20010 to be tougher in terms of equity returns: Edelweiss

ET NOW Fundamental check with Vikas Khemani, Executive Vice President & Co-Head, Institutional Equities, Edelweiss.

Last day of the year, would you say that 2009 has been a good one and 2010 holds promise?

Vikas Khemani: Of course we cannot ask a better year after 2008. So it has been a great year for equities per se and actually for more asset classes and I hope 2010 turns out to be as good as 2009 though I believe that probably it will be much more tougher in terms of equity returns than 2009 but let's see what is in store. There are lot of good things and there are many challenges ahead of us. So if 2010 gives us anywhere between 20 to 25% return on the equities, I would be very happy.

Just wanting your expectation of where you see the Sensex by the end of next year and also what is your EPS expectation for FY11?

Vikas Khemani: 2010 would be sort of range bound in my opinion. You will see spikes of return like it will give you 20-25% return but as I said there are lot of challenges in terms of global issues as well as the local issues and as and when we see market would be correcting and once should keep in mind while investing into equity this year. So from next year perspective even if you get 20-25% return, if Nifty goes to anywhere between 6000 to 6500, it will be a very good year in my opinion.

We were just talking about how do you approach 2010 in terms of investment ideologies, in terms of sectors or stocks that you may be looking at which could be multiple gainers or at least doing handsomely in 2010.

Vikas Khemani: One thing which is good about Indian market is that we will see anywhere between 7.5 to 8.5% kind of GDP growth which is sort of visible and one should try and play around that and if you just look at banking and financial services sector holds lot of promise and this I am saying despite the worries of interest rates hike because credit growth will come back and that will dry up the valuation or returns of the banking and financial services sector. So according to me that is one sector one must play for 2010. Other sector which one can play is around infrastructure building as you would know that huge amount of investment would happen as we go along into infrastructure equation, the cross capital formation would come about, the investment activity will start happening aggressively as the growth is returning and which will basically mean that the fundamentals improving for the capital goods company, construction company and infrastructure company and that sector broadly one should look to remain invested into the equity markets. Other sector one can look at in my opinion would be around the consumption stories which is basically consumer discretionary. As the disposable income increases in the hands of the consumer, we will see the autos and discretionary sector doing very very well and that is where one should look to play. These are the three four broad themes or sectors I would play for 2010.

Coming on the banking space there is of course talks of a CRR hike happening even before the policy meet. In light of that, in light of earnings as well, how would you play banking from the near term perspective?

Vikas Khemani: ...bit of tightening but the credit growth as and when we see sort of improvement which expect to happen in the last quarter we will see earnings (1:20:32) getting driven significantly through the credit off take because currently most of the banks are not able to grow credit while the deposits are growing. At the same time large part of their balance sheet is invested into SLR which is essentially very very unproductive. So once that happens we will see a growth in the earnings for the bank and which could potentially drive the returns in the banking space.

I was speaking to a couple of buy side fund managers and according to them, telecom could be the dark horse for 2010, even the second rung companies, one, would you play telecom and two, aside of Bharti would you look at the other stocks?

Vikas Khemani: Telecom is a sector where lot of negativity is already in the price. Most people are avoiding the sector given the competitive intensity and according to me that is right now probably the peak of the gloom in the sector or maybe it could be another three to six months as we see lot more 3G and use around 3G and mobile number portability but if you are a longer term investor, telecom story is yet there and it is going to give significant returns. So as a contrarian play and from a longer term investors, I would strongly recommend telecom story to be played, especially the companies like Bharti, very high quality company, the kind of subscriber level they have, the kind of margins and the way company is managed. Everything is very good about the company and you would want to remain invested into this kind of company for long term and you would want to invest into this company contra-cycle rather than at the peak of the valuation when the things are going great. So in my opinion from a longer term perspective, telecom is the story to look at.

Couple of smaller sectors, aviation and railway stocks which have shown some activity in the last five to six sessions, flash in the pan or do you think that they have more room to go?

