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Anand Tandon, Director Equities, Brics Securities feels that the markets are far from being bearish. He however, added that he won’t be surprised if the markets’ mood turns bearish. The banking sector was performing reasonably well, but post-Budget, he sees the sector as the same as the oil and gas marketing companies. Tandon told CNBC-TV18 that one should forget about valuing banks on a fundamental basis. He advises staying away from the sector.

Excerpts from CNBC-TV18’s exclusive interview with Anand Tandon:

Q: Are we already in or about to enter a bear market you think?

A: It depends on how you define the bear market. If we define it by saying that bear market starts with 25% of the price erosion taking place, I think we have been in the bear market for a little while, especially at stocks level rather than the Index. If you define bear market saying you get value in the form that something which is worth Rs 100 is available to you at Rs 80, I think we are very far from it. We still have companies, which are trading with Rs 10 worth of cash trading at Rs 60. We have banks buying pots of NPAs at five times book value and we have many other companies where even the best companies like pharma sectors and so on; where we are talking about the Budget having done good for them - all trading at higher than market multiples. So I think from that point of view, we are far away from bear market yet.

Q: What kind of levels could we sink to then because right now everybody is going with an assumption that 15,000-16,000 is it for the Sensex and we cannot see lower levels conceivably below that?

A: That is based quite logically on an assumption that the earnings for this year will remain what we are forecasting at. The consensus is 1,050 or thereabouts. So if you are arguing that it should trade at around 14 times or 15 times, which is from the mid-range; it has tended to historically traded between 12-18 times - then yes, that is a logical number. But then when we go up, we do not go up only on the basis of logic and I doubt very much that if we were to come back, we would come back purely on the basis of logic either. So I would not be surprised if you find that if the mood really turns bearish, that number will not sustain.

Q: What is going on in the banking space - bank stocks have got absolutely butchered after the Budget and there is no buying happening in PSU banks at lower levels. How are you reading the turf now for them?

A: As I have commented on the day of Budget, I think you look at the permanent de-rating of the sector. I think the sector had done reasonably well before the Budget on various expectations. I think we are now looking at the banks behaving in much the same way as the oil marketing companies i.e. there is no way that you can predict what kind of earnings they will have. More importantly, it is very clear that the Finance Minister is in the mood for direct credit lending all over again, inspite of his protestations to the contrary. So I think you can forget about trying to value them on the fundamental basis and purely look at the charts and see how you want to trade them. You could have a bit of a rally here and there, but by and large, I would stay away from this sector.

Q: How likely now are the chances that we are heading for an early election sometime by the end of this year and how might that sit with the equity markets?

A: I think that the probability is obviously rising very sharply - the way the government is positioning itself both in the Budget as well as in the policy statements that the Prime Minister made on the floor of the house - history as well as what we are trying to see on the foreign policy front or the nuclear policy, all of that seems to indicate that the government is gearing itself up for an early election.

What that means for the market however, is a lot more interesting because what I think will happen is that since the government has set the agenda and saying that freebies is the way to woo the electorate, the question to ask is what happens to the opposition-run State Governments and will we see a spate of write-offs, for example, on electricity or some other way of making sure that the state opposition or state governments are also in a position to claim that they have also provided something to the electorate and therefore have a reason to be reelected?

So I think that has opened a Pandora’s box and for me, the biggest concern is going to be inflation going forward. I think that is going to be a very serious problem; I think they are going to have a tough job on their hands. So for the markets, early elections - both from the point of view of political uncertainty as well as policy as well as the fact that the policy is now moved towards throwing money at the electorate, is not very good news.

Q: There are two spaces which have got hit the most - real estate and brokerages both those sectors, stocks are down between 50-60% from their highs. Any build a case for buying into any of those two now?

A: If you are working on a bear market scenario, the answer is clearly no. If you are working on a bull market scenario, then yes, possibly. On a bear market scenario, brokerages obviously are the biggest proxy to the volume in the market, volumes have dried up big time. So it’s not likely that any of them would report any stunning numbers this quarter. Also, if the market obviously scales down, the forecast for the volumes cannot be very bullish. Therefore again, the cost structure will come back to buy it.

So like I said, we think that the direction will turn by the brokerages. I will stay away from it. On a valuation basis, there is no great comfort I think they are still trading at worst at around 4-5 times book value, which in a global context, is extremely high and even in my historical context, it is extremely high.

Real estate - again the same story; while it appears they are now probably trading at a discount to current NAV, the NAV hasn’t adjusted yet. So on the assumption that the fund flow to the real estate sector will not suddenly go up because of what the government does in terms of allowing ECBs and by allowing lower loan rates to housing sector - if you leave that aside, then real estate has to come down along with the rest of the market. If you assume that the real estate is supported because of government polices, then obviously again, you are probably buying at 25% cheaper than what the NAV would suggest and therefore you can make some money on it.

Q: The other space that’s taken a big hit in momentum is fertilizers. Do those stocks represent value to you right now? How would you approach them?

A: The underlying assumption behind fertilizers was that the policy has to change because clearly the government is bleeding. Now what’s happened is that we have a very strange Budgeting system; we follow a cash method, we don’t follow accrual. We have a situation where the government has made only 50% of the provisions required for the fertilizer subsidy for the last year. So we are actually carrying forward for the next year a gap of almost Rs 40,000 crore by now.

So if the subsidy burden doesn’t get filled up, clearly the companies will have to pay for it. So on the one hand, we have a situation where the bill is rising. But the bill is not being recognized. So we could have a situation where itself account receivable bill, which is not going to be honoured by the Central government or at least not for sometime - it’s not good news for the companies. The assumption as I said was that the rising subsidy will force the government to create a policy and the availability of gas will allow the companies to expect. The gas availability is certainly going to happen; so therefore long-term bullish. The fact is that the government is not recognizing near-term liabilities and therefore to that extent, will continue to bleed the companies with working capital problems.

Q: There seems to be a bit of a buyer’s strike in the market right now - nobody wants to buy, everybody wants to wait and assume that the prices will get lower a thought process which has worked for the last couple of weeks. Do you see sense in that waiting longer before you make aggressive purchases or start buying?

A: I think from the frontline companies, I would imagine that this is the right policy after a long time. You mentioned a buyer’s strike, we have had a seller’s strike for far too long. That is why the market went to stratospheric levels beyond what you could justify. So as I said, I would wait for the valuations to become somewhat mouthwatering just because they haven’t yet released those numbers. The cases that I have mentioned to you are still looking at power utilities - for example trading at multiples of book, multiples of cash - it should happen in rational market, far from being from happening in a bear market.

Q: What is the mouthwatering valuation for the market in terms of a Sensex level?

A: It would half of what it started out at the peak of. I would be surprised if you really get into a bear market. You would have many of the leaders that led this rally go back to maybe a tenth of their value. That will just to put the scare factor in real perspective.

Disclosures: It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed

Source: Moneycontrol.com