These are signs, the markets always do that, there is noting surprising about it. But when markets do this, it is time to be alert in my opinion.

Q: Are you surprised that Infosys is hitting a 52-week low while the market hits new highs. Is it a sector write off for you or do you see value there?

A: A bull market does not mean that some stocks just go up and everything else goes down in value. We are in the initial stages of what is going to be a very big, long-term bull market. In the last two-three months, along with international uncertainty we are staring at local elections in the next 6-12 months, which the markets may not like. Don’t forget that the worst mistakes are made in the best of the times.

I don’t agree with this theory that interest rates in America will go down, all problems will be solved, and all assets in the world will inflate. Markets have had a too good and easy this Goldilocks situation. This is a dream run, in the world this has never happened that you reduced interest rates and all ills are over.

You have given USD 2.5 trillion in one-year to people who did not have money to repay. I don’t buy this theory that he will keep reducing interest rates and we will keep buying emerging markets. You can’t take valuations to any level and expect people to keep on buying. Why have flows slowed down in the last two-weeks? Why is China down 5% today? All of Asia and all emerging markets have been weak in the last 10-12 days.

Q: Let me come to another sector which have been one of the pillars of this bull market, telecom. The big pillars like Bharti and even Reliance Communications have started correcting. What do you see for the next one-year for this space, is the best behind them?

A: Some of the dreams of corporate India are now going beyond all reality. Look at the people applying for telecom license, I don’t know what kind of background and qualification they have to go into the telecom business. Someone is doing a broking business and he wants to get into real estate, someone is doing real estate and he wants to get into the telecom business. The way the markets are giving money to public issues, it seems that nobody is even looking at the prospectus or reading it. They are just finding what the prices are in Rajkot and how much is the issue going to be oversubscribed. If you give money Rs 50,000-1 lakh crore or even Rs 10 lakh crore it is not going to be enough because of the way dreams are expanding and the way in which people are getting money, these are all danger signs.

Q: What is your sense on this whole oil and gas space, especially exploration and refining, and the way the market is valuing some of these stocks?

A: I do not apply my mind at all there. There is surely value in oil refining companies. IOC has got a lot of non-refining and non-marketing income. The market doesn’t want the government to decide what income they will have and whether there is very good yield. Never forget in all this momentum that in 1992 the price of Hindustan Lever was Rs 18.20 whereas the index was 4,300, but in 2003 when the index was 2,900 then HLL was Rs 328. As an investor I found that it is not how high my scrip goes, it is at what level it settles after it goes high. If a stock moves from Rs 100 to Rs 1,000 and comes back to Rs 20, then nobody really gains. But if the stock grows from Rs 100 to Rs 1,000 and then does it stop at Rs 600 or Rs 500, I don’t know.

Q: You were speaking about excesses. Have you found some excesses in any of the stocks which we discussed over the last few weeks?

A: I don’t know what is RNRL business, I am confused and didn’t make any effort to find out also.

Q: But RPL tippled and that has a business?

A: It has a market cap of more than Infosys. I can’t say anything beyond that. I am told it has a market cap of more than the entire refining sector.

Q: Some other ideas?

A: In four years, a share of Great Eastern Shipping has appreciated about 25 times. It was Rs 25, when the management bought back six crore shares, they got all those shares in the range of Rs 5-7.

Q: Will you remain cautious for the next few months or a year?

A: We live in uncertain ages and times. Let us see how this will pan out. We will react to it but let us be prepared. We will react to it as it pans out. I don’t know whether the index will stop at 16,000 or if it may have a bottom there, there may be no correction at all. I have some feelings and am going to react to it as the circumstances arise.

As humans and investors we must have the maturity to realize that we can’t earn the wealth without time passing, without it being tested, and without our conviction being tested. Nobody has earned wealth easily and retained it.

I feel we have had it too good and easy to really last. We are going to be tested. In view of the narrowness, rise of uncertainty in the world financial markets, the fact is that we are going to face an election, and the speed at which we have gone up, the only thing I am saying is be alert and cautious and always be there in the market.

Market Outlook.

Market Outlook.

By Jayakumar, CEO. Prime Securities.


N Jayakumar, CEO, Prime Securities said that the Indian fundamental story has played out in its grandest glory. According to him, the re-allocation of capital is going to be the story that will drive our markets to valuations way beyond even current levels.

He advises that caution and moderation are good words investors should have while ascending the path of wealth creation in a market like ours.

