Rally could take Sensex to 16k levels: MOST

Manish Sonthalia of Motilal Oswal Securities said the steam in the markets could take the Sensex to 15,500-16,000. "However, tomorrow will be a crucial day as far as the direction of market opening is concerned, given that implied volatility at the current strike price is more than 50%. Markets would be looking forward to a gap up or gap down to the tune of maybe a minimum 5% based on today’s closing."

Excerpts from CNBC-TV18's exclusive interview with Manish Sonthalia:

Q: How is this rally panning out? Will it have much more in terms of gains assuming the UPA wins today? Is this looking like a very robust rally to you?

A: We had a lot of shorts in the system from the institutional side and on anticipation that the mutual funds would see redemption pressure. It was expected that retail, which has been holding out so far, would sell shares. That has not happened. So, one is seeing a heavy bout of short covering.

The steam in the markets can take us to 15,500-16,000 on the Sensex and tomorrow would be a crucial day as far as the direction of the market opening is concerned, given the implied volatility at the current strike price. So, the markets would be looking forward to a gap up or a gap down to the tune of a minimum 5% based out of today’s closing. The global markets and local factors are all helping the cause. Earnings are more or less shaping up in line.

Q: The level of 16,000 is a rally for a trader to bet on if the vote comes in his favour. Would you also ask investors to jump in? Do you see this rally as sustainable at all?

A: The crude factor will play out to a major extent. We think valuations are on our side at around 13,000 levels. We would have factored in all the negatives provided oil does not breakout above USD 145-146 per barrel and that band that always remains a caveat. If that were to happen, then we could see a lower top. But if that did not happen, then maybe we would be asking our clients to nibble at around current levels and there is no need to jump in because markets are not going to runaway in a big hurry.

Q: What is your view on the banking sector? Would you advice profit booking now? Would you say that valuations are still supportive for these stocks and they can still rally from these levels?

A: It is all stock picking. Specific stocks like the PSU banking space have good numbers and on the operational side there are mark-to-market rates. Oriental Bank of Commerce is still available at 0.5 times price to book. LIC Housing Finance declared the numbers yesterday. Its margins are intact while the NPAs are down. It is available at 5 PE or one-time price to book. There is a case for further buying into the stock at current levels.

As far as the private banking space is concerned, Axis Bank was clearly undervalued at the levels that we saw at Rs 580 or thereabouts and those are corrected. The PSU banking space and LIC Housing Finance look good at current levels.

Disclosure:
Our clients and I would be having some interest in stocks that we discussed.