Source: Moneycontrol.com

Market veteran N Jayakumar, president of Prime Securities feels the upside on the Nifty is capped at 5,100 levels.

The year has got off to a steady start with the market managing to stay in the green – although just about – for most of the time. According to Jayakumar, the market is in a bottom formation process at the moment.

“I think the adverse newsflow has been factored in and now the market is likely to focus on the positives,” he said adding, “excessive correction in rupee and equities in the last quarter of 2011 is reversing.”

He expects midcap to outperform in the near-term. “We need crude to cool off for a sustainable rally,” he said.

For now, his advice is to sell into rallies in commodity stocks. “I think export-oriented sectors will continue outperforming,” he said adding, “…sugar will continue to underperform in the near-term.”

Below is an edited transcript of Jayakumar’s interview on CNBC-TV18.

Q1: What have you made of this 7% rally in Nifty in last 9 days? Do you see more upside in the near term?

A: The excesses of the last year especially the last quarter of the calendar year 2011 are being reversed pretty aggressively. The currency movement including movement on the index was a complete capitulation in some sense. At least the portfolios did capitulate of most investors especially the foreign investors. The new money which was waiting to come in has started trickling in but 2012 has also brought a certain fresh perspective to it which it seems like there was no tunnel forget the light at the end of it in the last two weeks of December especially. In that context if you see the current year nobody knows really who the buyers are and yet a number of midcaps stocks have bounced off 20-30% in some cases even 40% from recent lows.

The beautiful thing about the whole movement has been that the index has done nothing much. A 6-7% rally is decent but really speaking Nifty is stuck in a range of 4600-5100 maximum and in that context a lot of stocks have done much more.

This kind of resilience that the index shows in the context of whatever headwinds it had to encounter, the rupee shows some strength despite recent dollar strength. The rupee has appreciated moderately in 2012. From the levels of 54 it is down to a tad below 52. In that context the first signs of bottom formation are now more and more getting established.

From a sector perspective there is clear rotation out of the IT, consumption and the leader spaces and move into private sector banks, infrastructure space and that rotation is clearly visible. The story is not really an index story, the story lies else where which is really the midcap beaten down space where without knowing who the buyers are and the stocks are up 25-35%. We are talking about a pretty sensible call that the bottom is around the corner and if you look at recent headwinds like the European down grade for instance what is it that the rating agencies have told us that we don’t already know.

Also to some extent there is a lot that’s getting factored in and my own contention is that bad news now will tend to get ignored faster and good news will tend to get lapped up. A few large policy announcements, some large orders and the infrastructure space will be up and running. A simple thing like the L&T Chairman who has been the biggest critic of the government doing nothing over the last 12-18 months suddenly came out and said things are not as bad as they seem. An optimistic statement from capital goods giant Chairman boosted up that space which makes me believe to some extent bad news has been over factored in and good news will push up stocks much more than people will anticipate.

Q2: Do you think the meat of this rally will unfold in the course of the next few weeks and months? Is there a potential of a pre-budget rally here?

A: Depending on what you consider a rally 95% plus of the market is focused on the Nifty. The benchmark index is trading in a plus/minus 5% range which will not excite most people. Just take a look at what’s happening to the midcap infrastructure space. GVK, Lanco and GMR Infra companies were giving a sort of bankruptcy pricing indications in the stock market and now they have started bouncing off. There is news about road orders and the Power Ministry taking steps to make sure that things are available for power generation. Even though some of these steps are relatively small but it is enough to kick up a reasonable amount of action in this space. Many of these companies are quoting at 1/10th to 1/12th of what they used to quote at peak times or peak multiples. So from that perspective the correction is completely overdone and maybe the story lies there.

Another story can be the heavy engineering space. Some of the recent safe havens like IT, FMCG are clearly meeting headwinds and had their run up and they are sort of tapering off. So it wouldn’t surprise me to see this story to continue where public still looks at the Nifty or the index for some kind of a relief to say that there is a bull market on and they are not getting any clear indications. Yet the meat of the market which is the midcap space displays strength and momentum which is belied by the lack of strength in the frontline stocks or the index.

Q3: What do you do with commodities now, global and local? Metals, sugar for example. Do you think they are also slowly getting out of the woods?

A: We need to see sugar slightly in a different way. Sugar is just too controlled right now. The industry is fragmented and the bane of the industry is whenever the industry has started making money, the government came out with all kinds of issues regarding how pricing cannot be passed on to consumers. It’s a political issue. We are heading into UP elections so any move in sugar maybe short lived unless decontrolling happens. It’s a long time the sugar industry is crying out for decontrol and consolidation amongst players. Right now virtually every UP player is either on the block or having problems with his debt. There is a real fundamental issue as far as sugar is concerned and these moves shouldn’t be taken into any positive sentiment  as it is just a few statements made about export quotas, etc which may have led to these moves.

The big bull run in the Indian market will come in only when commodities especially oil come off. Oil to my mind is displaying the same kind of price moves that golddisplayed at the 1750-1800 levels and then just came off to the 1600 levels. So the pullback in oil is the real trigger from an Indian market perspective. Iran has spooked the shorter term trend to make it more on the upside. But if you were to look at any other yardstick, oil should be significantly lower. It hasn’t played out more from political reasons. But for me, commodities would be a sell on rallies. Some of these levels in commodities are unsustainable, demand isn’t keeping pace and there isn’t growth in most parts of the world.

The rest of the world is still grappling with fundamental issues. How long Europe takes to move out of denial and into problem solving mode is one thing but the real story in terms of the engine of growth is US getting its act together. The first signs of recovery are more than just green shoots. The Indian story or from an index perspective what could help is really export oriented industries and the re-rating or de-rating of the rupee from a 44-48 range to what I think now is 50-55 range. So export oriented industries will certainly sort of lead the way. These are the spaces and sectors and especially dominant players with dominant capacities in these industries will be back in terms of picking popularly known as sectoral winners or theme based winners. So from a commodity perspective one would need to look at the continuation of downdraft. A lot of the commodity stocks have rallied more on short covering. So the price impact on the short covering happens vigorously. New money, I think is selectively walking in which is a huge change but overall the liquidity continues to remain a challenge. If the rupee provides some pocket of strength in the short run then that will attract more money in the Indian markets.

Q4: The concerns in infrastructure space both in terms of news flow and corporate governance still prevails. For instance JP Associates might have lost the Ganga express way or Sintex not strictly from the same space but disappointed the street with poor results. How do you deal with such road bumps?

A: These road bumps tend to get magnified in the current scenario. Assume one regulatory issue or one legal issue comes up in a company. In the past or in a bull market, stocks may have reacted 3% today but now they have reacted 30% or more in the last 12-18 months. So such kind of reaction has been seen. One must understand that in bearish markets people will see any regulatory issue as great excuses to continue shorting these stocks.

The events have always been an integral part of any stock market. A loss of one project can’t change the basic character of a company but if there are regulatory issues that fundamentally threaten the company is a different issue. Sintex results were decent, the forex losses were not there this quarter, in fact there were forex gains but the stock has reacted substantially more than any consideration. The bigger issue in Sintex has been the presence of FCCBs and whether the company will have enough money to repay it. The FCCB concern has really undermined a lot of stocks. So if you go back to the genes of some of these issues, one has been FCCB, second has been regulatory and third has been projects getting stuck. But other than that events are part and parcel of any market and we should take it that way. The over reaction is where the opportunity lies in terms of entering the market.

Source: Moneycontrol.com

N Jayakumar of Prime Securities, in an interview with CNBC-TV18′s Udayan Mukherjee and Mitali Mukherjee, feels that the market has been discovering newer ways to make tops and bottoms. He also said that people have been preferring commodities more than the stocks which is the classic sign of bottoms getting established.

He further stated, “The last bottom of 5,177 or 5,200 would not get violated.” He added, “We have made slightly higher bottoms than the 5,177 levels tested several months ago. We are very close to 1-2% away from a bottom unless something dramatically new emerges in the world.”

Below is the verbatim transcript of the interview. Also watch the accompanying videos.

Q: Does it appear to you that the market is finally close to forming a bottom this time around with the patterns that we have seen for the last few weeks?

A: The markets have been discovering newer ways of making tops and bottoms. At most times, the investors were offered an option of a sharp straight cut vis-à-vis the slow poison which was seen over the last several weeks and months.

While on one hand, business or financial market developments have been taking place a lot sooner than what people believe. On the other hand, markets have been taking much longer to find bottom.

