Q: Is this a start of a bigger pull back, or just some consolidation after last week’s gains?

A: It is difficult to say at this point of time. The markets are rangebound for the moment. The fundamental environment is obviously not all that good with inflation going up every week, the rupee depreciating, and the fear of a tightening Monetary Policy. All those things are there on one side and on the other side we have a sort of a mix of valuation baskets in the market, where there are certain largecap stocks and sectors which do not look to bad on valuations. Then, there are other sectors or stocks which are probably looking pretty unattractive on the valuation count. Right now, the market is undecided which side to go, so it is trading in a band for the moment. Until that band breaks, it is quite difficult to say which side the markets would go.

Q: We have had a nice little rally over the last few weeks globally and in our market, would you take profits now or do you think there is a chance that the market would break out on the upside?

Q: IT has had a very good run and capital goods looked rickety over the last couple of sessions.

A: IT has been a turnaround story. Before the earnings season started, everybody was very negative on IT. But the guidance for next year was not too bad. Then, we had this tax holiday getting extended for a year. We also have the rupee depreciating against almost everybody’s expectations. The general expectation has always been that the rupee would continue to appreciate. So, all these factors have actually held the IT sector turnaround and valuations are not that demanding. So, that is one sector which can continue to do well, particularly as the rupee does not seem to be appreciating in a hurry for quite some time.

As long as oil prices continue to go up, we are going to see a wider current account deficit touching 2.5% to 3% of GDP this year. Capital inflows are not very strong. So, the rupee does not look like it will appreciate in the short-term and that is obviously a positive for IT.

As far as capital goods are concerned, we are still bullish on them in the medium and long-term. But the valuations are a bit demanding. They are factoring in something like 30% growth rate for the next 2-3 years. The last two quarter results have been a little bit below expectations. So, they are in a sort of a consolidation mode and this mode in the capital goods sector can continue for may be another two quarters before you could see an uptrend resuming there.

Q: How would you play the cement sector now? Do you think valuations have become compelling after the underperformance or not good enough to take a contrarian call?

A: Absolutely not. This sector is in for a fairly long decline. It could be as long as 2-3 years because there are a few things happening. There is the inability of cement companies to increase prices because of the government’s persuasion. But that is just a short-term phenomenon. The longer-term fundamentals, which are playing out, is the rapid increase in costs which they are unable to pass on.

We are coming to a stage where in the next few months or after the next few months, we are going to start having a whole lot of capacity coming in. Around 30-35 million tonnes will get added this year and another 30-40 million tonnes will get added next year. So, the pricing power which the cement companies had is gradually going to go away.

We are at the top of the cycle as far as cement is concerned. From here, its going to be only downhill for the next two years. So, I don’t see any point in bottom fishing in the sector for the time being. You will only have some intermediate rallies for traders to play out. But for an investor, this is one sector to certainly keep away from.

Q: How do you play the rate sensitives now? They were quite weak today-banks and real estate. Would you buy any of them?

A: There is a lingering fear in the market that with inflation going up every week, at some stage, the RBI could come in and take some more tightening measures. Probably, the market is too much worried about a further CRR hike because that takes away the extra bit of liquidity. But in case the RBI decided to signal higher interest rates, then obliviously there is going to be a major negative impact on the rate sensitives.

So, while nothing is yet on the cards immediately but that fear is definitely keeping investors away from these sectors and particularly as far as real estate is concerned. Obviously, real estate prices have been falling all over the country. Real estate experts said there could be a further 10-15% fall in real estate prices.

These sectors should be looked at very cautiously. One should be buying only on dips, in a very cautious manner and probably go in more for value buying wherever there is a lot of value for the medium-term rather than looking for price appreciation in a hurry.

Q: What is your feeling about the next three-months? Do you think the market can consolidate in a higher trading range and get away this summer? Do you see more shocks coming during the course of the next three-four months?

A: Right now, I would say 15,000-18,000 is the sort of band the Sensex looks to be trading in. There are important issues: one is going to be the first quarter results in July which is about a month and a half away. One could see a further slowing down of increase in profitability from the corporate sector. That could definitely hit the markets as and when that happens.

Secondly, if there is a further signal of interest rate hikes, that could bring the market down significantly. Third, we have the monsoons which are going to start. But the impact of that is actually seen somewhere around the middle of July.

So, that is again the same sort of period where that would have an impact. The fourth factor, which is also unpredictable, is the global markets. If the global markets begin to sort of end their rally and start going down, because of oil prices going up further, one could have a downside.

On the upside 18,000 is about the limit, which the market can go to in the next 3-4 months. But the downside is open and depending on a lot of these factors. A lot of them are going to bunch out around the end of June and July. That would really be the critical period.

If we can get through the next earning season without too much of a dip in the markets and without too much of damage, we could be through this difficult phase. But the real difficult phase is going to be from the middle or third week of June to the end of July.