Meanwhile, Shankar Sharma of First Global said that globally markets including India are headed lower. However, he added that India will not suffer too much largely because subterranean India, in terms of the stock market, is looking in very good shape.

“I think India is largely a secular bull market. But having said that, I have seen consensus go wrong too many times to just stick out my neck and say five years from now will be substantially higher. The world can change a lot of things can change,” he said adding that think the markets will correct, reach levels of sanity and that the markets will give investors another terrific chance to buy in probably 15-20% lower than that.

Excerpts of CNBC-TV18's exclusive interview with N Jayakumar and Shankar Sharma:

Q: What do you say, would you be cautious here or do you see much high levels even next year on this base?

Jayakumar: I think we need to split the question into two parts. Yes, we had a great run and a lot of it is because the Indian fundamental story which is now well known and well talked about, that has played out in its grand glory as it were. Interestingly though, along the way what has happened is there’s been a bit of effective comparison which we have started drawing with other parts of the world, notably what was considered as the developed world, which has now been riddled with all kinds of holes, credit problems and fundamental issues.

To my mind, the re-allocation of capital is going to be the story that will drive our markets to valuations way beyond even current levels. My own sense is that, experience if you will, has been the biggest baggage, the biggest legacy that we have all carried. I agree with Rakesh Jhunjhunwala that 3,000 has become 19,000 odd, but the fact of the matter is that, much of the earlier bit, we used to say that other emerging markets are going up so are we, conditions of liquidity were high so we are going up, but I think right now, we are the destination or the beneficiaries of significant reallocation of capital, whether it’s endowment money, pension fund money or long-term money that’s been patient, has lost and made money in other parts of the world and is, I think, seeking new shores. To my mind, to try and predict where this could end is like, in a sense, doing exactly what Jhunjhunwala will tell you not to do, which is in a bull market do not call a top.

So caution, circumspection and moderation I understand are good words to have. And as people grow up the path of wealth creation, I think circumspection and caution come along the way. But I would like to believe that there is much more in this than we are able to see right now, which is why every bad news is being shrugged off, not by local retail participation, but by a broad group of people, most of whom you are not able to figure out who they are.

Q: Who would you join your voice with, the voice of caution or do you think there is much more on the way up ahead?

Sharma: We have been quite optimistic in the last three months, ever since the sub prime problem happened and that was at around 14,000. Our take was that it was probably going to see numbers north of 20,000 and it just kind of kissed that number a while back.

But we changed our stance about 7-8 days back. Now our stance is that we think markets are headed substantially lower globally. I mean for us, India is just another market in a larger global equity bull market and for whatever it is worth, I don’t think India will just simply sit aside if global equities sell-off sharply. We will participate, we’ll participate to a lesser extent on the way down and more on the way up, but we will not remain immune to that. So lets not forget, there has been a 4-5 year global equity bull market, we are squarely in the middle of it.

The global context that right now we are extremely negative on, we think you’re going to look at pretty much across the world sort of economic numbers, the macro number and the micro numbers look very weak. In that environment, we think equity prices are headed lower, we think India will also head lower. However, having said that, we think India will suffer a lot less largely because subterranean India, in terms of the stock market, is looking in very good shape.

Unfortunately, the large end of the market, the largecap end of the market is looking terrible. I have never ever seen a market that has been sort of run along on the basis of 4-5 stocks in the fashion that it has. If you look at pure fundamentals, I don’t see where the earnings numbers are going to come from. You look at the auto pack, pharmaceuticals, IT, cement, you look at some parts of the midcap sectors like even the banks have had NIM pressures, I don’t see how you are getting a situation wherein 9% GDP growth is not delivering any kind of sustainable earnings numbers, at least visible for the next couple of quarters, for any of the core industry that we are talking about. Even the construction company numbers have been disappointing by and large save for the odd Larsen and Toubro.

I am saying that there is a big divergence between the economic growth numbers and on the ground reality of businesses, I think it’s the time that something’s got to give. I think the markets will correct, they will reach levels of sanity and I think the markets will give you another terrific chance to buy in probably 15-20% lower than that.

Now you can say that’s short-term view and so what’s the long-term view. Frankly I have no idea what the long-term view is. I think India is largely a secular bull market. But having said that, I have seen consensus go wrong too many times to just stick out my neck and say five years from now will be substantially higher, the world can change a lot of things can change.

Immediately I do see significant downside and limited upside. A year out, I would still do hazard a guess that we’ll be higher than where we are. But what is causing me concern are those basic big divergences in economic numbers, macro numbers and the micro numbers of companies and their growth numbers. That’s really causing us a lot of discomfort.