Valuation bottoms or price rise bottoms might be close at hand. Time-wise, we might still be in for this extremely traumatic and agonising period, where volumes shrink and the participation disappears.

The classic bottom formation in the past has been such where the investors’ apathy was high. This time, it has been unbelievably high. The pink papers tell that the retail participation is at a five year low.

People want to talk commodities far more than stocks. Silver and gold are more appealing to people than Reliance and Infosys. These are classic signs of a bottom getting established.

I don’t think that the last bottom of 5,177 or 5,200 gets violated. If we go back, we have made slightly higher bottoms than 5,177 levels that we tested several months ago. We are very close to 1-2% away from a bottom, unless there is something dramatically new that emerges in the world.

Based on the factors we already know like Greece debt crisis, inflation, etc, these factors cannot create a lower low. We would need something dramatically different from all this.

Q: What do you think about State Bank of India ? You mentioned about a bottom formation. Do you think that the big bank has bottomed out?

A: SBI has firmly bottomed out. The factors like new chairman coming in, over provisioning and very aggressive Q4 management resulted in its investors getting peaked quite disproportionately.

At some point in time, there might be short-term pressures because of the rights issue. From the perspective of a sector and stock, it has been 40% higher and nothing has changed. Advance tax collections are high. The economy is in fine fetal.

The RBI talks about growth not being an issue as yet. If that were to be taken at face value, we may have one more rate hike. Another important thing is oil which is down almost 15% off its peak.

In fact, if we take the WTI, it is almost off 20% of its peak which is a significant cut. Oil is headed significantly lower.

Q: What do you have to say about Reliance ? Do you think that it is close to a bottom?

A: If I could predict where Reliance stops or bottoms out, one would have been in a different profession. I have no clue about that. My sense is that there are big fundamental developments happening in terms of the money coming in from BP etc.

The last word is not out on the gas production of the KG-D6 basin. To add to all this, a new development which is CAG (Comptroller and Auditor General’s) report seems to have spooked the market.

If you want to go short this market, this is the easy way to do it. There has been some investor disenchantment which the management needs to address.

Nobody knows whether the report is leaked or not leaked and whether this has any bearing on the developments. It is like one more straw at the camel’s back. I don’t know where Reliance bottoms out.

The chartists have been taking somersaults in telling that it would go down much lower. Fundamentally, it would have traded much higher, but one cant say where it can go on the short run.

Q: You have been tracking the shipping space closely. Do you remain bullish on some of the names like ABG ?

A: We have been very bullish on this stock. There was an announcement that took place 18 months ago that was not noticed. I don’t know if China presaged social unrest in different parts of the world, but they had their own coming. They increased wages 35% across the board. This was the highest ever wage increase that China had put together.

For a 35% wage increase, they wanted to stroke domestic consumption and keep social unrest at bay. We cannot give 10 club sandwiches to a hungry guy and ask him to start consuming. The consumption will take time.

In the short run, it made a number of their mass export oriented industries uncompetitive. The two big spaces where wage intensity was at its highest in China which led to their export was the ship building industry and the textile space.

Textiles have become uncompetitive and one of the reasons is this. The second is the ship building industry where the number of orders, from that part of the world, combines with the highest number of ships scrapping that has been in the world for past few years and has resulted in orders flowing through.

At least for the smaller ships, orders are flowing through China to India. The Indian ship building industry is further helped by the move to defence where two names Pipavav and ABG stand out.

Marketcap of Pipavav is three times ABG’s that is the reason why we like ABG a lot. The marketcap catch up has to play out. Promoters have been increasing their holding. Their debt levels have come down pretty sharply. The company has substantially a better balance sheet and well managed fleet.

Q: What would you pick in textiles because the excitement and depression has been around SKumars depending on whether Reid & Taylor IPO will happen or not? Are you focused on that or other names there?

A: I don’t know the valuations that the Reid & Taylor IPO is talked about. I am not too sure if the numbers are being touted around for the valuations, are numbers that are taken off brokers, are there whispered valuations or are these valuations being sort for.

In the absence of that, the textile space is a lot more than a brand here or there. Textile space is dramatically in a sense being reenergised because of China which has become uncompetitive in recent times. There is no question about it that the Indian textile space is headed for a much bigger time.

There are two parts to that – one is I don’t believe that the Indian consumption and brand story is understood like Titan. One more brand launch may not necessarily do much to that space. The dramatic export thrust that we are getting and where textiles are contributing is a bigger takeaway.

The other part about midcaps is that the ticker price is not attractive enough. That is the price that you see on the screen everyday. We have Andhra Papers, Sabero Organics and Camlin takeover candidates which tell that this sticker price for a sell out is higher than the ticker price that you see on the screen.

The real hope in this market is strategic interest, delisting interest and interest where promoters are increasing their holdings. This is the story of the next two-three years in the next rally. It is not in the Nifty that you need to find solace.

There will be the calls people will make on that. The real call will be on the consolidation story where foreign money or strategic interest comes in the delisting stories like the Atlas Copco where wealth creation is dramatic and the money that these strategic buyers get into the market is substantially more than what the FIIs are putting in. This is a story that for the first time dovetails quite beautifully with our supposed forte which is in the midcap space.

Source: The Economic Times

In an interview with ET Now, N Jayakumar, MD, Prime Securities, gave his views on Indian and international markets and global economic scenario. Excerpts:

ET Now: Characterise the markets environment for us?

N Jayakumar: I think the fall in the US markets boards well for the markets here. So if you just see the market action over the last few weeks or especially the last few days, you are seeing return of money to this part of the world. There is a dollar weakness and I think some of the thesis that was played out in terms of money moving to the developed markets, that thesis is unwinding. So my own take is that what you are seeing probably yesterday was an exaggerated action as a result of weak US economic data, but the underlying theme is still that you can fantasize about QE2 being removed and QE3 not coming in. But in some real sense they need it. The crutches required for the US economy still continue.

Some of the European economies like Germany, etc, have been doing fine, but in the larger context of Greece etc. they are weighing down. So this movement of money really has happened and they expected that those markets will start delivering returns and money got pulled out of this part of the world. But whether we like it or not, money is going to start coming back here and the dollar index is telling you that. And if China and India, which have been in some senses the deterrents, start managing the local environment a little bit better, I think money will come in.

ET Now: What is working for India in the near term and causing this rally? Would you say it is only the dollar weakness and that for the shift because the earnings have been bad? There have been downgrades kicking in, you have got the GDP and the macro picture is really not helping us.

N Jayakumar: When these kinds of headwinds kick in, when usually everybody on the street is worried, that is really when smart money walks in. We attended a couple of conferences and people tell me that while participation is high, but the mood is pretty downcast, the people are worried. When the street is worried, these contra rallies emerge. And if you look at it, the story of India is not about the front-liners as we speak.

The story of India over the next two years is going to be one line and I call this the ticker price being manifold, which is really the story of mid cap India where whether you have a Sabero Organics selling out at 4x or 5x to average market price for the last one year or Camlin or you talk about an Andhra Paper or Intelenet, you are talking about first generation or second generation entrepreneurs having run businesses for 30, 40 or 50 years. The BPOs of course are much smaller in terms of lineage. Now saying that the market or the ticker price is not giving you what you really wanted in terms of value…

ET Now: But there handful of such companies?

N Jayakumar: No, what it is telling you is this is not a one off and add to this the fact that there are multiple delisting stories, and Atlas Copco contemplates a delisting at Rs750-Rs800. Delisting gets actualised at 2750, a whole bunch of other companies, Siemens increases a stake in the Indian company with a well traded stock price going at 25-30 PE but pays 30% over. ABB does the same. I think this is indicative of the fact that, firstly, more and more delistings which mean that more and more international companies want to have a 100% holding here.

Secondly, those who want to set up a beachhead here whether it is for FMCG which is for clients or it is for markets, they will come in and pay substantially more and this will act as one of those all boats will go up in this. Because this is not possible that one company Andhra Paper does a transaction, the others do not follow suit. This is like cement the way the consolidation happen. So I think this is a big story here. So well the index at one level gives you hope that around 5300-5400 level there is money that always walks in, but the real story in the next two years is going to be midcaps, midcaps, and more midcaps.

ET Now: Now that you made a case that it makes sense for our viewers to buy mid and small cap stocks, identify some names for us?

N Jayakumar : For the first time, I am saying the story is really not in small or one of names. I think the market as a whole is crying for attention. If you take the midcap space as a whole, these have been quoting at probably sub 4000 equivalent Nifty levels.

ET Now: Which are your favourites?

