Ramesh Damani - will invest in midcap stocks

Will put money in midcap technology stocks: Damani

Indian markets are still not out of the woods and are trying hard to negotiate the highs of last year. Infosys' December quarter results, low November industrial output data and inflation are dampening market sentiments.




Ramesh Damani, Member of BSE agrees that the markets are struggling to find support levels. He expects markets to grind in next two quarters.

In an interview to CNBC-TV18, Damani said that 20500-21000 is higher end for the Sensex. While betting on the inherent strength of the Indian economy, he said the Reserve Bank of India (RBI) should not hike interest rates in a knee jerk manner. As an example, Damani quoted China, where the markets are struggling despite a sound economy.

As a strategy, he suggested investing in midcap technology companies.

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

Q: Has your head been spinning as well, it has not been the best of starts, has it?

A: Absolutely not. We are so spoilt in India, we are so used to overperforming, the Dow was up 5%, we would be up 10% and if Hong Kong was up, we would be up. I think this is for the first time in a long time India is underperforming global markets, whether it is America, whether it is Hong Kong. I think we don’t know how to handle it.

Within that range, ofcourse it is brutally volatile, 300 points up, 300 points down almost in a flick of an eyelid. So, like the rest of the analysts’ community, I am flying blind in this one. We have just seen that none of these instruments that we normally watch to track the market, to take temperature in the market seem to be working. So, as you rightly put it, it is 360 degree whirlwind.

Q: Your show is about maxims, so does that old maxim, ‘be greedy when others are fearful’, work in the current environment?

A: It is probably too premature to do that. I think the markets would go to an extreme position as it were at the bottoms of 2008 bear market or the top of the 2007 bull market. I don’t see we are anywhere near that. If you look at it very technically, we are down 7% from the peak. I agree cash seems like a much lower index level, but we clearly not in an extreme in terms of investor sentiment readings that maxim, which ofcourse I have covered in my show in RD360, works best at extreme ranges in the market. The last time the market fell in 2007-2008, we got to almost extreme temperature reading of being fearful at that time and the money from that was so quick. You get the flip when the market peaks out in the bull market, but my sense is we are nowhere near those extreme sentiments.

Q: What is the prognosis then even if you were to block out the noise of the early part of this year, still a rangebound year or do you think it could surprise a lot of people by the end?

A: My sense is that 20,500-21,000 on the Sensex is the higher end of the market for now. The market seems to be making or understanding how brutal a level that old psychological high for the market is and how difficult that is going to be taken out. So, I would suggest you that is the ceiling.

In terms of the bottom, I think the market is struggling to find that, maybe in the next few days, we will find a bottom. So, it seems atleast in the next quarter or so, we will struggle, guide our way through the range that the market is going to establish over the next few days perhaps.

Q: You study cycles for the market very carefully as well. In your experience when rates are this high in the system, when inflation is this high, how do equity markets, particularly ours tend to perform?

A: Badly, inflation is pretty bad for equity markets because there is always a tendency to move into debt and away from equity during these periods. To give you another example, in more mature markets, which I have said many times the Dow hit 1,000 for the first time and I think it was 1968, the first time the Dow ever hit a 1,000 was in 1968, it didn’t cross that level again until 1982 for a period of 14 years despite the US economy expanding, despite some major industries coming in at that time. I clearly don’t expect the market like that because we clearly have much more liquid free flowing market than that. But market sometimes make new highs and then take a long time to cross that on a decisive basis, our own markets between 1992 and 2003, when the range was 4,500 to 2,800.

My sense is 21,200 on the Sensex is extremely important psychological level for the market. It will take a lot better earnings, a lot better confidence, a lot better improved infrastructure for the market to take that out. But the heaven is not breaking down. The market even builds a strong range and remains there in that period for six months to one year. I don’t think heaven is going to fall.

Q: What is your favourite maxim from the many that you have discussed with your analysts in the series?

