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New investors should stick to frontline stocks: Anand Tandon


For new investors, it may be more prudent to stay in frontline companies, says independent analyst Anand Tandon. Edited excerpts from an interview:

Rating agencies did quite well on Monday. How do you see them fundamentally for the long term? Based on the current valuations, are they attractive? Or do you think that it does not warrant much of a value pick at this juncture?
Well, the only argument for looking at rating agencies is whether their businesses will go up. Right now, raising equity is perhaps much easier than debt. We have not seen that much of an increase in debt anyway. There is no case to be made right now for a sudden increase in the kind of volume of business that the rating agencies will do. So what you are really looking for is the fact that they are being rerated because they were an ignored sector for a long time. I do not think that is necessarily anything to do with their business outlook. From that perspective, most of the companies which have been ignored have gone up quite well.

Rating agencies have not actually covered themselves with a lot of glory, given their track record of being able to predict defaults. They remain a regulatory play. Regulations require that you need ratings from at least two raters before you can come out with a debt issue. They will always have some business but the longer term challenges to that model will continue.

A lot of people are betting on life insurance companies for the long term. What do you think about when you compare it to its listed peers?
It is clearly the best in class in terms of a business which is very attractive in itself. As you mentioned, life insurance is a long term business and the runway still remains reasonably good. We have a large number of policies but the value of policies is small. More importantly, there are less life insurance policies. Even now, more market-linked policies are around. So there is an opportunity for the market to continue to grow. HDFC Life comes out top-notch within that space. Obviously, it comes at a price. A company like SBI Life is probably a little more attractive in terms of its numbers, but in terms of execution you cannot fault HDFC Life. Valuations have tended to remain slightly higher than the comfort level. The business is fairly robust. So I think one should be long on insurance generally. Use any correction to buy. HDFC Life is clearly top of the class.

How are you looking at the cement basket? This space has been showing some amount of outperformance.
It is a space which has the right kind of tailwinds behind it. The demand will be reasonably robust given the stress on infrastructure and given the revival in housing and realty in general. But the valuations have got stretched out. The other important point is that many of the companies have again announced expansion. It does not board well for the utilisation levels. You should be able to show a reasonable amount of profitability. If that price discipline breaks, or in other words, if the cartels decide to act a little more like free market players then you will have a problem. Till then, earnings growth can be reasonably robust. There may be some fluctuations quarter-on-quarter because of volumes going up and down and other issues like monsoons, Covid, etc. At a general level, it is a sector that you want to back. Barring the valuations now, the only challenge is the fact that they are again going about expanding. If the expansions become fairly large and the growth does not catch up as much as expected, there will again be a pressure in terms of trying to keep the prices where they are.

What is it that you are advising investors to do at a time when the market is choppy? Should we shift to quality names within the large cap space or there is plenty of opportunity in the broader market?
I think both of them are true. You are at a level where the volatility is only likely to increase. Therefore, from the point of view of safety or capital protection, you need to move to companies where you are more comfortable. You may want to stay in more liquid names. On the other hand, it is very likely that the outperformance will continue from the mid and smallcap segment because it is under-owned. We are still seeing very widespread participation in the market. For new investors, it may be more prudent to stay in frontline companies. Experienced investors would know the kind of risks they are taking.

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