N Jayakumar: We will come to the favourites. I am just saying I think the story is not in the favourites. The story is not one of names. The story is in the fact that corporate India is seeing a sudden burst of FDI action where strategic interest across industries is happening. So you take a case like Camlin, people are predicting it which is that multiple family members, second generation or third generation to an extent involved, but may be when given a large ticket size they were very happy exiting. I think this is going to be the case of for a whole bunch of dominant companies in industries. Now the larger ones like cement, steel etc. have already seen much bigger action and people with large ticket sizes.

What is more difficult is to predict industries which are defined by one or two companies niches and that is where one will look at. The other big space and if you talk about favourites, we have our favourites. I do not think every broking house has got its recommendations. We for instance like Alok Industries. We have defined four or five parameters which actually could also be of interest from a strategic perspective. Companies that have a reasonable, let’s say, for the next two to four quarters or six quarters a reasonable kind of business case, you can make out, but more importantly a clear case of deleveraging, a clear case of full tax provision where they are paying out full tax.

They are not skipping dividends but more importantly there is clear indication that promoters want to increase their holding. So wherever promoters are increasing their holding there is de-leveraging happening, no case for dilution and they are going at single digit PEs. Inevitably these will become cases for either strategic people to look at or the markets to look at. I think free cash flow in capital intensive industries wherever they start coming through that is where attention goes.

ET Now: Does Alok Industry fit that well because if you look at the equity base of Alok Industry humongous?

N Jayakumar: Forget equity. The big opportunity is 11,000 crore debt. In the next three years, the management has clearly set for instance that they want to eliminate their real estate portfolio. They very clearly stated they want to even exit the UK retail business. If they do these two, they could pull in Rs 3000 to 3500 crore from non-core activities. So suddenly your debt goes from 11 to 3.5 and that 3.5 they do nothing else, must add to their 2000 crore market cap. So if 2000 becomes 5500 crore just on reduction of debt that is already a stock going from x to 2.5x, add to this the fact that they will do a Rs.12 pre-tax EPS. We expect about post tax about Rs.8.5 to Rs.9. Why should they not quote like Arvind Mills at 8 or 9 PE this could be a three bagger over the next 18 to 24 months.

Things need to play out, but that is the call you have got to take and the textile space has never been better so Alok is one name. We have always liked for a while now ABG. Debt has gone down by 500 crore at the gross level and 900 crore at the net level because their cash on hand has gone up by 500 crore. Now 900 crore debt which is almost one-third if a debt disappears. Promoters have increased holding by 4%, why should a promoter increase holding from 57% to 61% unless you have real confidence in the business. Actually free cash flow is getting generating. So I am saying there are cases like this. Like an Orchid Chemicals where the quality of balance sheet has improved dramatically and in the pharma business a lot of strategic corporate action keeps going on. I am not saying there is anything happening in Orchid tomorrow morning but the balance sheet has improved dramatically, earnings have kicked up. So whether it is an Orchid, Alok, ABG even an Aban for all that is going at a 3.5 PE and they have made about nearly 1200 to 1400 crore cash flow this year and will continue to make that next year.

So this is the story of corporate India where these kind of spaces where entry barriers to my mind were reasonably high, where people have gone through the difficulties in terms of debt restructuring, they have gone through difficult environment and now you are seeing probably a clear two-three year window where business could really boom. Then you will see the free cash flow coming, de-leveraging happening and the equity value kicking in that is the clear story here.

ET Now: So what about niche consumption names, the likes of VIP, Titan or a Jubilant Foodworks for instance?

N Jayakumar: They are all going at substantial PEs, the market right now and that is the beauty here. 90% of the market focuses on momentum, focuses on chasing and making a 30 PE stock into a 35 PE stock into a 40 PE stock. If there is ever a small something that pricks the bubble in terms of the consumption theme for whatever reason, you could have these stocks de-rating pretty aggressively. The India consumption theme is well played out, but it is not that you can keep buying these at, of course when somebody bought Jubilant at 600, I found it expensive at 450 to tell you the truth but it is at 850. So the call gone wrong, I would rather have missed it.

Not because it is a case of sour grapes, it is a case of saying that you are chasing a consumption theme. Now maybe food has got a massive upside and they are looking at corporate news, Starbucks etc. At the end of the day, some of these may play out, some of these may come much later or these JVs may not happen but the real thing is VIP for instance is a lot less hyped up as compared to the others. Titan is richly valued. It continues to perform in terms of numbers, but it is richly valued.

So the consumption names are not cheap, but the issue really is would you rather have a margin of safety by going into “a dumb, old economy, cash flow-oriented name” which does not have a high PE, but at least the margin of safety is reasonably high. So if somebody talks about uncertainties in the environment, I would look back and say let’s get into areas where the margin of safety is reasonably high where the returns may take time coming. All these names I mentioned may not have strategic action, but if any of these do, the returns could be 2 to 3x and I feel in any case the time for re-rating the mid caps has come through.

ET Now: You have liked sugar in the past, Shree Renuka has been your preferred pick.

N Jayakumar: It has not worked out well, no question about it. Shree Renuka has not worked out and the reason it has not worked out is numbers have fallen far short of expectations. Sugar prices have come off and there the underlying question is the presence of lose money in the world has meant that a lot of lose money has gone in principally into commodities and completely distorted short term prices of all commodities. Sugar was no exception.

So when it went to 35, we had managements coming out and saying that we see 40 cents etc. The reality is down to 23 cents. So the profitability in the near term, managements have followed up their line of thinking and I do not necessarily believe that that may have happened, but essentially, the orientation of management is a lot to do with the way stocks play out and there the fact that managements were far more bullish on sugar prices, not fundamentally driven but prices that were driven by speculators in the commodities market and as margins in those markets started going up or as money started getting pulled out, you had a serious erosion in commodity prices.

Even today the weak dollar may well be a support for commodity prices but the fact is how much of these commodity prices is driven by demand supply and how much of it is driven by speculation; it is only about 10-15% that is demand driven and news driven. The rest of it is entirely losing money. So from a commodity perspective, that is the one caveat that we need to, which is why Renuka Sugars being international into commodity prices has been more volatile than some of the other sugar names. So sugar has not played out. It is a theme that maybe was pitched on rising sugar prices which was not exactly the case.

ET Now: What about the NBFC pocket, are there any names that interest you?

N Jayakumar : NBFC, we are keenly awaiting this RBI notification on new banking. The one name that clearly stands out which we actually love is Aditya Birla Nuvo. It has got a fantastic portfolio. Anything they do from here will be an unlocking of value. It is one of those cases where every business is doing well. They can actually unlock value by giving sharper focus to individual businesses. I am hoping at some point in time holding company norms are coming to force and therefore an Aditya Birla Nuvo is able to do much more for the shareholders and it has done.

It hit a 52-week high yesterday in a market, at 10000 crore market cap, I would not say it is a large cap with $2 billion, it is still far short of what it can be in terms of the portfolio. They have got a lot of disparate parts, the BPOPs whether it should be there is an issue and by the way the numbers that have been announced have been without, they have announced 750 crore PAT number compared to 75 crores last year and this does not even include the Idea consolidation where the numbers have not been announced. So Aditya Birla holds a lot of promise and now with hopefully both in insurance and the mutual fund business some stability coming, this could be a stock that could dramatically surprise you on the upside over the next 12 months.

ET Now: But does not make sense for our viewers to buy holding company stocks because holding company stocks always traded at 20% to 30% discount to the intrinsic value?

N Jayakumar: But this holding company I am just saying whatever they do from here and I suspect at some stage, they will start removing pieces. For instance, carbon black, which is a big piece. They have different assets in different companies. Maybe there is a consolidation there that is waiting to happen. Maybe there is some spinning off there that is waiting to happen. Some of these are beginning to help. Take the case of Essar Ports de-merging and the kind of shareholder value that it threw up even in the short run, a lot more de-mergers.

Clutch Auto talked about it yesterday. So, a lot more de-mergers and corporation actions in this market may be a positive surprise for shareholders.

ET Now: Let’s get a disclosure going.

N Jayakumar: Disclosure, very clearly we are interested in what we speak and I want to repeat that at the risk of getting the wrong side of regulators, clearly we are interested. Our clients etc. have positions in these and would be interested in any or out of the names mentioned, but one last thing, the other reason I am really bullish in equities is in recent times over the last 3 months, I have seen just like individuals chase momentum in markets and they also chase stuff that moves, a lot more people and parties talk about commodities than they have ever done before and the people have not been able to get to grips of the volatility of an equity market. God help them when it comes to moving into commodities.

