Mkts capped at around 15K range: Kotak Secs

Excerpts from CNBC-TV18’s exclusive interview with R Venkat Subramanian:

Q: What is your sense of the market right now, do you think we are edging in towards the top of this upmove or there is much more upside room that you can see?

A: I think that we are perhaps reaching a reasonably fair value range for this market. What we saw towards the end of June was perhaps to some extent a forced liquidation by FIIs, which caused stock prices to fall as low as they went. But I think post this trust vote and post the result season, we have now re-sustained in the market where you cannot really sell off stocks at the levels that we saw last time. At the same time, the upside range is getting established because the results while they have not been bad, you have to remember that this is the slowest growth that we have seen in last about three years. So I think on the topside, the market is perhaps capped at around 15,000 range whereas we should not a panic towards 12,500 that we saw earlier.

Q: A lot of the Domestic institutional investors (DIIs) have actually been selling these past few days, tactically if the market were to get to 15,000 and hold 15,000-15,500 will it be a good opportunity to increase your cash levels?

A: I do not think the domestic institutions have any great pressure to actually sell off because of any reasons other than that they are uncomfortable with the valuation whereas the Foreign Institutional Investors (FIIs) selling that we saw perhaps is more driven by the fact that they had liquidation pressure. So from a domestic institution point of view, I would imagine that they may sectorally realign their positions at these levels to see that if they can get into slightly different sectors than they had. But I do not think they will have any great incentive to increase cash level substantially because I do not think you are going to get a big sell off that would justify sitting on cash.

I think there is also a possibility that if this government actually manages to get a few things done during this session in the parliament, you may also be looking at slight upside to the market from these levels. So I think it would be difficult for them to actually go into any significant amount of cash at these levels.

Q: What do you think is happening with the tech stocks?

A: Actually I am a bit surprised at the weakness that the tech stocks are displaying at this stage. Out of the three concerns that have been pressuring the tech stocks for the last 1-1.5 years, two of them namely the currency and the local attributions/ wage pressures have somewhat turned in that favour the third worry which is the US financial sector has actually perhaps worsened. But on balance, the valuations that these companies have now reached are rather attractive even considering the fact that there maybe a bit of problem in the US. So the sell-off we are seeing in these companies and at the valuations at which they are trading is quite surprising. So I would actually look to buy tech around these market levels.  

Q: Any thoughts from you on the whole energy space, between the Oil Marketing Companies (OMCs), Cairn India even Reliance Industries what would be your preferred pick?

A: At this stage, having been beaten down by oil - everytime it falls, that seems to be the best buy. So from that point of view, I may bet on Cairn India when it is around Rs 220 levels because that could possibly be a hedge against the oil price going up and the rest of the market suffering with it. So from a trading point of view, Cairn perhaps looks like a safe bet at these levels. But on the public sector oil companies, I would completely stay away from that.

Other than that perhaps for Oil & Natural Gas Corporation (ONGC), which for the first quarter at least has been let off the hook by the ministry. Perhaps they will report strong numbers because of the lower subsidy component. So maybe ONGC is a trading buy, Cairn a trading buy but I would completely stay away from the rest of the oil PSU.

As far as Reliance is concerned, I think the results were somewhat subdued particularly on the refining margins when public sector refiner like Chennai Petro can report USD 15.5 GRM (Gross Refining Margins), it is rather surprising that Reliance could not do much better. So that is a disappointment from a refining point of view but the story in Reliance remains the upstream from there-that is going to be the incremental trigger for the stock and that part remains quite attractive and we may get to hear a lot of positive news on that. So Reliance perhaps on a bad day if it dips below Rs 2000, it could be a buy but right here perhaps I would not even think of buying Reliance.

Q: How would you approach the capital goods space right now, the ones which have been moving up from their lows like the BHELs and L&Ts (Larsen and Toubro)?

A: I think the results have been quite okay. The BHEL results were quite good and some of the smaller companies like Crompton Greaves  - the results were really outstanding. So they have somewhat redeemed the faith that the investors had in capital goods that there is earnings visibility and there is no major problem there, the margins are not contracting that badly.

But all said and done, I think the valuations again- when BHEL reaches Rs 1,800, it trades at about which it did yesterday, it did for yesterday at 25-times current year earnings which in a bear market environment is rather steep. So unfortunately we are now getting into that range for capital goods where given the robustness their earnings, the stock prices have appreciated and they have quickly reached what would be the top end of the range. So what I can say is that the range is perhaps getting established for capital goods stocks.

In the next fall, I think they will not fall as much as even if the market falls they will be perhaps outperform the market because they have established in the Q1 that their earnings visibility remains intact. So you would look to buy them in the next fall but at the same time the top end is perhaps around these levels.

Q: What do you expecting to hear from the policy next week?

A: I would expect that they would continue to move on this tightening bias. I think that is the path that they have set themselves on. There is nothing that has happened in the last couple of weeks to change that significantly. So I would think that Reserve Bank of India (RBI) goes in and maybe increase the CRR at least. I think that much should be expected, so to that extent I do not think there is any relief from the monetary side in the immediate future for the market.

Disclosures:

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