Q: Let me ask you to respond to that since you are the most bullish of the three?

Jayakumar: The way I see this is that, we have had enough corrections of 10-15-20% along the way, so I’m not terribly sure if Shankar has necessarily said that we have broken down.

I think the key issue here is that, there’s a lot more happening in corporate India today. But I think there’s the large section of the market which will participate. My own feeling is that the flow of capital, the dollar pressures, which even from the US standpoint seem the favourable way to exit to this entire thing, which is a set of weak interest rates and weak exchange rates as being the combination. Now the moment you have that kind of a combination of a weak exchange rates and weak interest rates, inevitably the flow of money here, especially in the confluence of high economic activity and corporate India that’s performing; now there may be one or two quarters of slippages, but at the end of the day macro economic numbers of the kind of 9-10%, will result in numbers.

Maybe these sectors that they have talked about, many of them are export oriented sectors which are clearly affected, which even Shankar mentioned, which are effected by the dollar-rupee issue because they haven’t been able to adjust in the short run. But to my mind, that fact that the best performing stocks arguably Infosys at a 52-week lows and making new lows and the index at the new high, talks of a paradigm shift.

So my point is wake up and smell the coffee, there is a paradigm shift here, that the money from the rest of the world is coming through here, maybe India, China maybe India more than China in some parts and in some pockets.

But clearly, the flow of money which is one paradigm shift and second, the fact that returning Indian money coming back out here, our Fex reserve. If I just go back to the statistics, in the last four-five weeks, we had a net FII numbers of maybe USD 4-5 billion but our Fex reserves have gone up by USD 30 billion. The fact of the matter is that there is lot of money coming back, the confidence in the country, returning India money etc.

So my sense is that there maybe short-term aberrations; who doesn’t want a correction, if that’s the way to move sanity to move higher. But I have no doubt in my mind that the paradigms are shifting and we need to understand the fact that will take us significantly higher.

Q: When you speak about a correction are you speaking about major sell off or just about a 10%-15% correction. We have seen three of those this year and we are still up 50%?

Sharma: Yes, the fact is that we have seen it last May 2006, that was a pretty ugly one and we bounced back from there. I have no doubt that we will recover and recover quickly.

But my problem is different. I am saying that numbers have to come through because core sector numbers still don’t adequately match the GDP numbers that we are being told is growing at 9%. My real concern really rests around that, that when vast parts of the market don’t exhibit any sign of core business strength, how long can we just keep relying on a few utility stocks becoming sort of almost like tech stocks in their performances.

I would be very happy to see cement numbers comeback strongly or auto numbers comeback strongly. I am not so sure we are going to see that in this financial year. I am saying we would bounce back very quickly, we would still be the best performing market going forward, we will suffer the least, but all that apart, I would still like to see the big market move. From hereon let us say the market sell out to 16,000 which is conceivable, then led that second leg of that market we have be packed by a wider rally, which would only happen if you saw wider sort of earnings numbers coming through, rather than just a few concentrated, good set of numbers coming through.

The other problem that is about liquidity, liquidity is going to hurt us. I don’t think it’s really creating what it should create. It’s coming into the stock market, it is basically hurting the currency, depending which way you look at it. The fact is that the single biggest bear market case you can build for India is the rupee goes 31-32-35. I really do not know what will happen then, because you will obviously have the entire export basket being wiped off as our exporters are absolutely low tech, including the technology space, and you will have vast parts of domestic industry become completely un-comparative. Hence, job growth, consumer spending and everything will get hit. That’s my nightmare scenario out of this entire thing.

Liquidity will make the market look good for the short-run. I am not so sure it’s such a good thing over the next 24-months time. That’s the scenario that’s keeping me awake at nights.

Q: You track the rupee very carefully. Are these conceivable scenario sub 35 kind of levels do you think the stock market can survive that?

Jayakumar: Let me go back to the evidence in countries that are significantly, at least in the mid 80’s more developed than us. The Japanese Yen went from 300 odd levels down to 120 levels after which it remained roughly the same for the 15-20 years. The economy took 3-4 years to absorb those kind of aggressive revaluations.

It’s happened in the Sterling in the same period, September 25 1985 the Plaza Accord. It was 22 years ago, a lot before many a people here were in the market. I remember that a group of nations got together and said we need a weaker dollar and the weaker dollar at that time was something that was only conceivable and conceived against the other developed currency baskets.