ET Now: So the party talk is commodity, it is no longer equities?

N Jayakumar: It is no longer equities. A lot of us feel reasonably ignored because nobody wants to hear ideas. People want to hear our ideas as it were.

ET Now: So let’s nail it down to 2 ideas out of the 6 ideas you have discussed.

N Jayakumar: The 2-3 names I would say Orchid, Alok and ABG, these would be some of our top ides.

ET Now: And one year price target, 30%, 20%?

N Jayakumar: Price targets never. Markets overshoot and they could surprise substantially more than that.

Source: Moneycontrol.com

The whole of last week has been a bonanza for the market. As gains continue to pour in, an optimistic N Jayakumar of Prime Securities says money flows will continue despite local and global events. “We have seen multiple sectors helping the market come back to 5,800-5,900 levels. And now, a period of consolidation is clearly called upon,” he says.

However, he does sees the market hitting new high going forward. “Nifty could breach 6,000 on the upside if crude cools,” he says.

The big theme, according to him, will be the mid-cap space. “That space is witnessing a recovery. Scrips like Atlas Copco and AP Paper are showing undervaluation as of now,” Jayakumar explains.

Standing on the cusp of the fourth (January to March) quarter earnings season, he suggests to not expect many positives for frontline companies. “This season needs to be looked at on stock-specific basis.”

SELL if and when Nifty hits 5900-6000, advises Baliga

Being cautious on the banking and technology space, Jayakumar says he doesn’t see much of an upside in Infosys from current levels.

Source: Moneycontrol.com

Japanese stocks plunged 12% on Tuesday as the country is dealing with multiple crises. The economic impact on the quake-stricken country and the global market is yet to be construed. Veteran on the market pulse, N Jayakumar of Prime Securities, in an exclusive interview with CNBC-TV18 shares what the Japanese crises mean to capital markets and how the risk capital is likely to behave.

Jayakumar believes Japan will begin rebuilding on the scale it did after the second world war and risk capital will rush in to help in that process. “Risk capital will tend to move around faster searching for higher returns in different areas,” he says. He also points out that few industries will undergo changes, “the cost of insurance will move up, therefore, the cost of business in certain areas may move,” He further adds that investors are staying cautious on Asia.

Below is a verbatim transcript of N Jayakumar’s interview with CNBC-TV18’s Latha Venkatesh and Soniya Shenoy. Also watch the accompanying video.

Q: You must have seen the 1987 crash both in the US and in Japan, the 1995 Kobe disaster and the 10% cuts that the Nikkei saw on that day. How are you looking at this cut of 10%, do you think that Japanese, Asian and Indian markets could see some sustained downturn?

A: In the post world war-II scenario in Japan, the nation as a whole got down to a tunnel vision of saying let us just rebuild. This will be the only phrase that Japan will now adhere to over the next few months or quarters. They would want to rebuild and if possible eliminate the memories of the kind of images that we are seeing these days. There will be huge rebuilding and reconstruction effort. There are certain fallouts like the future of the nuclear power in the world depends on this. The kind of safety standards, back-ups and disaster management systems that are present in every country will probably go through a sea change.

These days capital moves around ruthlessly to seek out the returns and to that extent, I feel the period of low interest rates will actually get prolonged substantially further. While the initial estimates have put the reconstruction value at USD 50 billion to USD 80 billion, but this morning the value has got to the level of USD 150 billion. Hence, once the numbers get into this level, or at USD 150 billion, USD 200 billion, rather than USD 100 billion, there is going to be a massive amount of capital spending on this, not just by Japan, but even by capital that moves into Japan.

The insurance industry is badly hit because there are far more natural disasters hitting the world. Hence, there are numerous changes that are taking place in a couple of industries. However, it is not the end of the world.

Q: For the next couple of months or a quarter, is it possible that risk capital will sulk and look for safe havens like interest bearing bonds? Are the political turmoil in North Africa and West Asia the beginnings of doubts over sustainability of the growth numbers that one saw in the West? The sovereign defaults are also coming together. Is there capital preferring interest for at least the next quarter?

A: If sovereign defaults have been identified as risk factor, I would scarcely say that interest bearing bonds are necessarily safe haven. People may move towards oil and gold as natural outlets. The oil movement may actually happen far more prodigiously than one expected because the perception will drive people into oil.

On the other hand, technology these days tends to make things happen quickly, hence, the reaction that we need to see gets overemphasized in the short term. So, we have an exaggerated reaction whether on the up-move or the down-move. Therefore, rather than a protracted period the rebuilding process maybe protracted.

The direction for rebuilding, the amount that needs to be put out and the need for capital is not an intuitive call but risk capital will sulk. The cost of insurance will move up, therefore, the cost of business in certain areas may move. However, it is not intuitively appealing that risk capital will sulk.

Risk capital will tend to move around faster searching for higher returns in different areas. Therefore, from that perspective the markets have the ability to be ruthless and looking at pockets of out performance. Capital will move there because capital in that sense is faceless and will move where returns beckon. Technology is accentuating cycles, is enhancing impact and to that extent we need to see response levels and response timings have been much faster.

Q: Don’t you think given how unprecedented this event is, FIIs or even an average investor would be averse to risk as before?

A: If the extent of damage remains unquantified into the next few weeks or this continuous to snowball or if radiation impact hits the main street much harder than seen so far, then clearly, what you are saying is true. However, if events like these spiral out of control maybe governments around the world will tend to rally around. We are still seeing the aftereffects, few aftershocks and the reactor meltdown risk explosions. So, people haven’t faced this level of reality. We need to give this a few days.

Markets will not wait and therefore markets have corrected. The Nikkei was flirting between 10,500-11,000 levels; however, it touched 8200 this morning which shows the how quickly the market adjusts to various things. However, I would like to believe that some of this will come under control. The cost of that may be substantially higher than what we have imagined; the period around that I hope is not longer than the next few weeks, in terms of getting this immediate thing under control.

Q: For our own markets what is the call right no, what are people talking about in terms of a downside?

A: Markets move in a certain realm of possibility and the possibilities they have envisaged right now and a move from 10,700 on the Nikkei to 8200, I would scarcely say is not catastrophic. However, it indicates that even though 10% of the economy, may be affected, the market is gone down close to 22% at its lows which is catastrophic.

However, for the moment the world believes possibly that some of this will come under control. The more medium-term or far reaching impact in terms of nuclear power being at a premium or people being unsure of nuclear power especially in coastal areas etc that is something which impossible to predict as of today. So, even the markets move in a realm of possibilities and for the moment markets have been seeing this move as having factored in.

India fell substantially more and at 10700 Nikkei, it’s possibly up 4% to 5% for the year. We were down 12.5% for the year, we are still down 12-13% for the year, other markets have moved barely into negative territory. To some extent it is catching up by not falling adequately, but let us not get fooled by short term market moves. Markets when first faced with a possibility or indeed of upside in case of an opportunity but those seldom become the medium-term levels and markets will reverse around the mean. However, it is important to note that this has happened in one of the most technological advanced era of ours where responses to things like this are available; not entirely predicted but certainly available. Hence, I do have that this will not spin out of control into anything worse than it already is.

Q: There has been a systematic fall in several commodities. If as you say the loss of faith in nuclear as a source of energy should logically increase the price of crude, what we have seen, since the earthquake and even may be before, is actually Brent falling off from USD 117-118 to all the way to USD 111. How do you explain this last one week or two week fall in commodities?

A: If you take a look at the level of brent, on Friday it was floating at USD 112 levels. It was not distinctly over USD 112- USD 113 in any case. Financial futures of commodities or even in commodities have been the single biggest destination for loose capital. Loose capital in the world has run riots in terms of commodity markets.

Industrialists in the cotton business in large companies tell me that the international markets couldn’t even absorb USD 100 million – USD 150 million. In certain cases like cotton because the agricultural produce is being perceived to be short the cotton prices went up 30%. Therefore, this particular financial future that you are talking about as in commodities have been entirely sort of almost abused and abused beyond belief by loose capital that has walked in.

The level of oil prices at USD 100 was not close to where oil was available in terms of demand-supply equality, for demand-supply parity, which could have been at USD 75. Hence, if it is already 30% higher, I don’t think short run moves are in any case under scoring a point. Commodity futures are overbought, and any markets that are overbought, especially into events like this, will tend to get the hail out first, before they ask questions. Therefore oil and coal become far more appealing than earlier.

