Rate hike certain, but won’t upset street: PN Vijay

Monday's market rally has been the best one this year. And, thus, portfolio manager PN Vijay says India's valuation story is going strong. In an interview to CNBC-TV18, he says the market has corrected enough for long-term investors.

However, he feels even as the downhill in commodity prices is helping boost the Indian picture, there are certain global headwinds yet to be played out.

Speaking about the upcoming Reserve Bank of India's meet in September, Vijay dismisses any possible pause in the rate hike cycle. "The industry and fund managers are not expecting the RBI to pause yet, unless, there is a terrible GDP number, which, however, is least likely," he says. The hike (which is almost certain), is not going to make the market unhappy, according to him.

Further, Vijay says all eyes are now on Pranab Mukherjee. "With oil coming down, the finance minister now needs to get the act together and concentrate all his attention on cutting down fiscal deficit," he adds.

Below is the edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying videos.

Q: If we get another 5-7% rally from here would you be adding investment positions or lightening your portfolio?

A: If we get 5% from now, we are looking at, past 5,100 or closer to 5,200 then one would watch. One would not be in a great hurry to add to portfolios. We are adding to our stocks from the middle of August on the presumption that valuations are getting very attractive. Going forward, I see good valuation story in India.

The Bloomberg consensus is talking about Rs 1,100 EPS for the Sensex, it is a downgrade from Rs 1,232-1,240 expected earlier. On the other hand, the markets have corrected 20% compared to this projected decline in earnings. On valuation terms we have corrected quite nicely for long-term investors to come in and in fact certain stocks have corrected probably 30-40%.

There are buying opportunities and valuation case. The commodity picture is getting into Indias favour with falling crude and metal prices. Also, RBI would raise rates once more in September and halt at least for six months.

Going forward valuations are likely to improve but on other hand there are global headwinds, lot of them still left. We are hoping to get this rally and after that stay put and watch how global events turn out.

Q: How did you read the draft guidelines set out of NBFCs? What do think it may do to the banking space and the NBFCs generally?

A: These was fairly liberal. Last time, in the mid 1990s licenses were issued to anybody and everybody. Times Group got a license and there was huge wave of mergers. RBI has been cautious but this time we expect them to be objectively cautious. You dont want promoters with great exposure to real estate or broking because banking is a confidence industry.

It is a trust industry, it is where many old people put their savings. Fortunately, India has had a very robust banking system for the last 200 years and we dont want to spoil our track record. RBI has gone about it sensibly. There is not enough competition among private banks. We need lot more competition among private banks.

Q: If the market remains in a constructive frame of mind going into the RBI policy as well, how do you think it may react to any potential rate hike by the RBI? Or do you think this time round its probably playing for a pause?

A: I dont think the industry and fund managers like us are feeling there will be a pause. We were sort of hoping for a pause but we got a knock on the jaw with last inflation figures. I dont expect a pause this September given the type of inflation numbers seen a few days ago. If we get a terrible GDP number then there might be a lot of pressure on RBI to stop saying you have destroyed the economy enough, just cheese it. But I dont think we will get a terrible GDP number.

The attention is on Pranab Mukherjee now and he better get his act together, tighten his belt. Fortunately, the oil coming down to this level is a great boon for him because without doing anything, the fisc is under check. All the attention would be on cutting the fiscal deficit now. I wouldnt think the market will be too unhappy if the RBI raises by 25 bps and make enough noises the same time they are probably at the end of cycle.

Q: Where do you stand on the ADAG pack? Yesterday the market seemed to be quite enthused with the news coming out from the courts?

A: The are high beta counters. Smart trade right now is to get into high beta and move little bit away from stocks which we took shelter, so one might get a huge rally maybe 10% in these stocks. One needs to differentiate, Anil Ambani is the common denominator for the power, telecom and finance company and they have nothing to do with each other.

Among them Reliance Infra is a good company. I used to deal with that company when it was a multinational incarnation some 25 years ago. They have got very good franchise. They also have good EPC business, so if one goes into the detail, you just forget the ADAG factor out of it.

One would be thinking about this company almost like a cross between L&T and BHEL . There is a great value but there is this huge cloud over the group itself in terms of corporate governance and government relations. So, one would be a bit circumspect but purely on fundamentals Reliance Infra is a good company.

Q: How you would approach Maruti given it seems to be mired in labour union issues again?

A: One needs to be careful about Maruti. I am getting a sense that the entire Gurgaon-Manesar area the labour is getting militant. This has even spread to some ancillary units and people are not that confident it will all die down. There is that big overhang on Maruti.

Apart from that the high interest rates have hit the passenger car makers hard. Also there is humongous amount of competition that is coming from the likes of Volkswagen etc. Among all the auto majors, one needs to be cautious about Maruti the most. 

Q: From the infrastructure lot what would you start buying not the L&T, BHEL but outside the index?

A: Nothing. The risk reward ratio just doesnt sum up for infrastructure because most of them have debt and the debt levels are very high. Unfortunately, I dont see the type of urgency in government to give the last mile connectivity to some of the major infrastructure projects whether its freights or the roadways. It is sad that with so much of good bargain hunting to do, we are not getting into any mid market infrastructure stocks at all.

Q: Would you be tempted to buy anything in two other beaten down spaces - aviation and textiles, which have started rebounding yesterday?

A: Probably aviation . In textile very strange thing is happening, the cotton prices have fallen but these people are sitting at least in September, October with old inventories. Whereas the Yarn and the kapda prices which they get are based on new cotton prices. There is a huge mismatch which is a bit like sugar.

That should go on till last few months of this year. Textile will give great opportunity as the low cotton prices sink in to margins. Aviation is a very difficult space. There is great governance issues in names like Spicejet and Kingfisher. That leaves Jet Airways, and fundamentaly, Jet Airways at about Rs 260-270 could give huge move up because it is a very volatile counter.