A: There are many. But ofcourse Warren Buffet standout very easily that ‘in the short run, the market is a popularity machine and in the long run, it is a voting machine’. The cream will always rise to the top. The second one, which I find very appropriate for this time and era, particularly yesterday, when Infosys results came out, that ‘it is not the new that is important, it is how market reacts to the news that is important.’ Just for a slight disappointment in volume, the share has got trashed, it shows that the market is inherently nervous and that inherently it was not ready to go up. So, it was the reaction to the news more than the actual reported earnings that were important to the market. So, those were some of the maxims.

What we have done is that we have taken all the veteran watchers of Dalal Street, we have Sanjoy Bhattacharya, Rakesh Jhunjhunwala, N Jayakumar and divided this show into various segments. With Rakesh we did his very own show called Rakeshisms and we did Dalal Street Wisdom with Madhu Kela and Jayakumar. So, we try to bring the wisdom of generations. It said that quotations capture the wisdom of a generation and asked them to explain it in terms of their own stories as to what works in the market, what maxim prompted them to think that the market was at a peak, what prompted them to buy a stock when it was very unpopular. So, we try to have a lot of fun on the show, bringing in different opinions and trying to explain the wisdom of many generations through quotations.

_PAGEBREAK_

Q: What is making you less nervous about this year, the fact that global markets are more sanguine or do you believe in the inherent strength of earnings and you think that will tide us over any interest rate or inflation crisis?

A: I think there is inherent strength in the Indian economy. If you have a country that will grow at 8%, I think it will weather almost anything nasty thrown at it this time. I think food inflation is a problem. I hope the RBI doesn’t raise interest rates in a knee-jerk fashion because it is more of a supply related problem than something that can be addressed from monetary phenomenon.

I think the Indian economy is on a roll, even sectors that people don’t like like aviation, the entire aviation sector for example is available at a few billion dollars and you have one company that is unlisted giving USD 16 billion order out to airbus. That is phenomenal and that shows the power of the Indian economy, consumer spending that is rolling across the economy.

Markets and economy sometimes tend to get divorced. I think the markets tend to go in the shell and the economy continues to expand. We may reach a phase like that where the economy will continue to roll along and the markets would be subdued for a period of time. But there is no reason to turn negative on the market. I think inherently unless you do something bad in terms of populous schemes or something bad in terms of inflation or go in front of the mid-term poll, I think the market will chug along and the economy will do fine.

Q: We have had two good years in the market what can be classified as a bull market, is there anything on the horizon which makes you fear that we could get pegged into some kind of a short-term bear market? Is that likely at all for any reason in 2011 or to use your maxim this bull market will climb the wall of worries that we have been discussing?

A: I hope it is the latter, but something like China could happen. You look at China for example, they are struggling. I don’t know if you classify it as a bear market, but clearly the market has gone nowhere over a period of time despite the economy doing well, despite one of the great stimulus packages in the history of the world being launched in China, the market has gone nowhere. It is almost very difficult.

I think given the fact that corporate earnings are expected to do well, the economy is expected to do well, there is no reason we need to revise this forecast at this point. I think the best point is just take it out, just weather it out. I think trying to be two acute and time the market perhaps is not the best strategy at this point. The market is clearly not at an extreme, these things are very good when the markets are extremely overbought, extremely oversold. Now on an intermediate basis, it might be oversold at this point, the market fell yesterday, put the fear of the god in bull’s eyes and a lot of liquidation perhaps took place. But if you look at it, there has not been any great selling. I think in the FII and domestic have cancelled each other out. The outstanding positions are fairly light in the market out there, sentiment is perhaps overwhelmingly negative. So, I see no reason for the market to just fade away into bear market.

While I can agree with the bulls that maybe the market is capped out at 20,500-21,000 level on the Sensex, I am not going to throw in the towel and say that we are headed into bear market. Nothing I suggest or nothing I see suggests that we are entering a bear market.

Q: Is it a period though where the midcaps will have to struggle much harder to prove themselves and perhaps that pocket may underperform whatever else, the rest of the market or the headline index does?