Vikas Khemani: Again if you see aviation is a very high operating leverage sector where if you see with the first sign of the activity picking up, you see the operating leverage kick in very well for them. Occupancy levels for most airlines have gone up significantly but if you just look at aviation sector in a global context, no airline or no aviation sector on a longer term basis has created significant amount of wealth and most airlines have not done well over a period of time. So I would say till the time of we see some sort of heightened activity and additional capacity coming in, probably it can do well for next one or two quarters but one needs to see about the long term ability to generate returns over a period of time because there are too many variables especially for the aviation sector right from the oil price movement to infrastructure bottleneck to the economic activity. So a lot of things have to fall in place before aviation sector starts making money. So I would advise to look at aviation sector probably as a trading buy rather than structural investment opportunity.

You have been talking about a lot of sectoral views. I wanted to pick your brains on the midcap space because that is really where the dark horses are expected to come out to surface from some stocks that have moved in that space, the likes of an Indian Hotels, you have a Hotel Leela, tourism as a pack has moved quite well over the last month, do you think that is going to be a story playing itself out even further?

Vikas Khemani: Again hotel stocks (1:24:39) operating leverage plays and as the economic activity picks up, they tend to do very very well till the time capacity addition happens and in hotel industry, probably capacity additions are lined up but they are slightly away. So I would tend to think that most hotel stocks will do very well in next couple of quarters or in next one year also we can expect hotel stocks to do fairly well.

The rural plays, do you think rural sectors, consumption stories would play out in 2010?

Vikas Khemani: See, couple of things about rural sector we can say, as the disposal of income in the rural India is going up, we will see consumption picking up there. We will see stocks around food and agriculture doing very very well because one thing which is certain is that food prices are going to remain strong and lot of activity will happen around the fertiliser sector, agriculture sector. So while there are very limited number of plays to play agriculture theme or food related theme but whatever plays we have, that sector per se should do very very well and rural India is definitely going very very well. We have actually done reasonably good ground level check and this demand which is there is probably not only stimulus driven, it is actually driven by the growth in the disposable income of the rural India and this cannot be not sustaining. This is likely to sustain for quite sometime and that is the key pillar of the Indian growth story.

The oil and gas space, HOEC are the smaller ones but even the oil PSUs which are probably going to see some activity in 2010, would you look at any of these stocks in the oil and gas space?

Vikas Khemani: Oh, of course, in my opinion HPCL, BPCL, these stocks look very very good if you just look at. Right now the refining margins are almost sort of at bottom and both of these stocks are trading very very cheap. HPCL is trading less than one time book, it is around five times earning, good amount of dividend yield and if you have the kind of stocks available at those kind of valuations at the bottom of the refining cycle, they can deliver very superior result for a period of time. In my opinion in markets like this I would recommend HPCL, BPCL kind of stocks very aggressively.

Also cement as a pack, we did talk about it but do you believe that the second rung cement stocks have legs to go up further because they might play catch up with the large caps which are anyways trading at a substantial discount to the market PE multiples?

Vikas Khemani: That is likely to happen because now incrementally in the frontline cement stocks, valuations have already caught up, so there is not too much of the play. Even the fact that still there are two or three quarters of headwinds in terms of the additional supply coming through. So wherever there is a significant valuation gap in most of the second tier company, probably we could see some sort of action still left and over next three to four years, I am sure cement sector will do very well because we will see the supply comes into step function while the demand goes in a linear way. So as and when we see the demand supply gap narrowing down, we will again see a second round of run up in the cement stocks.

One final word, one or two ideas if you could leave our viewers with as investment themes for 2010.

Vikas Khemani: As I said I am reasonably bullish on the banking sectors, over there you like ICICI Bank in the infrastructure space. You could look at something like Reliance Infrastructure. Oil and gas you have HPCL. So there are multiple sectors we can look at one or two names which could be a (5:59) over a period of time.