Nasdaq will make a lifetime high; bullish on IT stocks: Sandeep Tandon

Nikunj Dalmia: You have mentioned that pharma sector is in a bull run. Historically, every time when a sector is in a bull run, every stock in that sector goes up. This is not the story for pharma. One side we have Wockhardt and Ranbaxy, and on the other we have Sun Pharma and Dr Reddy’s. So, not everything in the pharma sector is in a bull run. What do you have to say about that?

Sandeep Tandon: They are very stock specific issues. Wockhardt has a lot of FDA related issues; otherwise that stock had given a massive run from Rs 80 to Rs 2200. We have seen a big move. This is a company specific issue and not a very sector specific thing. Ranbaxy has also gone through a tough time. The result was fairly good and much better than what the street was expecting. Hence, the stock moved up sharply.

Nikunj Dalmia: How exactly would you approach pharma? Would you be tempted to look at Ranbaxy or Wockhardt stock which are broken down and where PE multiples have contracted from double digit to single digit? Or would you like to stay with leaders like Sun Pharma and Dr Reddy?

Sandeep Tandon: I will still like to have a diversified portfolio within this sector, depending on the interest and stock. It can be a skewed portfolio also. But, if the sector is positive, I would like to have a diversified portfolio. Ranbaxy or Reddy or Cipla will get skewed on the large market cap company, but there are many niche companies which will do extremely well. Small cap or midcap companies like Alembic, Ipca, Ajanta, etc came out with good numbers. They have given far better growth than Lupin and Cadila on the domestic market.

Nikunj Dalmia: Your trading approach is not based on a single parameter. You look at trend and currency, and then, you club it with volatility. Shifting the focus to currencies, the dollar index is down, but rupee is still going down against the dollar. Why is that happening?

Sandeep Tandon: Rupee has India specific issues. The biggest worry is also on dollar strength. Right now, DXY has corrected from 83 levels to 81.5 levels or so, but broad trend of dollar index is still very powerful. We still expect the dollar index can spike back to 85-87 levels may be by year-end or during the next year. We are more bullish on dollar index more from the developed market perspective for a slightly on the long term or may be two to three years view. Emerging market has own challenge from a short term perspective. Indian currency will not depreciate as fast the way people are looking at.

Nikunj Dalmia: Do you see a situation where Indian currency will stabilise irrespective of how the dollar index moves in the short-term?

Sandeep Tandon: Even two- to two-and-a-half week back, rupee was 60 against the dollar and Nifty at 6000. The dollar index was close to 82.5 levels. We have India specific problem that is the reason rupee has depreciated. Nifty has corrected because of liquidity related issues. The complete inverse correlation with the rupee that existed in the past has not worked this time. I am confident that dollar will appreciate in the future more than what people are visualising. But, it will appreciate much lower than the domestic side or the emerging market side. It will depreciate or appreciate more in terms of developed market currency rather than emerging market currency.

Nikunj Dalmia: If your view is positive on the dollar index, are you extremely bullish on IT stocks? They are the direct beneficiary if the US economy recovers.

Sandeep Tandon: We are bullish on IT stocks. Nasdaq will make a lifetime high.

Nikunj Dalmia: The previous high was about 5000.

Sandeep Tandon: It will break that high may be in 18 months’ or 24 months’ time. It is difficult to predict the exact timeline, but it is definitely in secular bull run. Entire US is in a secular bull run.

Nikunj Dalmia: Can Indian equities do well if US markets continue to move from strength to strength? The logic that has helped the Indian market is that US economy is in a mess and money needs to get out of US market and find a better avenue for growth. And, emerging market was that island of growth. If for a local investor US economy is picking up, will the need or urgency to invest in emerging market automatically dire down?

Sandeep Tandon: Historically, whenever US market has done well across the globe, everything has done well. There is a high correlation with the US market. You might have some lag effect for few months. We have a relatively aggressive view of 2200 S&P by next year and it is already 1700.

Nikunj Dalmia: It is a big call. You are more bullish than Morgan Stanley and Goldman Sachs.

Sandeep Tandon: Yes. We have given a target of 1750 for S&P December 2030. We still maintain that view. We are more bullish next year.

Nikunj Dalmia: I would also like to draw your attention to the ownership pattern. The local ownership is at a historic low and the global ownership of Indian markets by foreign institutional investors is at an all-time high. So, foreigners are buying into Indian stocks and locals are only selling the stocks to them. What do you have to say about that?

