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Raamdeo Agrawal, Director and Co-founder of Motilal Oswal Securities says of the JLR deal, that the Tatas may find it tough to fund the deal and he expects the stock to underperform in the ner-term.

On the other hand, he said the inflation situation is uncomfortable and would put pressure on growth. Also, markets may not run away, but volatility has peaked.

He is looking at 20-21% earnings growth in Q4.

Private sector banks are trading at attractive valuations and he sees opportunity to buy ICICI Bank and HDFC Bank. It's also time to buy large cap IT stocks like TCS and Infosys, he thinks.

Excerpts from CNBC-TV18’s exclusive interview with Raamdeo Agrawal:

Q: What do you make of this deal, Tata Motors?

A: I think the financial details are not too much out there; except that they are about USD 13-14 billion turnover kind of brands both together and I believe that Land Rover is quite profitable and Jaguar is some kind of a financially struggling brand. But then combined, it is profitable at the margin.

So the price, which is paid about USD 2.3 billlion is in the backdrop of a global slowdown for durables and generally the developed markets are slowing down. So in that kind of situation, it looks to be a very tough business to make it financially viable more particular in the next 12-18 months or two years.

So for a parent company, it will be quite a challenging task for the next 4-6 quarters in terms of funding the deal per se because of the cost of funding; due to the current credit squeeze, the cost of even tweleve months money of USD 3 billion- could be significantly high - it might be as high as 9%-10%. So I am not saying where exactly the value will be there for the shareholders at this juncture.

Q: Do you see the stock underperforming as it has over the last few weeks since the news of the deal came in over the foreseeable future then?

A: Yes, because what happens is that since it is very large - USD 12-14 billion and you have UK cost structure, which we have to figure out - what's happening there and what kind of impact it would have; one goes into an uncertain world. Even if it is profitable, one keeps apprehending how profitable and what is the volatility in their earnings and things like that. So in that kind of uncertain atmosphere, people try to shy away from this stock. It generally doesn’t workout well for the short-term movements of the stock unless the market sees very clearly the rational for this acquisition in the short run.

Q: So it wouldn’t be a top pick in the auto basket right now?

A: Definitely not, in the sense that one is that locally also times are challenging because of credit squeeze and now with this, there is further uncertainty attached to the total earnings outlook for next 12-months at least. So I wouldn’t gather courage to buy into the stock at this juncture.

Q: What's your own take on the kind of sluggish macro-economic numbers which have been coming in and which sectors would you stay a bit cagey about or cautious about if indeed this kind of an economic slowdown were to manifest itself over the next 3-4 quarters?

A: I think because of a lot of changes in commodity prices, currency markets and all the markets are in a lot of volatility. I don’t remember in recent times this level of volatility across all the markets. It is very important that we look at a very bottom-up kind of thing and every telecom company is not good. One steel company could be very different from another steel company because what is the level of raw material linkage one has of what is the product mix and what is the volumes growth plans? So one has to go bottoms-up and figure out which businesses are extremely well-aligned and actually it is benefited from the current volatility rather than be completely suffering from this current situation. It is not a question of sector, but it is a question of a few companies where one could remain invested.

Q: How do you see this whole inflation interest rate scenario pan out over the next six months and what impact do you think it would have on the equity markets and sentiment?

A: Definitely it is not looking very positive because inflation in China is also going up day by day - it is up 8%-8.5% and we have also seen very new level of inflation at about 6%. So things do not look easy at all at this juncture and we are yet to see the full price of petroleum products passing through to the consumers. Food prices also - we are lucky to have our own food self sufficiency in rice and wheat. But we are going to see some passing through of even that in the days to come. So inflation side does not look comfortable at all and it has been an election year. But at the same time, I think Finance Ministry and RBI will try their best to deliver at least 8% kind of growth with whatever 5%-6% inflation we can have. So it is going to be a very challenging time to deliver growth at 5%-6% inflation.

Q: Put all this together- what you have just told us about sluggishness, inflation and the global factors are of course there- what do you expect to see from the market over the next two-three quarters?

A: I am not too optimistic that markets will certainly run away. But I think we are at the peak of volatility and if US interest rates has any meaning for the global interest rate benchmarks - in that case they are at the lowest like 2-2.25% and some more cuts to come in. US markets could rally very strongly and these are not the times-particularly after the 30% decline in the stock markets here-that one should be very bearish on the market. But I am not very bullish on the markets move in next three-four months, because this level of volatility just makes you nervous.

Q: What do you expect to hear from earnings, which we are about to enter another week’s time? There have been lots of apprehensions this time, do you think we will get positive surprises or at best earnings will be in-line?

A: Some positive surprises will be there. But this derivatives part of it, we don’t know which companies are going to provide it and which companies have actual problems or which banks have problems. That is one thing. But overall according to the rough estimates that we have, we are looking at about 20-22% kind of earnings growth which is looking better than what we thought would be looking at Q3 earnings. So earnings side should broadly be alright for the Q4 - that is the one silver lining on which the markets look to be reasonably priced.

Q: How are you approaching this whole private banking space? Stocks have fallen 40-60% - ICICI Bank halved in just about one month - are you a buyer there or are you also apprehensive of bad news tumbling out?

A: There is lot of misinterpretation of so-called accounting, which is there about mark-to-market kind of thing. But there was a froth in the valuations to start with and with the market and these kind of fear building in clearly, these stocks have come to a level which is very attractive to buying for investing. I don’t see much of a challenge, if somebody is willing to see 10-15% fluctuation from the current price, these are the opportunities to buy into HDFC Bank or ICICI Bank and these things have fallen 30-40% from top. So I think the future for banking is very good and future for private banks in India is even better. I see this as an opportunity to accumulate these stocks.

Q: What about IT, in about ten days time we will hear for the guidance for next year from Infosys, would you be owning IT stocks before that event?

A: Yes, I think IT companies have come to a level of no growth kind of situation. Many of the companies are available at 12-13-14 times except Infosys or TCS, which might be at about 17-18 times trailing four quarters; for the next year I think they are clearly at about 14-15 times. So my sense is that IT is completely out of favour and these are times to buy great companies in IT. I would not go for bottom fishing with very small companies but I would seriously look at large companies like TCS or Infosys.

Q: Give us one final word on how you are gauging general sentiment - you talk to a lot of clients from PMS HNIs to retail are they in that kind of frame of mind where they will use rallies to just get out of the market or do you think they can ride out this difficult period and still not lose their faith in equities?

A: No, I think everybody wants to see what has happened in last one year -repairing itself in the sense that we should have moved upwards into the market to 17,000 and 20,000 and that aspiration is still there and that is holding back a lot of people from selling out the stocks, which they are stuck with.

There are a lot of hopes and at the same time, when they see all these headlines, there is lot of fear that we could be in for trouble. But broadly speaking, there is a very strong fear in the market my sense is that earnings are intact and nobody knows the big picture and how things are going to shape up. I never thought that oil will go to USD 111/bbl so quickly. So there are lot of things. But broadly companies are in good shape, earnings are intact, valuations have become much more reasonable - maybe after four years or five years of bull run, we may have a little more modest ’08-’09 with flat or maybe a 5%-10% kinds of return or depreciation and that should be fine.

Source: Moneycontrol.com