A: They have already corrected. I think the interesting case to see in this month what happens, for example, largecap technologies have been leading the market and leading the technology sector out of the doldrums if you will and now they have corrected. Infosys is corrected very sharply yesterday. But if you look at the second round, the midcap technology stocks, they are all cheap. My sense is that on a next six months basis, the midcaps will catch up with the largecaps in terms of performance. So, infact I would start putting money into midcap technology sector because the stocks that I follow are fairly beaten down, but are fairly cheap now. The visibility is looking much better than they have ever looked for the last two-three years, they are still trading at very low single-digit P/E multiples with very stable cashflow.

So, I think I am not of the view necessarily that the midcaps will underperform. Broadly if you look at the midcap stocks, they have already been hammered down. So, I think if you go around and do a bottom up stock picking, which a lot of analysts are recommending in this time of the year, you would probably do well. So, I am not of the view that midcaps as overall rule of thumb will underperform.

Q: You are a stock picker, but even you would have been keeping an eye on what is going on in the banking space, the average fall is about 30%, some stocks are down 40%. Do you think it is overdone or would you be finding any value there?

A: I would think so, not necessarily there is a best banking analyst around. But I know why it has gone down, it is fairly obvious because people think that margins will contract, there is a liquidity squeeze going on out there. But this seem to have corrected sharply enough that you should start looking to start nibbling at the bottom of those stocks again.

_PAGEBREAK_

Q: You mentioned midcap technology, what kind of stories do you like there because it is so individual in that space and it is so down to every single client and every single margin?

A: I will give you a few names of some of the stocks that I own, I have a vested interest in them. I am huge fan of Ramadorai and what he has done in building Tata Consultancy Services (TCS) or building CMC. If you recall, CMC used to be Rs 20 stock, today it is 100 times up, that is Rs 2,600. A large part of it goes to Tata Culture that he has put in there and the growth that has come. There is another company they bought called eServe, which was in the BPO outprocessing service is now 19% owned by them. It is a subsidiary of TCS, it has come out with some breathtaking results.

Now, he has become chairman of the company called Tata Elxsi. I think it is going to become a major player in animation and design space. So that looks very attractive from a year’s perspective. I have absolutely no idea of what they are going to do this quarter. But I think you bet with great management and people who have a vision of where the business is going, I think you will probably end up okay. A smaller stock like Geometric, again which I own which, should do about Rs 9 this year, it is trading at about Rs 75 looks fairly attractive to me.

The other sector, which I like is ofcourse as I have said before, is aviation. I think that there are so many skeptics on the street on aviation and yet none of these analysts who are skeptical can do one day of their business without taking the flight somewhere. So, this is a sector that I think it is going to be very important sector of GDP, maybe contributing 5% to gross domestic product (GDP) in the next 10-15 years and yet there is no respect to these stocks. I think there are some good pickings there.

Q: In a show Dream Decade, you talked a lot about what public policy would do for the market. In that regard, are you disappointed about what has been happening from the government side?

A: I have been in this market now for about a quarter of a century, I am fairly old guy. I think with age comes patience. I know when these governments used to fall in 1980s and 1990s, I used to get so disheartened that nothing will ever happen in India because you lose a member or vote of Pparliament by one single vote, but that is the nature of the democracy. The fact that corruption is an issue, it is not a wake up call to me. I know it is there, we deal with it everyday basis and I think Indian democracy the way it has, it is going to be four steps ahead and two steps backward.

I think to force the pace in any other direction is going to just set yourself up for disappointment. So, yes, I would clearly like the FDI in retail opened up, I like the FDI in insurance opened up. I like so many other things being done. But I still look back and take the enormous journey that you have taken since 1993-2010 in the last twenty years how well Indian industry is restructured itself, how well technology has grown, how we have right to information act. For example, if the government has pioneered, how tax collection, custom collection has become so much easy in streamline that there is hope for the future. If you are not going to get in the stock market, you have to be an optimistic and you have to be bullish.

In India, you tend to get very cynical about these things and I myself have been cynical. But I think with age and wisdom, I have realised that in a rambunctious democracy like India where you have to take coalition partners alone, you just have to tide your weight. I think the trend is in the right direction, the speed isn’t.

via CNBC-TV18/MoneyControl.com