Q: Do you think the worst is priced in India or do you think that because of these ugly inflation numbers we are going to see a little more of sell off before we see support?

A: Inflation numbers have been higher than otherwise. India is completely out of our control in most cases to address commodity prices. The RBI is attempting to try and control money. There will be one more interest rate hike, may be a second. We may not have overcome the inflation issue however, the money tightness which is afflicting a lot of industries especially in this quarter. We need to ease up money for our GDP forecast. If the government also does not crowd out the private sector as its number seems to indicate, then money will be available, but we may have to wait until April before some of the tightness becomes a little less than what it is.

Source: Moneycontrol.com

N Jayakumar of Prime Securities is cautiously bullish on markets for 2011. In an interview to CNBC-TV18, he said that Nifty may test 7,200 mark by Diwali and could end 2011 at 6,800-6,900.

He is concerned that move towards new high won’t be strong and Nifty could test 5,400 in worst case scenario.

According to him, there are lot of value in midcaps compared to large caps sector. He is bullish on softer commodities. Jayakumar is betting on Shree Renuka , Core Projects and Everonn .

Maintaining an extremely bullish outlook on offshore space, he is positive on Aban Offshore , Pipavav and ABG Shipyard . Among the real estate stocks, Jayakumar is bullish on Orbit Corp . “ Rel Infra may rally towards Rs 1,050-1,100 mark,” he noted.

As a strategy, he prefers L&T over SBI and Tata Motors .

Here is the verbatim transcript of his interview with CNBC-TV18′s Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: Are you feeling bullish or cautiously conservatively bullish for 2011?

A: A very Happy New Year to everyone. I think one is feeling bullish cautiously. I stay cautious because suddenly one week all headwinds seem to disappear and another week headwind seem to come back. But I think the way I see this that 5,750-5,800 will act as an extremely strong base.

My own thought for the year is that if an extremely negative event were to take over the markets, we could test 5,400. But otherwise we will probably do another grinding kind of slow upward movement through the year. That is the view that I have.

So, it may not be very different from the first six months of what 2010 was where the markets kept moving up much against the wishes of people. My own sense is that we are going to have a grinding kind of a movement rather than a quick dash beyond 6,300-6,400.

Q: So, 18-20% by the time the year is done or will the grind have more traction on the upside?

A: I think from current levels we could, my own thought process is that, once the 6300 gets taken out convincingly, inevitably our markets have always maintained this move in a band of 900 as it were 6,300-7,200 will be the new range. We could test 7,200 sometime in the course of the year, probably closer to Diwali. And then maybe we end the year around 6,800-6,900. That is the kind of feeling one is getting.

One of the principle reasons is that in terms of big positive surprises or big negative surprises a lot of that has actually got eliminated. Unless there are serious dislocations in either the commodity space or dislocations in terms of money markets worldwide, I feel a grinding move is probably more the order of the day. Volatility regardless of what people are expecting, I think will be on the lower side for much of the year.

Q: Where does that leave midcaps? Do you think it is a rear where midcaps will be the place to hunt for value or do you think that played out already in 2010?

A: I do not think so. I think it played out in 2010 and just about when the world seem to want to jump into midcaps, you had a complete collapse for one reason or the other in the last quarter of the calendar year. I think that is where as they say angles are fearing to trade and that is where one should go out and venture and put ones money and ones mouth in the midcap space.

We have been a bottoms up kind of broking house. That is the orientation that I personally have. I think one would tend to look at a lot of value in the midcap space, especially because people feel that it is time to just stay in the front liners. The fact of the matter is very-very few front liners have actually contributed to this kind of a rally.

Q: How long does it take for us to move into a new high? We have been labouring with that for the last three-four months, have come close to that, but not quite killed it. Do you think it happens before the budget through January-February in this move or it takes longer to grind it out?

A: I do not think it will be an explosive take out in any case. I just think it is going to be one of those things if liquidity and allocations continue the way things have been, we will continue to strive for the new highs. New highs, especially those made three-four years ago, technically tend to take a lot more time. If it got taken out in the first pass, chances are that corrections around that could be pretty steep. As we have seen the last time we attempted that we went down about 10% almost from there. We have built base. We have worked ourselves back into a shouting distance of the new high.

My own feeling is that it will be a grinding takeout. It is not going to be based on significantly large flows because today flows are also getting directed into things like initial public offering (IPOs) which the government is putting out etc. So, my sense is that it will be one of those not an extremely explosive, not particularly marked by great volumes etc, it will be a gradual takeout. I think the old high in this point in time is just one chart point. It is physiologically important, but nothing beyond that.

Q: You sound quite tempered, are you expecting a boring year then, another year of pretty much a 5,000-5,700 kind of Nifty range with individual stocks outperforming, but nothing more exciting than that?

A: I think so. I think it is not going to be particularly rip-roaring kind of a year. I feel it is going to be a year where the Index, the Nifty etc will not really give you the big thrills and spills in life. It is going to come from individual spaces and the joys of looking at spaces that have either underperformed dramatically in the past or being undiscovered or where angles fear to trade. So, you need to see this in the context that because the world is focused on the old highs, the world is focused on the Nifty and world is focused on performance parameters across markets, that is where I think the least action will be. I think the action will be in places where people are expecting them or people are scared to get in to them.

Q: Just to approach another way though people who look at stock market cycles point out that 2011 is the third year of the cycle and that is when you start seeing PEs begin to expand. Is that a possibility that there is no run away rally, but the markets PE expands ie people are comfortable with it being at far higher rates purely because earnings are performing better?

A: The performance for last year has actually not kept pace with the earnings growth in any case. So, if there is a case for a PE expansion, I think it is being there even last year, as of this year that the need for a PE expansion or the case for it actually is probably stronger. But if we are able to produce the same 9% plus kind of gross domestic product (GDP) growth second year in a row and corporate earnings continue the way they have been, there is no reason to believe that PEs will not expand.

But typically big exciting moves happen in the market when large players who haven’t had any allocations and new money get allocated in a big way. Right now, the world is in a situation where they are seeing the developed markets as attractive in many case. If you see the commentary around the world, people see as much attraction in the developed markets as they are seeing in emerging markets. In fact in many cases people feel that money flow into the equity markets or the developed space will actually will be pretty strong.

My own feel is that a lot of that money may actually come from the debt markets around the world because the debt markets have had an unbelievable run despite sovereign default etc. As those yields start moving up money could actually move from there into the equity markets whether it is the US or Europe etc. So, while I do not see money from emerging markets necessarily moving back into the developed markets, I do see the allocation not being dramatically different from what it has been and the easy money policy on the back of a weak dollar continuing. So, given that this scenario, really I can’t at this point in time make a case for a dramatic surge past 6,300 etc.

Q: Where do you stand on commodities in that case, no lasting impact on market or economy or one of the reasons we may trip up or at least not outperformed?

A: We are pushing the envelope as of now. The dollar is clearly showing signs of weakness despite the fact that the US economy and this is the paradox really, the US economy was weakening 24 months ago and the dollar kept strengthening. Today, the US markets actually and the US economy is showing strength. The dollar weakness has suddenly set in. It has slipped below 79 or thereabouts, 79 and a bit on the dollar index. But importantly that weakness is principally due to the weakness in the euro.

Look at the Swiss franc for instance, look at the Japanese yen, these are trading at their life time highs. If you look at that perspective, the Aussie dollar etc, you are seeing commodities clearly gaining on the back of this. But as commodity prices move up, there will come a time when commodity index will threaten consumption and demand. And that is when I think you will have impact on economy etc. Right now, it has been tempered and moderated. The only commodity that has moved one way, which is probably not a consumption lead thing but more seen as a currency of alternative choice if you will, has been gold. Right now, the speculative furor seems to have moved to oil.

With the world in general seeing economic activity pick up, I think the oil could head a lot higher. Maybe into the USD 110-120 range, at which point in time I would like to believe that the panacea for India is probably having a dollar rupee closer to 42 or in the 40-42 range. So, that is going to be the off set to a dramatic increase in oil prices.

But other than that, I think commodities worldwide are pushing. We are far more bullish on the softer commodities because I believe there weather patterns across the world courtesy global warming or other wise have dramatically impacted and there are droughts co-existing with floods in different parts of the world. I believe that a company in the soft commodity space could do extremely well, especially those positioned in multiple geographies. No prices for guessing something like a Shree Renuka Sugar where we have an interest and have stated so in the past as well.