Subsequently in the 90’s it became against the Asian currencies and now in the new set of currencies. The Brazilian Rial till a year and half ago, was at high 2s, toady it’s at 1.73. It has had 22-24% correction and is still going strong.

The bank buys everyday and the market is scaling new peaks and to the best of my knowledge, the only problem is the adjustment factor. How long does it take for people to adjust to the fact. I have no doubt in my mind what is poison for one is not necessarily the case for somebody else. The technology sector in the US is looking extremely good because the same weak currency there is spilling off. So if Infosys or the tech sector were to reorient themselves to say that let’s start reworking the numbers, I have no doubt in my mind that you will probably hear that.

So to answer Jhunjhunwala’s question, it may be a case that today we are making new highs and new lows on certain tech stocks while the index is making new highs, but maybe this composition will change. Maybe momentum players or the companies that he is talking about with no fundamentals and futuristic earnings are making new highs, maybe that will change.

One very important thing, in every leg of this journey up from 3,000 we’ve had different animals taking us up next leg. You had cement initially, then infrastructure then banking and then IT, etc. After 14,000 IT has given way to other people. I think there are new horses for new courses and the paradigms are shifting. So I will not stick my neck out and say it will be the same set that lead us up. Capital goods has, yes project imports have become cheaper and a number of things have become cheaper, import of foreign goods for local consumption have become cheaper. So there are positives as well.

Yes, competitiveness is an issue, steel prices are an issue as the rupee becomes even stronger. But I think the adjustment factor is an important issue. If it happens in a moderated way, which the RBI is trying to do, maybe it will pan out well. But if the rupee rashes to 32 in the next 6 months then I think we have a problem. So the whole idea here is to try and moderate it, which is not an unholy objective. But unfortunately, you can’t moderate flows.

Q: Have you also been spoting excesses on the screen for the last few weeks, have some of these movements worried you a little bit?

Sharma: No, we love these excesses, that’s where we make terrific money, and that is where experience probably helps in the sense that, you have seen it before so you are careful to take money off the table sooner rather than later. But it’s good in a manner of speaking because the hedge funds love these kinds of things and as a securities house, we love these bouts of volatility.

The problem is that’s not necessarily good for the average investor on the street. There have been absolutely situations wherein it had simply become way too easy to make money, specially the last four-eight weeks. Obviously that never ever lasts. Anybody who believes that can last has obviously never been in the market long enough. We saw January-February and March 2000 when it was, today was not of the same order, but that was crazy as well when almost everything with a story around it was going up 50%-100%-200%. We’ve seen something along those same line on a senile basis. There’s terrific amount of froth out there and these tides can turn just as quickly as they have risen.

So my sense is that we will see the markets sell off. More importantly, we will be right in the middle of a pretty bad global macro environment, we think equity markets are headed for a far uglier course going forward.

So given all that, I would be very surprised if India were to stand apart from all that. We will participate, but we will relatively outperform the market on the global equity benchmarks. But other than that, I don’t hold out hope in the next couple of months for the markets to be up in an absolute term from the 20,000 high watermark, I think we will be trading lower.

Q: You are surprised Infosys hitting 52 week low as the market hits new highs. Is a sector write off for you or do you see value there?

Jayakumar: I genuinely believe that this is a time for Mr Nandan Nilekani or his successor to put up their hands and say, this is where we will make a differentiated pitch as to what we are. Yes, they were outstanding managers in a bull market but as Shankar pointed out, everyone was making money who was in that space.

I think this is a time for a TCS or Infosys to actually put up their hand, and I believe they will, where they go out and actually make acquisitions which in a sense align them with this currency problem, because what the markets are telling you is, in the short run, we don’t like a business, which clearly will lose out on the rupee where we think the rupee is going a lot higher. But we’ve had not evidence from them, and this is where I go back to the fact that whether at a Rs 12,000 Infosys price or at a Rs 2,000 Infosys price, whether for stock or for cash no acquisitions were made, in fact I still hold it against the Infosys management that they did not even bid for a CMC at the time when it happened because they felt there was a problem.

The point I am making is, this is the time where in this difficult environment as it were, where people are only focusing on the rupee, my sense is that they will need to have a differentiated strategy. If they do that, I’m actually willing to bet that Rs 1,600 may well turn out to be a very strong base because finally there the management will wakeup to the fact that something has to be done different, from merely following the services the model the way you are out of India off shoring etc.

