There may be opportunity to make money but this is going to be a challenging year: Anand Tandon

As of today, in the energy space, Power Grid and NTPC, NHPC look reasonably attractively priced even after the run up, says market expert Anand Tandon.

How would you look at the market set up?
The markets have been doing reasonably well over the last few days and clearly after the last interest rate hike that we saw, the fear seems to have receded somewhat at least in the US. Traditionally, whenever the US Fed has stopped increasing interest rates, the markets have tended to rally. At a stage where they are still increasing rates, it is not very common to see the market rally.

So, right now I would still say that there is a little bit of scepticism about how long the rally can sustain and we are already fairly hitting the upper end of it. As long as the assumption that inflation will continue to move up and we see the interest rates moving up, there is a cap on where we can go as far as the valuations are concerned.

Coming back to India, the same problem exists here. We have seen after this quarter many companies have reported better than expected returns. Overall, the index earnings numbers have been downgraded and as a consequence, we are again touching the upper end of our valuation band as far as the overall market is concerned. Within that, we will always find sectors which are doing well.

Auto and more importantly auto ancillaries, public sector banks and so on are likely to be in a sweet spot and continue to grow reasonably well. So long as one chooses the right sectors, there may be an opportunity to make money but overall this is going to be a far more challenging year than people thought of and got into.

Is the best behind us? We have seen record profits from oil counters not just in India over the weekend. Look at what happened with Saudi Aramco as well. Is the best behind us when we talk about energy related stocks?
It is very difficult to say when it is behind you but if you are looking for just oil price movement, I do not think we are done yet. We will likely see another oil price move up again because you cannot have a situation where there is no demand destruction and yet the oil price continues to move down. On the other hand, if you actually assume that the oil prices will continue to move down and stay down, you have to then assume that the economy is going to fall down accordingly and then we are looking at a recession at least in the developed markets.

So we are in a strange conundrum where either way it is not great news, especially from the stock market perspective. We will continue to see a shortage and therefore continue to see prices showing up another spike of strength.

When one looks at energy as a whole, it is not only oil and I would think that in India especially the power sector seems to be fairly poised and even though we have staged strong performance in terms of the stock market from all the electric utilities including NTPC or NHPC, we are in a stage where there is a kind of a shortage for electricity and that will continue to add if the attempts of the government to improve the viability becomes even better. More of this space will come in but as of today, Power Grid and NTPC, NHPC look reasonably attractively priced even after the run up.

What is your view on insurance names?
I have always maintained that they should be part of your core portfolio. SBI Life has been doing exceedingly well with the kind of distribution and advantages they have and that will continue to stand them in good stead in terms of growth.

Those growth numbers are coming through. Some of the others are a little more expensive but I would believe that this space is still large enough for many players to grow quite significantly except perhaps the largest where you will be able to get only the benefit of the market growth and not so much market share gains.

One should be looking at building a small portfolio of insurance companies with companies like HDFC Life and SBI Life Insurance as the two core holdings.

What about some of these large metal names, cement names? Some of them have de-levered themselves and the balance sheets are much stronger?
Well the balance sheets are stronger but the steel companies will make sure that they do not stay strong very long. They will be expanding at the peak of the cycle as they always do and they will make sure that they take debt which will then set them up for the next downcycle.

When you are looking at commodities I would prefer to look at domestic commodities. We are seeing the same problem in the cement companies as well, despite the fact that we do not have an adequate amount of capital utilisation in terms of capacity and at 65% or lower capacity utilisation, you barely break even. Despite that, every cement company continues to expand but then given a choice between cement and metals, I would think that cement looks like a slightly better longer term play as bigger companies can be picked up at lower prices on a bad day.