So, we think soft commodities look extremely exciting at this point in time. Steel to an extent does, but input prices have been the only reason why steel prices have been going up. The last few hikes have all been because of input prices. So, maybe at some point in time, demand could come a cropper at the margin. But until that time, the commodity party will continue, the dollar index continues to grind lower and that is the view that we have.

Q: How much of a roll will the government play influencing the stock market in 2011 both in terms of the noise which has been surrounding it over the last few weeks and how that resolved itself and in terms of any concrete policy action?

A: I think what has been missing in this market has been policy action. I think the government will move in the path of least resistance i.e. implementation of infrastructure projects for instance is something that the government can do without too much noise from the opposition. Implementation of projects in basic infra, whether it is hard infrastructure or soft infrastructure like education will be spaces that the government can move without meeting its two months resistance. Infrastructure has been a space that has underperformed dramatically over the last two years. I think that is where big amount of action could come in. So, both these spaces whether it is hard infrastructure, things like Reliance Infrastructure , BHEL , L&T or the soft infrastructure and what I call the education kind of companies and we are very bullish on education including companies like both Everonn and Core Projects. We like companies which are in the spaces that are ancillaries to these. So, if you overall look at it, these are spaces that have been shunned on neglected. My own assessment is that those are the spaces where the value will be found big time because the implementation of these is going to be without too much government interference.

The other aspect of policy action that you said and we need to be worried about is this the entire divestment programme and I wanted to just pause for a moment to consider this. Whenever the announcement of an FPO has come in, it came in Shipping Corporation, the stock was at Rs 200, the pricing got done at Rs 138 and the stock probably quote somewhere around, I am not even sure, probably even below that around more than Rs 130. Essentially SAIL got announced at Rs 250-255, the stock is already down into Rs 180s and probably gets priced even lower. It is a matter of some concern that the government seems kind of almost careless or unconcerned about the pricing of FPOs. If you see in Shipping Corporation, for instance, the short positions prior in the run up to the FPO pricing got taken up fully, it was in the band period as it were.

While we are kind of quibbling on pricing the government is kind of with gay abandon going around pricing its FPOs which become not just an overhang into the system but if some of these FPOs are based on index based stocks, that could put a little bit of a pressure. Now, the government is announcing ONGC, I gather, very soon. Does that mean that ONGC gets slammed into so that it gets priced at any point so that the government can get its money? To an extent I am little concerned about the government’s if you will carelessness. But in these illiquid FPOs, things like Hindustan Copper etc, nobody knows what the true value is because the listed price is not indicating that. So, if there was an area that I would be a little concerned about is gay abandon with which these FPOs are getting priced.

Q: You spoke about Core Projects earlier and that stock got smashed up when all this corporate governance issues came to the fore in the month of November. Why did that stock tanked as much as it did? Why are you bullish fundamentally on this stock?

A: I am not aware of any corporate governance issues that surfaced. All that happened was we saw huge volatility in the stock, which has been always a matter of concern. But at the end of the day as I said, it is also an opportunity in that space when the volatility is high that you can make good quality purchases at good prices. But I have no idea, a whole bunch of technical reasons and rumours dominated the last quarter, atleast in the midcap space.

We from our perspective have a coverage on Core, we have infact gone to great links to check out and work through their business models etc. We believe that the kind of coverage they have in the US, for instance, as well as now an increasing presence in UK and what they intend doing in India offers a tremendous combination.

Typically, the education companies have been beset with problems wherein the Indian context they have been bidding for projects, especially in the ICT kind of space where the bill of material is almost not covered in most cases. So, I am not sure how existing companies, the Indian space make money. But I think the way Core has approached it is almost they have no presence in India and now they are planning to increase their presence in India by getting into schools etc which is a lot more asset intensive.

So, yes, you could have concerns on return on capital employee, but the space itself is so large that coverage atleast for the first few companies that get into the space will be pretty aggressive. I think education is a space in the past has been seen as almost like a no profit activity, which is not the case today if you look around and see IB schools etc. So somebody who wants to get into the schools and they have got a tremendous management team which we have interacted with and we are pretty confident about the kind of numbers they are doing and the kind of opportunity space that exist in the Indian markets.

Q: I know you keep an eye on offshore related or exploration related space quite closely, anything that stands out for 2011?

A: Selan is more on the exploration space which is a little more of a, I would not say lottery ticket, but a lot more of a long gestation kind of project. The offshore space we are extremely bullish on. That is again a space that is seriously under owned, if you see the way Aban has moved or see some of the way other players in the industry. So, we have got coverage on Aban. We think that the market for new rigs have improved dramatically. The word is dramatically here.

The market for old rigs on the other hand is still a bit lukewarm and the only takers are ONGC etc. Especially in the context of the accidents that have happened in the rest of the world where old rigs no longer are finding great takers. So, we think that Aban has been addressing its debt problems through its operations. We think there maybe an equity offering maybe a year down the line or six months down the line, when valuations improve slightly. So, Aban will be a steady performer in our opinion.

I think a lot more undervalued in the space would be like Great Offshore where the valuations have just fallen out of bed. They are going at middling single digit price multiple, price earning multiples. We think that the related space which is the shipyard space, again catering to the offshore space or defence, which include the companies like Pipavav, ABG Shipyard etc they look attractive. Again going by the infra theme and going by the offshore theme. Yes, we like these spaces, but we have to be selected about the company. Aban may be a bit more of a slower, but a gradual riser because the worst is behind them.

Q: I think Orbit is one of the stories that you like from there?

A: I think from our perspective Orbit at least has got a stated business plan of being only in the South of Mumbai. If real estate moves, South Delhi and South Mumbai must move first before anything else. The way I see this is that the real estate space has got confused for a whole bunch of reasons. The least of them being that people now do not want to touch their debt; people do not like their equity. So, it is not that these stocks are suddenly going to come into fancy.

I think what companies might determine is what they want to be. You can’t be everything to everybody. So, you can’t be for instance an SEZ player plus a real estate, a retail player plus commercial plus residential etc. So, we think that most companies have tried to be everything to everybody. At least to that extent, I give Orbit credit because they have been focused on being in prime South Bombay redevelopment kind of project. I think at the end of the day if real estate were to move, this will be the first space that will move.

Having said that, the real problem that real estate companies face right now is that when payments of loan repayment start coming, they might find that they are not being viewed with the same optimism by banks and lenders in terms of rolling over these loans. So, if the takers for debt reduce, the takers for equity have not been there. The only thing they have left to sell them is the inventory which means what they hold in their books in terms of real estate inventory. When that starts hitting the market, sometimes February-March-April-May, when these payments are due or at least in the loans, I think real estate in the over populated areas in Bombay, where a lot of activity happening, like Parel etc may well become a cropper big time.

Q: If your call is that this year is pretty much about the same thing ie a grind up for the markets, what does that mean for local money and participation? Is it going to be a year again where people basically sit on their hands and wait for that big dip?

A: People will keep waiting. But one interesting trend that may emerge is that SIP money, I am given to understand, over the last couple of months at least has started perking up. Ultimately four-five realities that the world and especially the Indian investors will content with a) they cannot time the markets, b) they need to be in the equity markets because really they are showing resilience, c) equity markets will definitely beat fixed deposit returns and d) because they can’t stomach the volatility, they may want to go through the SIP mode and through mutual funds.

I think if these realities were to come home to roast, you will have a lot of SIP money coming through. For a country like India we are still seriously way below what equity investment should be like for individual investors. Given that, I think SIP money will replenish or make up for the kind of short fall that mutual fund have been showing or the stuff that mutual fund have been pulling out of the market. I think that will stop and will actually start having come q1 of next fiscal. I think decent money coming in through the SIP route and that might actually make up for any depletion in flows as far as FIIs are concerned.

Q: If I put a gun to your head and said you had to pick one of these three largecap names for 2011 between SBI, L&T and Tata Motors, which one would you plum for?

A: I think I would say L&T.

Q: Not SBI or Tata Motors?

A: I think SBI will face headwinds in what are challenging interest rate scenario. Tata Motors has had a great run and my feeling is it is also serious over owned. I feel in the Tata Motors front oil prices will be a dampener sometimes in the course of the year, if not in the first quarter itself.

Almost by default, I would say L&T, but if also fits in the theme of infra that we have. While we are talking about L&T, I would like to take advantage of the fact that we are on the channel and speaking that might even want to look at space like Reliance Infra which has under performed and has potential to go back at least to a Rs 1,000-1,100 range very quickly. One must take all disclosures as been live and current that we have interest in all the stocks we spoken about. Our clients would have positions in some of these. I think that disclosure needs to be aired loud and clear.

