Market to remain volatile, don’t extend equity exposure: Anand Tandon

“We will have a somewhat slow year for IT, maybe a single digit kind of growth but to some extent that has already factored in. Maybe, there will be a little more downside but I do not see it being a strong underperformer from here much of that to me seems to be in the price, says independent market analyst Anand Tandon.

How do you read into the quarterly performance of HDFC Bank?
The stock is cheaper than it has been for a long time, except for the last one year where it has not performed. One rarely sees HDFC Bank trading at less than three times book value two years out and that is where we are today.

HDFC Bank is trading at probably less than three times book and while there are some concerns that the deposit growth has to catch up because of the merger with HDFC itself, the fact of the matter is it has one of the strongest retail franchises and that is only becoming stronger.

So from all perspectives, having it as a core portfolio is a sensible strategy, especially given that it has somewhat underperformed compared to many of the other banks given its humongous size. Therefore the likelihood is that as rotation happens in the sector, HDFC Bank will come back as one of the better performers.

What is your view on the kind of outperformance that we have seen in IT numbers. Having dissected what TCS, Infy, Wipro etc. have delivered, what have been some of your key observations?
The one common thread across all the commentary has been the fact that this year was reasonable while the next year is going to be slow. The clients are not willing to commit to what kind of budgets they will have, but if we go back in history, whenever there has been this kind of volatility, there is no question that there will be a slowdown over the next one year, especially if the US market were to come down as expected.

The fact is we would be looking at cost take outs coming through and that is something we have already seen in many of these companies' reports including Infosys. Cost takeout deals are moving up and so there is no question that Indian IT will remain a preferred bet so long as the cost arbitrage continues and the ability continues to stack up.

So, overall, we will have a somewhat slow year, maybe a single digit kind of growth but to some extent that has already factored in. Maybe, there will be a little more downside but I do not see it being a strong underperformer from here much of that to me seems to be in the price.

What do you do with Avenue Supermart? Also, the results are below expectations but the stock continues to trade at a PE of almost 77 odd times?
Yes, since that kind of valuation can only be supported with very strong earnings and expectations of that persisting over a long period, many of the analysts have started taking a slightly more bearish view given the margin compression that we are seeing and apparently a clear loss in terms of market share as competitive action heats up.

So at this stage. there is no scope for any execution issues in terms of growth. There are hints of that coming through and I would argue that it is perhaps time to reduce exposure to that in the portfolio. This is not the time to be brave and bet on very high growth.

Are markets expecting anything big from the Budget this year? That excitement is yet to start?
Well yes I think the only indication that we have had is the fact that one of the secretaries has mentioned that they may want to do things with the income tax again especially capital gains. I would imagine that would be possibly one item in the agenda which one needs to look out for especially if they were to extend the time frame of what is defined as long term capital gains etc.

At best, that will be at the margin. We may see some immediate knee jerk reaction, but beyond that, as we have seen in the past, most of these things tend to taper off. There has been a consistent increase in custom tariffs across the board and we can now see that the government is not waiting for Budgets to make changes. By itself with GST, we stabilised with custom tariffs being changed in an ad-hoc manner across the year and with the income tax, nothing much is to be done there. There is not much that you should expect other than a statement of intent.

But if there is any tinkering in the long-term taxation and if short term and long term in a sense are lined at the same rate, could that be a selloff moment for the market?
I think it will only exacerbate whatever is the general trend. If they were to increase the long term capital gains time frame, obviously it is negative in the near term but the question is what are you going to do about it?

You are not going to participate in a market if the market was to go up just because you now have to pay 5% extra assuming that they do not change the rates. So the impact beyond a point is unlikely to be extreme. Of course, if they were to change the rates overall or make all short term capital gains equal to your marginal tax rate, the impact will be a little more but as they have done in the past, they have tended to grandfather most of the gains that you had already in the portfolio as of a certain date and that kind of insulates a market little bit. Any increase in tax is an increase in the friction in the market and therefore not something that the market will like but you have to you cannot do much about it.

Do you track Varun Beverages?
It has been the best performing stock over the last one year. There is not much that one can do with it other than the fact that if you have it in your portfolio, hold on but overall, I find it strange that companies which are only franchises, are valued at the kind of valuation that these are even given the growth.

From a health perspective it is not a great drink that one should be looking at buying but from a growth perspective, it has done reasonably well. There is no reason why anything dramatic will change. So, if you have it, hold on to it; otherwise, I do not expect to see very strong outperformance from the company per se.

Last year we saw a decisive comeback in value and that trend in a sense is only getting more and more magnified. If somebody owns a Bajaj Finance or Asian Paints or Pidilite, the so- called quality stock, is it time to get out or time to accumulate in this decline?
Well it depends on your overall view where the market is headed. Obviously as you said last year, value came back into fashion largely because interest rates came back to levels where you could count interest rather than look at zero numbers across the world and where you had all kinds of funny money chasing stocks which had promised growth 50 years down the road.

So with value coming back, nothing has changed considerably since interest rates are not likely to fall at least in the current year. As a consequence, I would argue that you would still be able to do a DCF on most of these companies. Now the question is what happens to the demand? At least on the NBFC front, I would argue that it is better to be with banks because liabilities are going to be a lot more important than the ability to build up assets in companies like Asian Paints, etc.

Unless you are expecting an absolute boom time in terms of all kinds of consumption, the valuations are such that it does not leave much scope for upside. Whereas if there is an increase in input prices which is quite likely, we will have a margin compression again.

Bharti on the other hand, is very well positioned because they will keep on increasing their ARPUs. Even in Grasim, we expect another bout of increase in prices. The excitement that one is looking at in paints, affects Asian Paints negatively. So, other than Bharti Airtel, I do not see any great reason for strong outperformance from any of them except if they fall substantially from where they are.

Gold is moving higher because there is fear of recession and uncertainty in the financial markets. Bitcoin is coming back as markets feel that liquidity which was drawn out will come back and we have metals which are going up largely on expectation of demand coming back, Gold, Bitcoin, copper everything is going up together?
I would reclassify all of them in general sense of commodities because if you see the characteristics of all of these, none of them are actually earning assets. You are really arguing for te fact that inflation will stay where it is because if you are looking at a slowdown in growth and inflationary environment, that is the timeframe best suited for things like gold and to some extent Bitcoin is mimicking that kind of position as well.

I do not think the commodity increase should be viewed as a market signalling there is going to be great demand. It is simply that one is expecting the dollar to weaken from here on and because we are arguing that the interest rate rise in the US may slow down, if not stop and consequently we are looking at movement into other assets and commodities that are likely to benefit.

If there is any stock idea that you would like to share with our viewers? Anything that you recommend buying?
Not really, I would just hasten to caution that you should be looking at not increasing equity exposure despite all the positive noise you may see. This is a market which will remain extremely volatile during the course of the year.