Abhijit Chakraborty of Edelweiss Capital said that the market rally has been decent and it has taken most people by surprise but at the current valuation,  trading is about 16 times one year forward.He added that the market has perhaps already seen the bottom of the market at about 4,800-4,900 levels.  

Excerpts from CNBC-TV18's exclusive interview with Abhijit Chakraborty

Q: How much more would you give this rally?

A: The market rally has been decent and it has taken most of us by surprise but at the current valuation, we are trading at about 16 times one year forward. Also given the fact that we are not completely out of the woods, in terms of the macro concerns, both internationally and in India, I wouldn't give too much of an upside from the current levels.

If we take a look at yesterday's data in the F&O side, the Open Interest has gone up, whereas there has been net selling both in the futures as well as stock futures. This indicates that we are somewhere near the resistance levels and we can see some kind of a correction.

I'd like to put this entire rally, and how it's going to pan out in a much wider perspective. Firstly if one looks at the tech guidance that has come out from India, I would believe that the Indian IT guidance is a reflection of what is happening underground in the US. The guidance obviously is lower than the previous year, but it is not shockingly low. Also if one looks at the guidance that has come from IBM, Intel and Accenture they are very good, so may be, the US slowdown is not as severe as it was feared to be.

Secondly if you look at the initial estimates of credit write-offs, it was about USD 300-500 billion. As of now USD 300 billion worth of the write-offs have already happened in the system. This first quarter write off, from most of the international majors has been less than the analyst estimates, so this is one problem which is getting mitigated. I think the majority of the shock is already out of the system in terms of the credit write offs.

The third important fact is the commodity prices, they have had a stupendous rally and that is because the fronts moved out of the equity as the risk appetite fell and went into commodities, these prices of commodities are unsustainable. I feel that once the overall macro situation in the world stabilizes there is going to be an outflow of money from commodities back to equities.

Yesterday the Planning Commission made a statement that they expect inflation to be back to 6% in 2 months time, and we have already seen the first week's inflation dip from 7.4% to 7.1%. So incrementally things are positive. However, we have to keep in mind that this year, we are going to see a slowdown in corporate earnings. There is going to be a slowdown in investments because of the unavailability of credit and squeeze in the credit system. What I'm saying is that, unless there is any drastic shock that comes in the system once more, we have perhaps already seen the bottom of the market at about 4,800-4,900 levels.

According to me, going forward we can see more of a time correction in the market, because the index stocks have already moved a lot. Barring a few stocks I don't see much of an upside in the index stocks, but if the market consolidates, it will bring back the investors, and that is what they are looking at more rather than volatility. If it's a steady market that will bring back the investors, they will probably shift to more non-index stocks and midcap ideas. 

Q: Are you expecting to see a correction after the expiry? What kind of a range do you see the market holding, once we are done with earnings and expiry?

A: That's a tough call, I don't know where the market is going to find its support. I don't see any immediate upside from the market, neither do I see any major reason for the market to correct in the short-term because incrementally and gradually marginal news flows are positive, things are becoming clearer both on international and domestic fronts.

So may be a 5-6% kind of a correction. But what is important, is that, may be one sector could see a correction and the other sector could see an upmove, because I think telecom still has an upside though Tata Steel and SAIL is in a correction, because there is a talk about steel being in the essential commodities etc. So you can see a phase where the index might not go anywhere but there could be some sectors outperforming each other.

Q: What's your top pick from telecom right now?

A: Bharti and RCOM, I think as a business model my top pick would Bharti. But from a price performance point of view RCOM may outperform Bharti.

Q: How much of this current rally owes itself to short covering you think, and do you think with the expiry of this series, short covering as a trigger will be done for the market?

A: I think the short covering logic is over done, when the entire broad market moves up by 1,500-1,800 points, and if you notice during this period the breadth of the market has been very good. Everyday there has been 70% advances to 30% decline, so this breadth tells you that this is not a short covering and it just cannot be attributed as a short covering.

Short covering has happened in the system, when Infosys came out with better than expected result. There was some marginal buying and some short covering happening in the system, so those will happen in pockets. But I don't think that, attributing the entire thing to short covering or to a majority portion of the rally because of short covering is justified.

Q: You are positive on gas and oil as a space, what would you pick from that whole universe?

A: Within the oil and gas I'm more bullish as a house and individually I'm very bullish on the gas sector. Gas is the emerging theme in India right now and I'm very bullish on Gas Authority of India. If you look at the business going forward the incremental gas production in India is going to go up by almost 150% over the next 2 years, and GAIL is going to be transporting that.

Apart from that they have got 39-40 ENP blocks there is a possibility of value unlocking, and the fact that this company has not been going at all, it has been going at the rate of 5-6%. After two years time if you see there is a topline growth of 35-40%, a PAT growth of 30%, ROC of 30% and dividend of 3.5%, I think there is a case of both the case of P/E rating as well as earnings growing exponentially. Some of the related sectors to oil and gas like Aban Offshore and GE Offshore they are relatively much cheaper right now with very strong business prospects.

Disclosure:

It is safe to assume that my clients & I may have an interest in the stocks/sectors discussed.