Commodities will remain underweight for first half of 2012: Manish Sonthalia, Motilal Oswal Asset Management

Manish Sonthalia, Vice-President and Fund Manager, Motilal Oswal Asset Management, in a chat with ET Now, gives his portfolio strategy. Excerpts:-


ET Now: Given the way how money managers and traders are re-engaging in high beta stocks are you looking at selling your pharma stocks, the FMCG stocks you own, the ITC, the HULs, the defensives?

Manish Sonthalia: Not yet, you would get ample opportunity to do that once rate cut is affected. Obviously it is not happening in a hurry. January 24th is absolutely ruled out and you have the whole set of results for the third quarter to come in for the infra companies which in any case are not going to be that good.

Closer to expectations of a rate cut, these rate sensitive stocks including real estate and infra stocks should see activity. There is still time when you would do that. As of now we are staying put with the consumer staples and discretionary names.

ET Now: What has been your portfolio strategy for 2012? Are you in a buy mode or are you still in a beware mode?

Manish Sonthalia: It is a long term portfolio and there is not too much of churning happening. We are still convinced that the consumer names are going to give decent returns. Sector rotation would be taken once you have rate cuts being affected, which means going overweight on rate sensitives. That is the sort of strategy we have mentally planned.

Commodities clearly would remain underweight for at least the first half of 2012.

ET Now: Global economic growth is slowing down. Crude supply is static, the outlook for crude is negative, rupee has appreciated against the dollar. These are factors which will have a impact on oil marketing companies and companies like Cairn. Given the kind of backdrop, why are you still bullish on Cairn?

Manish Sonthalia: Cairn is more of a volume story rather than betting on the oil price per se. What we are assuming is a $100 on Brent for the next three years. This 1,25,000 barrels per day going up to something like 2,40,000 and then to 3,00,000 barrels per day means that you are looking at assured cash flows of Rs 10,000 crore every year. Market cap is closer to Rs 60,000 crore. Proven reserve of 1 PE is 1 billion barrels, which means the reserve sites are there for 12-13 years.

Basically you are getting an undervalued asset even assuming that Brent remains at $100 to a barrel and your net profit margins would be in the vicinity of around 20-22%. At $22 per barrel it would mean profits, moreover it is a volume story.

ET Now: What to your mind is the real price or the real intrinsic value for Cairn and at what price point you would like to sell Cairn?

Manish Sonthalia: PE reserves are at one billion, you have three PE reserves which could be in excess of two billion barrels coming from the Rajasthan field and the Barmer Hill fields If you have confirmation that yes there is a sizable amount of oil in the Barmer fields then absolutely there is no case of selling Cairn at these prices. You could be looking at multiples of current prices in the next 5-10 years. That is the whole story and there is no case of selling Cairn currently. It has a long way to go.

ET Now: Tata Motors and Maruti, what would be your call here?

Manish Sonthalia: We are extremely bullish on Tata Motors. We own that in our portfolio, we saw the JLR numbers yesterday showing 45% growth. Analysts estimates on JLR volumes will keep on getting revised on the upside. So right now we are working with 3,50,000 for FY13. May be you could see an upside on that.

As far as Maruti is concerned there were some reports today in the newspaper saying that they are looking at hedging for their vendors. If that is done, then it takes away lot of pain on the 30% imports which the company is doing.

The problem of the company had been that Yen has been appreciating and 30% is imported and it is all Yen denominated. If there is some resolution on the royalty which is again Yen denominated and it is the bottom line and the minority shareholders you could be looking in at expansion in margins.

Between the two, Tata Motors looks like a more compulsive bet at this point in time.