Global cues to drive mkts in near-term: Pranav Sec

Speaking to CNBC-TV18, Rajesh Jain of Pranav Securities said that there is substantial leverage pressure on the market as far as the Tier-II and Tier-III stocks are concerned. He added that the confidence is not just building up and the weaker stocks are the ones where the unwinding seems to be the highest.

Excerpts from the exclusive interview with Rajesh Jain:

Q: What’s going on in the broader market, the Sensex is holding out but most stocks are down 5-8-10%, where is the selling coming from?

A: It is coming from all sorts of quarters, I think there is substantial leverage pressure on the market as far as the Tier-II and Tier-III stocks are concerned. It is unlikely that finances would like to carry on huge positions in off center stocks at the crucial March 31 date, so there is lot of unwinding taking place.

The confidence is not just building up and the weaker stocks are the ones where the unwinding seems to be the highest and we are also seeing fair amount of portfolio selling and for the last fortnight or so, all the buyers have disappeared from the markets. If it is not a marquee stock, if it is not a heavy weight, then the buying is all the more shallow, as a result of which even small selling continues to drag these counters down.

So while there is some sense of confidence on accounts of developments in US, people would like to see how Hong Kong pans out tomorrow morning and it’s only after you see a stable US and a stable Hong Kong, some amount of buying would commence in Indian markets.

Q: What’s your own sense, do you think the markets will manage to hold out, given such poor breadth and such lack of confidence because we have been hearing a lot of people saying that may be we are close to the bottom and we’ll see a relief rally but the way the broader market is going, do you think it will hold out?

A: We just have the expiry round the corner and depending on how the internals of the markets are placed at this point, I suspect there could be some amount of upside from short covering, which could come in as the March series comes to a close. I think these are the two upsides, which the market could hope for, if indeed a bail out has to happen in the remaining week of this financial year but aside of that, the buying signals will emerge only when you see both the US and the Asian markets stabilize.

Secondly you get the first positive signal from corporate India in terms of performance going forward that essentially means that you should not get any major negative guidance going forward and like I have said this before, you should see the assumption of a very confident buying once you have some sort of initial cue on which way the monsoon will go and finally a verdict in late May or early June. I think before that buying in a strong way looks difficult. 

Q: What’s going on in the couple of these stocks, S Kumar’s down 28%, Gujarat NRE Coke down 20%, Cairn 13-14%. Anything specific that you have picked up by way of selling in these names?

A: I don’t think I can specifically confirm any major which could have led to such a major sell off except that there is the commodity price, which is reflecting in some of these stocks but besides that, it is completely the March 31 factor and the fact that there is unwinding taking place across portfolio and all of them are Tier-II stocks.

Q: Do you think the worst is over for the financials for the moment we have seen some inkling of buying in the ICICI Bank, the HDFC’s of the world, do you think there is quality buying, which is stepping in finally or is it just a pull back?

A: We’ll have to be satisfied by assuming that it is just some sort of a pull back and initial traces of value buying. There is a hope building up that the RBI could produce a rabbit out of the hat and despite inflation, probably signal some sort of rate softening even on the official benchmark level. But aside of that, my own personal call is that the buying will return only in the new financial year, until then I think it is just the pull back being used to square off some shorts and very initial traces of value buying, not yet.

Q: Anything that you have heard by way of margin calls etc because the future’s OI has got cut down in stocks like Ispat, IFCI,RNRL to a large extent yet they are falling at 6-7-8% a day, is there anything by way of residual margin call in the HNI system?

A: There has to be a whole lot of money which is still lying unpaid to brokerages and to banks, given the sharp fall that the markets witnessed in January and the sustained negative deltas that we have seen over the next 2 months. The losses were huge, we are all aware of that and as a result of that, the debits and the clients leisure’s were not satiated immediately. A lot of people would have been allowed to carry positions or debits in the leisure against the collateral of stocks, which was indeed the strongest, and the largest currency used in the F&O market led to the huge build up of positions in January.

Now with March 31 approaching and the fact that you are almost two months after the event, all broking houses and bankers would now be at the end of their patience to try and recover these dues and with the market equally divided between close to 4,000-5,000 levels on the Nifty. I don’t think too many finances would like to take a call given the risk factors involved and with March 31 approaching, most of them would like to see their books clean and collateral selling would be triggered off.

There is also a huge element of margin trading that goes on particularly in Tier-II and Tier-III stocks and all these margin traded stocks for instances, last week when you had a fall in Orchid, it turned out that the promoters themselves had bought a stake using margin funding. Now in such situation, unless you have enough collateral or unless you have confidence that there is an upside left in the counters,I think most financials would like to play it safe and with an important landmark date, given the tough income tax regime that is now building up with disclosure and all, I think not many financial would like carry forth such funding.   

Q: What are your thoughts on the metals end of the market, are you apprehensive that metal stocks could run out of steam now or would you buy this decline in many of the metal names?

A: Given the huge demand which continues to be buoyant in the infrastructure segment and the plateauing real estate segment, I think the metal space looks good and we also have the upside through the power infrastructure development. But if you take the volume growth driver out, there are concerns on the cost side, we are all aware of the increases out there and we have just seen the commodity prices take a bit of a U-turn and I think that could put additional pressure on the bottomline.

So it is a bit of a balancing out act and therefore it would be a wiser thing to give metals the pass at this point and look for probably areas like FMCG where there is substantial underownership and plus the fundamentals seem to be giving a thumbs up and if the Pay Commission is any other signal to go by, at least the feel good factor for FMCG and pharma will improve. So in the near-term momentum as well as one year horizon fundamental, buy an FMCG or a pharma or some of the consumer segments like entertainment and media could benefit over a metal but if you are taking the three-year horizon, I think the volume growth story would make metals a buy.

Q: You spoke about entertainment and media, what about something like an Adlabs, the way the stock has got hammered from its peak I think it is trading at 30% of its peak value?

A: I think the momentum froth has been totally skimmed off this stock. It is after Zee becoming one of the best-developed integrated play on the entertainment space and it only needs to just add broadcast to its portfolio of products to become the complete entertainment play. I think it has got tremendous lineage given the Manmohan Shetty connection and the current Reliance ADA Group connection and I think the business model has been rolled out very well. It is growing at a scotching pace in practically all its segments and entertainment being a consumer industry. Adlabs also has this spin off from the retail and the real estate segments of its balancesheet and I think it is for me one of the best buys in the market at this point.

Q: What about real estate, are people stuck at higher levels with the stocks having collapsed 50%-70% from their peaks?

A: It would appear so but I have said this before last week or some days ago on your channel that real estate is a sector I would stay away from at this point but I think it is only going to require a couple of things to change the entire sentiment for this sector. One, it could be a drop in the benchmark interest rate and second, it could be some sort of SOPs, which could be announced after the fact when the budget is being cleared in the Parliament to help an industry such as the real estate sector.

It is a core sector, we are all aware of the huge unsatiated demand in this entire space and the kind of value added as well as basic products are being launched across the spectrum by a host of developers, I think the shave off in the valuation in the tickers has been far too sharp and I think even though I would probably stay away from real estate from an investment point of view even for a six months to one year horizon, In the near-term if I want a quick pop 5%-7% gain I would probably buy real estate even today.

Rajesh Jain Disclosure:

It is safe to assume that our clients and we could be having trading/investment positions aligned with the views/extracts.