Sandeep Tandon: When we are talking about rupee depreciation, the confidence level of FIIs has not shaken so far. It is not reflected in the outflow which people visualised earlier, the panic that people will withdraw money with this sort of rupee. With rupee depreciation, fresh money has not come in. So, there is some amount of halt there.

Nikunj Dalmia: This week’s price action in HDFC Bank, Asian Paints, HDFC or Bosch could be the first harbinger of selling in quality stocks. Now, some of the blue-chip stocks are coming under pressure.

Sandeep Tandon: Correction first starts with the weakest stock. Exactly at the bottom of that cycle, the strongest counter will correct. We have seen FMCG and pharma correcting, which is a clear case that bottoming process has already begun. In last two to three days, IT up move has halted. Even if they correct next week, then good amount of bottom should be in place. It may not happen up to large extent, but we should be happy, with even 3% to 8% correction in these stocks.

Nikunj Dalmia: What are the sound bites you are picking from some of your global clients? Are they ready to buy into Indian stocks more or are they have read about how their portfolios have moved in last two years because of weakness in rupee?

Sandeep Tandon: Rupee is a concern. The moment rupee stabilises, buying will start. They are not very bearish on India as such, but rupee is the short-term worry. Rupee should also stabilise from the current level at 62.50-63.50 levels. Rupee will not immediately depreciate to 70 or some odd level what people are looking on the street. It may not appreciate up to the extent what was visualised earlier. It might come back to 57.50 levels. The range has changed from 52 levels to 57 levels. The lower range for rupee might be 57.5 levels to 58 levels and the higher range will be around 62 levels to 63.5 levels.

Nikunj Dalmia: Will rupee have a very big range over the next six months?

Sandeep Tandon: Yes.

Nikunj Dalmia: In the light of current state of rupee, how would you approach importers like oil marketing companies now?

Sandeep Tandon: We are very bullish on the energy as a sector, but we are bearish on the public sector bank. It is more of a PSU related issue. Reliance is the best bet in the energy sector. After many years, Reliance has started outperforming the Nifty. We are very bullish on Reliance. Reliance can give you around 30% return from the current levels. If somebody has 12 months to 15 months perspective, we are very bullish on Reliance.

Nikunj Dalmia: If you have to construct a portfolio of five stocks, irrespective of the market cap, which are the five stocks you would like to buy in that portfolio?

Sandeep Tandon: Our portfolio will be still skewed towards export names and the defensive sector. It will narrow down to the four-five sectors like FMCG, pharma, media, IT and agro chemicals.

Nikunj Dalmia: Why do you like media? Media has got nothing to do with exports.

Sandeep Tandon: This is an under-owned sector, which has stability. A lot of things have changed positive for the sector. Under-ownership is the biggest factor out there.

Nikunj Dalmia: Why do you like agri?

Sandeep Tandon: Agri has to do a lot of thing with a good monsoon. The numbers are reasonably good. The earning numbers of stocks like Rallis, Dhanuka and United Phosphorus have been very good. The whole segment is stabilising.

Nikunj Dalmia: Do you like all three Dhanuka, Rallis and United Phosphorus?

Sandeep Tandon: We prefer Dhanuka as a midcap or small cap idea. In the large cap, we will prefer United Phosphorus over Rallis. But, we are not negative on Rallis.

Nikunj Dalmia: What is your call on Nifty range for next six months now?

Sandeep Tandon: I feel Nifty will be between 5450 levels to 6350 levels for the next six months. It is a trading range. If you look from the perspective of 2014, you will still get 20% to 30% return from the current levels.

Nikunj Dalmia: Will it be about 6600-6700 levels?

Sandeep Tandon: Yes. It could even be on the higher side.

Nikunj Dalmia: Which are the sectors that could lead the next leg of rally?

Sandeep Tandon: Sector rotation is on right now. From a pullback perspective, I expect pullback rally happening in some of the metals names or some of the beaten down private sector banks and even in industrial names. So, these sell on rallies strategy will work, but ultimately it is a phenomenal opportunity to add some of the defensive names in your portfolio.

Nikunj Dalmia: What is your take on private banks? Have private banks lost that halo status of safe haven?

