Slow pain may lead to hard landing in US : Pandey

If the US banking were to head into a situation of hard landing, then there is a possibility of sharp volatility and probably a panic reaction. Already anxiety levels are quite high across most of the major markets. That might speed up the process going forward., says Pankaj Pandey, Head Research,

ICICIdirect.com

Looks like we are in for a good day of trade finally.
Yes. Our sense is that given that the US is facing issues on the financial stability side, probably one bigger challenge could be that if the prospects of hard landing have improved and that probably might lead to even higher volatility, subsequent to the Fed meeting which is anticipated this week. But the good part of that in this entire volatility is that typically the bottom formation for the market should happen. This kind of a slow pain which we have been experiencing for quite some time, is probably inching towards a logical end.

It could be slow but markets typically bottom out when you see a sudden crack, a lot of capitulation and a lot of panic. Stocks have to fall 5, 10, 15%. Historically, market bottoms are made when there is panic, not when there is a slow grind?
Which is our expectation because if the US banking were to head into a situation of hard landing, then there is a possibility of sharp volatility and probably a panic reaction. Already anxiety levels are quite high across most of the major markets. That might speed up the process going forward. That is what our anticipation is.

Why is Reliance underperforming? Even though their businesses or business verticals are firing full cylinders, the stock is just going down as if there is no tomorrow. What is bothering the market?
A couple of things; one, if the world is going to experience a slowdown or an accelerated slowdown, the GRMs could be under pressure. So, there is anticipation that the GRMs may not really sort of hold those levels. Telecom is another business. What we are seeing is that probably the tariff hike is not panning out on expected lines. We might see data growing from about 22 GB per month to 50 GB by 2026-27, but that is probably not a good enough lever to pull that business vertical up.

On the retailing side, probably given the higher base, we may not really experience the kind of double-digit growth that we have seen. So, from that perspective, a lot of businesses are still sort of looking subdued and which is why Reliance is experiencing the kind of pain in terms of price performance. I really do not see that changing anytime soon with the global perspective still being challenging.

On the telecom side, we might see some bit of a higher data consumption given the upcoming IPL. But until the time tariff hikes happen, it is not going to provide much help to the overall performance of Reliance Industries.

Coming to Tech Mahindra within the IT space, do you see any concern? Which are your top IT picks?
In the case of Tech Mahindra, 40% contribution is coming from the communication vertical. That has been a historical underperformer compared to most of the other tier one names. We still don't see that segment sort of doing much while the stock is trading attractive at 12-13 times but till the time we get enough clarity in terms of growth on a higher side or lower double digit, I do not think this stock is going to do much and which is why we have a hold rating on this stock.

What we like are tier-2 names like LTI MindTree or Coforge or smaller companies like Newgen Software where the management is confident of delivering 20-22% kind of top line and bottom line growth.

Infosys has seen two big exits and we have not heard any big replacements. TCS has seen one exit. It is the season of IT exits. Is it because every large company is suddenly seeing a lot of exits?
Infosys has historically seen higher top level exits and which is why compared to TCS, the stability at the top has been missing for quite some time. Our view is that despite the good historical numbers, Infosys probably will continue to lag compared to TCS. It is still trading at a marginal discount to overall TCS PE multiples.

On TCS overall, our sense is that we may not see that kind of a challenge, especially from the growth perspective, because the new amendment is still guiding for $50 billion kind of revenues. So 9% growth is not a major thing to deliver. Infosys would have a lot more challenges given the fact that one needs to get the new management and then they will put up their strategies for chasing growth. On top of it, things are getting challenging in the US market. IT as a sector is still looking quite soft or subdued for some period of time.

Yesterday we saw a bit of a pressure on India Cements which was down about 5% and this morning there was this Shree Cement analyst meet wherein MK was talking about the key takeaways as well. How are you looking at the entire cement sector?
In the cement space, Q2 was one of the worst quarters and in Q3, we had seen some bit of improvement in EBITDA/ton largely because the power and fuel cost had sort of gone up from Rs 700 per ton to Rs 1000 or even more. Our view is that in Q4, we might see some bit of a respite or some bit of expansion of Rs 150-200 EBITDA/ton and largely because of the lower raw material prices because the cement price hikes have still been sort of muted.

Overall our sense is that the demand will continue to grow at 6-7% odd plus. The capacity growth could be slightly lower than and might lead to slightly better prices. One can expect some improvement but till the time price hikes do not really come into picture, we do not see this space outperforming compared to the rest of the market despite the fact that some of these stocks are trading at quite attractive prices compared to historical valuation. So a bit of relief in Q4, but not good enough for the entire sector to outperform.