So I am not as bearish on this sector as I use to be earlier because the rupee is now being sort of held back by everyone. So now we need to look at how managements respond to this. I believe Infosys and TCS, before the next quarterly announcements, will need to standup and say we are doing this differently and therefore, we believe we have got a hedge or a strategy which works out and now just an Fex edge but a strategy.

So Jhunjhunwala may well have his other elements coming in as well, which means the tech may actually participate in next leg up, surprise- surprise.

Q: Let me come to another sector which have been one of the pillars of this bull market telecom. Shankar you have been a little circumspect about it, and big pillars like Bharti and even RCom have started correcting. What do you see for the next one-year for this space, is the best behind them?

Sharma: No, we have not been just circumspect, we have been fairly negative on the sector for the last 5-6 months. And nothing that we see fundamentally compels us to change our view. We think that for the sector, its best days are behind it.

Telecom is ultimately a month’s game, and you are going to put up a network at USD 80 a subscriber, then you are going to sign him up for lifetime free and then you expect the market to pay you. That subscriber, for the time that it stays in your network, will pay you like USD 100 a year, in ARPU maybe USD 80-90 a year, and the market is going to pay me USD 1000 sub-perennially, that’s rubbish, that’s not an equation that is held up anywhere in the world. It does happen in the first phase of the growth, which is why you know these guys were getting a USD 1000 a sub in terns of enterprise value.

I think the sustainable Indian subscriber is not worth more than USD 250 considering that ARPUs will, to my mind, go to USD 3-4 instead of USD 8-9. Think about it, India is a country with per capita GDP of like USD 600-700-800 thereabouts. USD 100 a year in ARPU, that means the average guy is going to pay out like a sixth of his income, and that is per capita GDP, that’s not really income in the pocket, it’s a notional number for most people.

So in effect, he’s going to pay out something like 50% of his per capita cash flow on the average to telecom operators, that’s just not possible. He is going to be spending like probably a quarter of that number. So you are going to see intensifying competition as we already see it. But more than that, we just think the valuations have gone completely crazy where they will correct. You will see subscriber ads coming through, that there is no doubt about, we will go to 40 crores of subscriber, 45 crores of subscribers it’s just that the per sub value will compress to more realistic numbers of USD 200-300-350. In Russia you have companies earning far higher sort of margins and ARPUs trading at like USD 500. I think the Indian subscriber incrementally is worth a lot less.

Remember the tech boom, earnings from 2000-2001 till 2007, barring the last two quarters, have been extremely robust for all tech companies. Their numbers have been completely off the charts. But barring Infosys, none of them ever made it back to their 2,000 highs. So, we can over pay for growth, we are overpaying for growth in telecom, we think valuations will compress significantly. You are just seeing the beginning of the end of thetelecom space as a big bull market stock.

Q: Talk about some of the stories that you guys are very bullish on. You have been extremely bullish on Aban Lloyd, the stock is up 370% this year. Does the story still remain, can you still justify higher levels from this appreciation?

Jayakumar: Considering this the only time of the year when we talk of specific stocks, we will relish the opportunity in a sense. Clearly I think the way we see this is that, for the last several years, we were pitching for the opportunity in the Indian exploration space as being significant enough to warrant not just dedicated India players but even movement of rigs form the Gulf of Mexico, North Sea etc to this part of the world.

What’s happened over a period of time is, a company like Aban Lloyd has grown several folds, but interestingly enough, it has always been catching up on valuations with its international peers, which seems to be the bench mark or the high water mark for everybody else. But I think not just oil prices, but just the fact that the company like Reliance has asked for a three year monitorium on the exploration activity simply because rigs aren’t available, I think nobody believed that the combination of two things, the Middle-East moving from the onshore to offshore and India opening up NELP blocks they have been doing, will lead to the rig shortages that are currently in existence.

So even if you take the backlog, and there is a two and a half year waiting period for a new rig to come through. There are high entry barriers in terms of USD 200 million for the new rig, very few players with experience. This is a consolidated industry and the Americans have been extremely conservatives in leveraging. So what Aban’s been the biggest beneficiary of is leveraging at a time when nobody did. Also, today as one of the top 8-10 players in the industry and having clear contracts, I think we can make out a clear case for Abhan to go significantly higher from currently levels.

Q: You are generally cautious about the market but there must be spaces which you are bullish on. What would you buy on if there is a market fall what are you most bullish on in the next one year?

Sharma: We do only the largecap end of the market, so to that extent, the odd multi bagger is something that we really don’t go out looking for. For us the largecap space, the PSU bank space, offers terrific value. In India at least the financial sector is in reasonable shape and I think the interest cycle globally is trending down and in India it will also trend down at the appropriate point in time.