Sandeep Tandon: After the RBI moves, some amount of confidence is definitely shaken given the bond yield. This time, private sector will not be a leader which used to be in the past. Whenever the Nifty moved up, private sector banks used to be there. This time, they will move up with a lag effect of a month or so. Current quarter will be the one of the worst quarters for the banking sector with whatever steps the RBI has taken. The market has already factored that. In the beginning of October when the earning season starts, private sector banks will start recovering. Some of the names like IndusInd Bank or Yes Bank have been beaten down sharply. One can expect a pullback rally in these names also.

Nikunj Dalmia: What is a fair level for Yes Bank and IndusInd Bank? Yes Bank is down 50% from the recent high and IndusInd Bank has taken a hit of about 36%-37% from the recent high.

Sandeep Tandon: We prefer IndusInd Bank over Yes Bank. IndusInd Bank has been my favourite in the sector. For a month or two, it can still under perform from the current levels. But, at appropriate time when everything looks attractive, they can correct. Banking sector cannot correct another 10%-15% from the current levels. If these stocks correct another 12-15%, I should be buyer in these names.

Nikunj Dalmia: Will banking not lead the decline?

Sandeep Tandon: No. From these levels, small correction is possible. Banking cannot bring down indices sharply from these levels.

Nikunj Dalmia: Why is HDFC Bank still holding on? This week HDFC Bank corrected by about 4-5%, it is the strongest stock which has corrected this week.

Sandeep Tandon: Yes, but it can also correct. When I say 10%-15%, it will be the last stock to fall at that stage.
Nikunj Dalmia: Is it better to give PSU banks a skip?

Sandeep Tandon: In a downtrend when overall economy is not doing well, most of the market participants look more from the quarterly perspective. If the public sector banks don’t have the next two quarter visibility, people will not bottom-fish out there. The biggest worry in the banking sector, which was outperforming the market, is that it is grossly over-owned by the institutions. We should not be in a hurry to buy PSU banks.

Nikunj Dalmia: Can I apply the same logic to IT as well? IT is getting a very crowded trade. Ten out of 10 brokerages are bullish on IT.

Sandeep Tandon: IT will not be an out-performer from the current levels going forward.

Nikunj Dalmia: What could outperform from the IT sector?

Sandeep Tandon: Midcap IT names could outperform the sector. So far, Tech Mahindra is the only one that has outperformed. Some stocks like MindTree or Persistent System could also do well.

Nikunj Dalmia: What is your take on earnings? Do FY14 estimates have to be hunkered down?

Sandeep Tandon: They will correct further. We are seeing a decline every quarter.

Nikunj Dalmia: What will generate upside momentum?

Sandeep Tandon: If you look at equity asset class … we have a view that global liquidity will outperform bonds in general. India specifically has lost money in bonds, gold, commodities, etc. Ownership is at lowest at less than 8%.

Whenever short positions spike, you see a rally happening. In the last 10 days, good amount of capitulation happened in many stocks. So, you will see a pullback rally, but I will stick with the defensive name because FIIs will not exit India completely. We have challenges, but there is a long-term growth plan.

If somebody is looking at global diversified portfolio, they will still allocate certain money. But the problem in India is becoming skewed now. Certain sectors which had some amount of interest are missing now. So, the option becomes very limited and the premium for this sector will only expand. If everybody will chase few stocks, the premiums should remain high.

Nikunj Dalmia: The other side of the more popular logic is that the market range has shifted downwards. If the market range will shift downwards, quality, medium quality and bad quality has to correct in a synchronised manner.

Sandeep Tandon: I am not willing to buy the argument that everybody wants to just move out of equity completely as it is already at 10-year low. If you look at the cumulative advance in declining ratio that the whole market has put together is a life-time low. At these levels, there is a buying opportunity. There is not a massive bull run in the Nifty in general, but if there is a great opportunity, I would like to participate.

Nikunj Dalmia: Is it too late to panic now? Is it time to be a buyer rather than being a seller? Should one not hunt for value or anything substantial in the beaten-down infra or banking space, and only stick to defensives because they will make money even though they are expensive?

Sandeep Tandon: Even if your call on a particular sector is right and your stock selection is wrong, you will not lose big money. We may not make big money, but you will not suffer. This is the reason I am still sticking to some of the sectors. Last month, ITC and Lever have given a classic euphoria from a trading perspective. It was not maniacal, but was euphoric. Nothing maniacal has happened, and neither is there any euphoria in the Nifty and some of the sectors. If have to plot the FMCG index, there is no euphoria so far. It is skewed.

Nikunj Dalmia: Is it time to do selective buying?

Sandeep Tandon: Yes, very selectively buying.