Source: Moneycontrol.com

N Jayakumar, CEO, Prime Securities, expects the market to make a new high in 2010 on lower volatility. He is bullish on the midcap space and advises a bottoms-up approach. “There are a number of undiscovered stories, undiscovered spaces, which are going to be the adrenaline and kicker for the coming year.”

Here is a verbatim transcript of the exclusive interview with N Jayakumar on CNBC-TV18. Also see the accompanying video.

Q: What is your prognosis for 2010 in a nutshell?

A: In a nutshell, we will make a new high. Contrary to what people believe, the year will be low on volatility. The principle reason there being that a lot of companies are raising money. India will continue to get the capital it needs in the primary markets. Corporate India is keeping all the protection and the insurance in terms of raising money, so the market downside seems limited. When the downside is limited, the upside will surprise us. We will make a new high and that will be marked by low volatility.

Q: If you are betting on a new high, do you think it will be front-loaded or people would get an opportunity to buy and then the market will go to a new high?

A: Markets are never so accommodative. Even today, the public kind of has the money. The risk appetite is slowly coming back. But if you just take a look at the F&O data, virtually every stock is in backwardation. The striking feature is that virtually every Nifty stock is quoting a backwardation. This means that almost nowhere is there a serious long position built up, where people are kind of leveraged etc.

The greatest gift to India was allowing insurance companies to buy over the last two years. What we haven’t noticed is that they are buying quietly. This is the buying that goes principally in the Nifty 50 stocks. If there is a straw poll that CNBC conducts, you will find that virtually nobody has put money in frontliners especially in the Nifty 50 stocks. Foreigners short the Nifty to hedge against their portfolio. So, you are seeing the Nifty going up, participation is limited, and you have new highs being made with virtually no conviction.

Q: Do you still sense anxiety on part of investors — institutional and high networth — of having not participated yet?

A: If you talk about the investors who have been in India, whether institutional or hedge fund investors, for the last even 10-15 years, they are running net positives or net neutral positions. If it is net long, it is probably at the lowest net long that they have been in their existence even today. I don’t want to give names because that is not the objective here.

But most people, who have been long in serious measure through the better part of the last 7-10 years, have got 15-20 stocks that they have shorted for every 10-15 stocks that they are long on, trying in some sense to capture the higher gain from one vis-à-vis the other. But the bottomline is that people are ready to short, people are ready to buy insurance because everybody has 2008 writ large on their screens, if not on their minds.

I have a theory on why insurance has got so much money. I don’t have anything to base this on. After 2008, as the recovery slowly began, people said let us take more insurance as we don’t know our future. I think insurance premia is a function of the psyche at the end of the day. That has been the fundamental bulwark of our market because nobody counts their investment in mutual funds as an exposure to market.

I think people have the money, have the risk appetite, so every asset category is coming back. I do sense some bubbles building up, but the anxiety of direct investment is not there, which is why we are so bullish on the midcap space and the bottoms-up approach because undiscovered stories, undiscovered spaces, which are going to be the adrenaline and kicker for the coming year.

Q: Will we hit a new high in the first two quarters?

A: There is a good possibility. When I say first two quarters, I mean the June-July period. Without unnecessarily pinning myself to a date, we will have made a serious attempt at a new high by September 2010. Maybe concerns come in, maybe tightening of money etc, but one of the universal truths in the market today is that markets have sensed liquidity coming into them in some form or the other.

If you go back in time when the yen carry trade created leveraged money and more recently the dollar carry trade and then the stimulus packages which have just been pumping in money, the markets have sensed liquidity. So, it is going to be very difficult for central banks in my opinion to pull money out en masse if you will. There will be some tinkering here, some tightening here, the Australia Central Bank for instance has already started tightening. But other than these isolated pockets, it is going to be very difficult for money to move out especially when it has tested blood in these markets.

We may well look back and say that this entire 2008-2009 might have been a 12-15 month correction where institutions across the world panicked and then the lender of last resort, which is the central bank, came in.

While people have been arguing about whether it is a U-shaped or V-shaped or W-shaped, I thought one should coin something to keep this debate going. My own feeling is that it will be more tick-shaped, which means that the high made will actually be higher than the high made earlier. We may have a V but it is an extended V. It is like a tick mark which indicates that the correction maybe complete. So, this is the little thing which amuses us a bit.

Q: What about the base, where do you think that has been lifted to?

A: I would be surprised if 4,500 gets violated for any length of time. I would probably have gone ahead and said 4,700-4,800. But I don’t know if I can ever get the last few percent, but I think 4,500 to 4,750 may well be a base which is the equivalent of last year’s 3,900-4,000 which I talked about. At 4,500-4,700, you might consider playing safe. It is only 700-800 points off from here, but I would be very surprised even if 4,700-4,750 gets taken out for any length of time.

Q: You said the year might be marked with low volatility which is a departure from what other people are saying. The VIX is already at 19-20, you think it will not rear its head through 2010?

A: I think the markets are surprising us and let me take a few things that have happened which indicate this. Everybody said that the corporate fundamentals must follow an economic recovery. After which comes liquidity because people have risk appetite. Now, it is exactly the opposite. Money has flowed into sectors that were most unlikely to get money. A Suzlon is getting money, Unitech is getting money, all happened well before there were any signs of recovery. This has all happened in May-June after which the company started showing better fundamentals, at least in terms of debt reduction, in terms of promoters pulling out their pledged shares.

That has brought some marked sense of improvement in the economy. Sometimes traditional economics has turned on its side. If you look back at the empirical evidence of what has happened, it has been money that has first come in, then the corporate fundamentals have sensed a change and then the economy has moved. That is one departure from the past.

The second departure is everybody had either a L-shaped, U-shaped, V-shaped kind of thing. Maybe it is going to be completely different and I had a different take on that. My fundamental bullishness through the last year has been not because I had sensed a bullishness because of certain inputs but more because of what the masses were thinking. I saw anxiety, I saw caution and I saw bearishness. So the flip side of all this was some bullishness.

Everyone is talking about higher volatility and the screen is telling you that we are close to 5,300 on the Nifty and a 5,400 call with almost a full month going is going at Rs 55-60. So, we are not even sensing a 2-3% move with any clarity. There are not enough buyers or adequate buyers for a 5,400 call at more than Rs 55-60 tells me that volatility should be low.

Every balance sheet in the economy — in a sense the government of India through its divestment programme or corporates through their qualified institutional placements (QIPs) and their global depository receipts (GDR) programmes — are raising money, in a sense creating a base. Most of this is for balance sheet repair or some growth, but for some kind of insurance money. People aren’t talking about aggressive expansions.

When do balance sheets have volatility? It is when you have aggressive expansion, aggressive leverage. People are going the exact opposite. So, if the balance sheet of company and the balance sheet of the country is getting cushioned by equity issuances, then by definition volatility in the environment must be low. That is exactly what is happening. I think there is a fair degree of predictability that the US will be unable to raise interest rates. The short dollar trade to my mind may have played out. We may be in a range of 75-80 for the short run.

Most of the negatives have played out. People feel the markets have played out the positives. I genuinely feel that if there is a sharp dip, there are buyers waiting. So, the sharp dip may not happen, the runaway boom is not happening because people are not committed. I don’t think people are jumping in a hurry. Net-net, I feel low volatility with dips being bought into and any sharp move being sold into by people who have invested.

This is going to be a year where corporate finance will be very active. This is a year when companies will be seeking to put themselves on the radar and new stocks, new companies will come into focus which means new sectors. We have already seen it. In the last 24 months, where fresh issuances like initial public offerings (IPOs) were met with either a lukewarm response or a negative response. Some issuances listed at below par. You had Cox & Kings which came and blazed its way – whatever reason. People just like a whiff of fresh air. A new space like a travel and tourism, like logistics, none of this is index based and the index is well covered. On one hand you have low volatility, on the other hand you have exciting new spaces to look at – logistics maybe a result of various things, the offshore industry, shipping industry, the shipyard industry, marine logistics for instance, neglected spaces. I think these are things that we should be looking at for new ideas. I can go through multiple spaces. So, it is going to be a year where you need to kick the tyres, need to be out there with companies. It is not going to be a year of volatility. The Nifty play to my mind is not going to be sharp moves, but I think I am very excited about the corporate finance work that we have. I am excited about the kind of portfolio selection we can make.

Q: So, you found your new Aban for 2010? Don’t say it is Aban once again, you said it last year.

