“Sentiments are extremely bearish. Bearishness is there in the subconscious mind of the people. So, I do expect there will be a pullback rally,” Tandon said in an interview with CNBC-TV18.
Tandon said investors will need to assess whether the expected rebound remains a pullback rally or develops into a broader change in the market’s direction.
“For now, it’s a pullback rally definitely, which is visible,” he said, adding that he sees opportunities in individual stocks and sectors that could perform irrespective of global activity.
Optical fibre stocks: 3-5-year opportunity
Tandon remains bullish on optical fibre companies, which he sees as a way to play the artificial intelligence theme in India. He said the sector is facing a global shortage and that adding capacity will take time.
“It’s not only in India. There’s a global shortage, and even if these companies put up their greenfield or brownfield expansion, it will take at least a year to three years to expand the capacity,” he said.
Tandon expects the shortage to last for at least three years and potentially as long as five years. He said Quant has been using optical fibre, along with power, to play the broader data center theme.
He said global sentiment towards AI could affect these stocks in the short term, but does not expect it to materially affect their earnings because of long-term relationships and contracts.
“These are long-term relationships, and they have long-term contracts. So I don’t think their earnings will be impacted in any manner,” Tandon said.
He added that some companies have three to five years of earnings visibility and more than 90% of their revenue comes from exports.
Tandon also said investors should look beyond trailing earnings when assessing these stocks.
“These prices are not a reflection of trailing numbers. They are a reflection of what is expected in the next three to five years,” he said.
He does not believe the optical fibre companies have reached the stage of maturity or excessive ownership in the cycle. Instead, he said they have moved from being among the most neglected stocks to attracting investor interest.
Quant cautious on capital-market stocks
Tandon said Quant remains bullish on the long-term opportunity in India’s capital markets but is currently cautious on capital-market-centric companies.
He said volumes have increased on exchange books in recent quarters, while option volumes have been shrinking. Regulatory changes and lower interest among participants have also affected the segment, he said.
“If capital markets start improving, sentiment starts moving. These are companies that are unique. They can come back,” Tandon said.
However, he said Quant would prefer to wait for more attractive valuations before adding to such names.
“None of the capital-market-centric names, are cheap,” he said.
Tandon said Quant does participate in NSE and could add capital-market names at an appropriate time. For now, however, he remains cautious because of valuations as well as high ownership levels in some of these stocks.
Over-ownership a key risk
Tandon said over-ownership is an important factor in his investment approach and that heavily owned stocks can struggle even when valuations appear attractive.
“The extreme over-owned stocks are not performing in the current environment. That’s one of the big risks you see,” he said.
He pointed to the banking sector as an example, saying banks are heavily owned by foreign institutional investors, family offices, domestic mutual funds and insurance companies.
For Tandon, the issue is therefore not simply whether a stock’s valuation looks attractive, but also how widely it is owned.
HDFC Bank: Tandon wants to see changes over 3-6 months
On HDFC Bank, Tandon said Quant does not own the stock and has been negative on it for the past four years. However, he is optimistic about the bank’s new leadership and believes the change could remove some of the uncertainty surrounding the lender.
Tandon cautioned that any changes would take time, particularly as the new leadership would need to understand the bank’s internal systems and processes.
He said he wants to see what changes take place over the next three to six months before taking a view.
“I am optimistic that going forward, this one uncertainty which was there should be left behind,” Tandon said.
However, his broader concern remains the level of ownership across the banking sector.
Selective approach to IPOs
Tandon said Quant remains highly selective when participating in IPOs and block deals.
He said the fund house generally participates only when it is convinced that the opportunity will be meaningful from a longer-term perspective.
“Nothing comes cheap,” Tandon said, adding that the fund house is cautious when companies come to the market with high expectations.
He said Quant’s approach to IPOs remains selective rather than broad-based.