I think the PSU banks offer terrific value trading at books, some below books, some a tad overbooked. I think you can make serious bank for the buck buying them as a pack because frankly, I can’t really make out too much difference between one or the other, save for some superficial managerial superiority of one bank over the other. By and large they will move as a pack and as a pack they make for a very good investment. I think they will beat the market in terms of performance in next 12 months time.

Q: The other story, which you have liked, is S Kumars, which has also gone up quite a bit and textile generally as a space have not though S Kumars is not strictly a textile play. Can you justify more upside here?

Jayakumar: We can for two reasons. One is, the way we have liked it is because fundamentally it’s been a branded story; it moved from commodity end to a branded end over a period of time. We have seen significant additions to brands and now, in licensing of brands like Dunhill, Escada etc, which make for good sales pitch in this market because with the rupee appreciating 11-12%, imports are cheaper, with add on duties etc. So there’s a big offtake for “foreign goods” in the Indian context. I think that’s as far as the retail end of it.

The other brands whether its Reid & Taylor, Belmont etc, they will all have their place in the sun because as consumption level and aspiration levels move up, people want branded goods. It’s not restricted to S Kumars but our fundamental pitch against textiles have been almost all textile companies in India have been almost stubbornly export driven, they have got large capacities and they are obviously under pressure to sell. As opposed to that, here you’re talking about a portfolio of brands which we’ve been pretty excited about and we think the story will continue to pan out extremely well.

Q: What is your sense on this whole oil and gas space I’m not talking about oil marketing but people on exploration and refining the way the market is valuing some of these stocks what is your thoughts on this space?

Jayakumar: I wanted to add a point further to what Sharma mentioned further to the PSU banking space. I think one of the points we have to pay heed to is the fact that private sector banks have been raising capital virtually at the drop of a hat, and they have been recipients of cash of the capital virtually whether it’s XYZ Kotak, virtually all the banks have been raising capital.

A State Bank of India, which has been sort of lumbering along as it were, virtually without raising capital for the last almost a decade and a bit, I believe and you must take all the disclosures that come with it in terms with this being a part of the portfolio etc, but I think if there’s one multi bagger that I see potentially there over the next 2-3 years and, I agree with Shankar Sharma to a extent that these could lead the next charge, will actually be State Bank of India.

Q: Your observations on this whole Reliance pack which is been going up, RPL, RNRL, Reliance Industries. If you had to buy one or two of them which ones would you buy and which one would you a completely?

Sharma: I don’t know the businesses that RNRL etc are engaged in. So before you can come down to the basics, the stocks have doubles so you say what’s the point.

Q: That’s a surprise none of know.

Sharma: The fact is that, yes, we’ve been bullish on Reliance Energy, but I never foresaw a price which was almost near Rs 2,000, we were bullish from Rs 550 or something. It was a normal utility stock with some other kickers coming in so you can bet on 35-40-50% or maybe 100% upside. But four times in four-five months, that’s completely beyond imagination.

Q: Would you sell now?

Sharma: I would definitely take money off the table. The fact to the matter is that it’s been a terrific bet, a lot of our clients have made tonnes of money and obviously you should take some gains off the table in general in this market at these levels.

The Reliance pack has made the most money for investors in the last four months time. So it is conceivable that that pack might see more selling from foreigners because that’s where they have been long up to their gills, specially the smart money in the foreigner pack.

Q: Some other ideas?

Jayakumar: There is one another idea that we have recently been looking at, and we think that a number of ideas in the Indian context, if they have parallels in the international space, they tend to get similar multiples if they can prove the internationalization of the business. One such business we like is Great Eastern Shipping where we think that the company is trading at significant discount, significant discounts to the big shipping companies across the world.

In a business which is truly international, and they’ve been in terms of return on equity or most of the parameters, astonishingly good managers of the business for the last not 1-2 but almost 10-15 years. So we think that Great Eastern Shipping as an idea for the year.

Incidentally post 2001, just a footnote here if you will, a lot of things in life, especially post the technology boom as it were, maybe there was a technology burst in terms of stocks, but one thing that’s definitely happened is flow of information, the ability to digest information, it’s all happening in a manner where a lot of things, in a time wise sense, are happening in a much more compressed manner.

So I take Jhunjhunwala’s point saying that perhaps time frames have now got compressed enough for us to not have those meaningful time wise corrections of the 80’s and 90’s.