A: I said it last time. I think there are quite a good spaces that are exciting. I am going to give the disclosure that we have some or a lot of interest in all of these. Bharati Shipyard has pulled off a major coup with the acquisition of Great Offshore. On a consolidated basis, we see Rs 90-100 earning. So, it is about 2-2.5 times. It is in the same sort of place where Aban was a year after acquiring Sinvest. Aban didn’t dilute – that was a different issue, maybe Bharati through the receipt of subsidies from the shipping side may well have an automatic deleveraging of the process.

But the most important thing is the full integration of shipyard is down to actual deployment of the offshore vessels because now the shipyard business which is very volatile may actually have been dampened. Here is one more case why this acquisition may actually dampen. We think a Bharati Shipyard could be a serious multibagger from here.

I don’t know if it is a multibagger, but a space that people looked at is Cox & Kings. We think Thomas Cook has been rubbished by the street being a Re 1 or Rs 1.5, I think their next year earnings could surprise our own estimates are that they could do Rs 4.5-5 earning. If that comes through, this could be Rs 150 stock especially given our bullishness on the fact that the consumer discretionary, consumer spending could be the way forward. If auto is one indication of that, the next level derivative will be travel and tourism.

Q: Between the two, you would route for Thomas Cook now between Cox & Kings and Thomas Cook?

A: No question, Thomas Cook all the way. That is another space. Companies which are there in the logistics space could be serious plays for the current year. In terms of multibaggers, we will need to look at some other fallen angels of the past, the IT space.

Q: Midcap IT still?

A: I don’t want to say midcap IT as a broad brush because that is deceptive. We are doing work on a few. Maybe two months from today, one could look at these spaces. These are not that a multibagger has happened and then we are talking about it. We are looking for some which could actually be a serious multibaggers going forward. There are one-two that we are working on that could be interesting in the weeks or months to come.

Q: You said shipping, you still see value on that space?

A: I think not so much shipping but those that are integrated. For instance, if you take Great Eastern Shipping, we think their offshore subsidiary which is Great Ship India will have significant amount of value. We understand that they maybe contemplating going public. If that happens, I think it will dramatically re-rate the parent company. While I am not that bullish on shipping, I am bullish on the shipyard space especially if integrated or on the offshore space.

Q: What about sugar?

A: We were very early in the game. It’s the only business where I see people have rubbished it for being cyclical. The fact of the matter is that when you have a year like this, who cares if its cyclical or not. Balance sheets are repaired and balance sheets are made, Balrampur has actually become debt free which is why it is kind of in the race to be acquired.

Q: At Rs 50 for sugar there is still selling?

A: The need or the consideration the management may have had or the promoter family they nothing to have to do with sugar, the orientation to be in a business because at the end of the day UP is not one of the most friendly states to be in. If there is a consolidation and I did see the Renuka name come up, I couldn’t see the logic of why Renuka would dramatically enhance their risk profile. In fact, they reduced their risk profile by making a Brazilian acquisition. They are straddled between the two spaces. I couldn’t understand why they had increased their risk profile by getting into UP. I can see good logic for Bajaj to do it because Bajaj actually then gets scaled and there is no competition for cane procurement etc.

It was a beautifully synergistic deal had it happened or as the press made out that maybe there was a deal or may be there wasn’t a deal. But clearly if that deal would have happened, I could see the synergies on that one, I could also see perfect logic in why Vivek may have wanted to look at that because they were encashing at what they thought was a good price.

Bajaj is dramatically expanding in power. We love Bajaj Hindusthan as a story because with power comes the natural cushioning in sugar volatility. Renuka has gone into two countries so they can actually export out of India two years from today if the situation so demanded.

This space will get consolidated big time. A lot of the bigger players will either sell out or phase out in that sense. We like sugar because this is the only one where production has not kept pace. We have not seen a visibility of about 12-18 months, their PE’s are dramatically low compared to what they can be even at what people consider mid-cycle. I think sugar prices will go up to Rs 60-65 in India at the retail level.

Just put it differently, when Rs 16 became Rs 18 three years ago, there were hue and cry and all sorts of hell broke loose and today Rs 18 has become Rs 45 what is the government able to do. This is a de-controlled industry, forget what people say, the government is not able to control. This is a very important thing, so there should be a natural PE accretion for that.

I do see by the way spaces like aluminum etc where I think a bubble like formation has started happening. SAIL has gone up 50% in 45 days and I don’t know if anything dramatically has changed other than the fact that the government wants to dilute more. I cant see this logic where the government wants to dilute more and spaces like Nalco etc they go up 30-50%. I would take profits there.

While people are trying to raise money, the space that continues to strike growth — and maybe the growth is slower but the equity is more valuable where people don’t dilute — is multinational and FMCG companies.

I would say phama companies where dilution is not there. Pharma is again on event risks, so I would be a little cautious. Ranbaxy has been a surprise which nobody saw coming.

But the entire range of multinational or domestic FMCG companies are growing without dilution. I mean Asian Paints has never diluted since 1978 or so, and look at the growth there. Look at Nestle, the growth there has been dramatic. This has never been on anyone’s radar. So, these are the sort of things which attract and where people value their equity extremely highly and the growth is thorough internal accruals and debt.

SBI says credit growth is a concern, I think that’s a good news because really speaking interest rates really can’t grow in that sense. It means companies are also more self-sufficient and that means the Tier II and Tier III companies will continue to get access to both capital markets and credit markets which is a good thing.

Q: Any thoughts on power as a space?

A: If there is one genuine bubble in the system, it is probably power. But there will come a time when these IPOs will get subscribed because these are good promoters coming out with IPOs. That is a good news. So, a number three or a number four promoter in a sense will not be able to raise money, but all the top guys have raised money. The market in its wisdom is saying I am getting an India exposure by coming into your company. But I think the returns over the next two-three years will wait for actual implementation to come through.

Q: You won’t make too much money from here?

A: I don’t think so.

Q: Any other area which seems like a bubble already?

A: I think some of the metal price movement to my mind is certainly like a bubble. They need to cool off. I think some of the public sector undertakings (PSUs) that have run ahead of divestment, people are going to lose money being in that space.

Q: Would you get out of the gold trade in 2010?

A: I think the gold trade has happened. I think it is a currency shift as most of these guys like Marc Faber and others say that the best currency they like is gold. It is viewed as a currency, it is a currency shift. I don’t think there is significant gains to be had in weeks where it gets hammered at 12-15%. So, the bounce from USD 1,080 per ounce to USD 1,120-1,140 per ounce could happen. But apart from that, I don’t see much play in that. I believe the gold play has moved to oil because that ties in with winter, ties in with economic recovery and ties in with a general scenario that the upside in the dollar maybe capped. But again you don’t want oil shooting significantly above USD 83-85 per barrel levels.

Q: But looks like it may do USD 100 per barrel again in 2010?

A: It could because what is happening is markets have become thinner and with the consolidation of players internationally , there are fewer players. I don’t want to say manipulating markets, but playing big in markets internationally. The international commodity trade is also dominated by a few players as we have read enough emails to substantiate. I believe that there are a fewer players now but they moved from gold to oil. I see that clearly evidenced by the way this will happen. So, oil could do USD 100-110 per barrel.

But among all commodities this is one that is not replenishable. To that extent, the base becomes higher on oil and therefore the offshore business and pipes business. So, something like a Jindal Saw is something which is where we think is a serious multibagger in the making even though it has moved up 50% from the recent lows and probably tripled in the year. Why? Because principal amount of the market cap is accounted by the investments it has. Now it is a different matter that they may not sell or they may sell one day – I don’t know – maybe 4% of Jindal Steel & Power is worth Rs 3,500-4,000 crore. But I think the important thing is that they are getting into new business like water management and to green energy etc which could make waves in the next few quarters. So, Jindal Saw is a stock that you would well watch out.

Q: What is the one central risk to your hypothesis for 2010 that we have a new high?

A: I think the central risk is that if there is a dramatic recovery in the US prompting significant tightening of money because this easy money is moving into these markets. Let us not forget that Brazil has just hit a new lifetime high, so either markets will follow maybe with a lag and Brazil has been held by the fact that the currency has been in their favour. The foreigners have done well to invest in the Brazil area.

I think the central risk is that there is a dramatic tightening in the US interest rates. Two, I do not believe and I didn’t believe even when it happened on the same day itself that Dubai etc is much more than a blip. If anything, it will probably make people look more and more towards countries like India where I think the size of the market – the stability etc – will be something that people can look at. My own feeling is that even in comparison with the BRIC countries. I think India is looking significantly better than it has ever looked before.