See Nifty trading at 5K levels in Q2: Edelweiss Cap

Abhijit Chakraborty, VP, Institutional Equities of Edelweiss Capital feels that in the short-term, there are more chances of the market catching up a very sharp trade coming because of short squeeze and some long buying coming in the market.

He said, “In the current quarter, the Nifty could be trading as high as 5000 levels. We believe that there is deep value in the market right now and our call is that the commodities, primarily crude are going to correct. Inflation is somewhere near the peak levels; it might remain at double digits for a fairly long period of time. But if the pace of growth was to increase, inflation peters out and valuations are on our side, then we can see a substantial increase in the stock from the current levels.”  

Excerpts from CNBC-TV18’s exclusive interview with Abhijit Chakraborty:

Q: How are you feeling about where the market is poised right now and what do you think is riding most on its mind, politics or crude or something else?

A: It is a combination of factors, the way crude has behaved in the last couple of days and yesterday’s inflation data has come as a great relief. The pace of increase in inflation has cooled off. So these are two positive things that are going to play on the sentiment of the market. But again next week, we are going to see two new events one is UPA government’s trust vote and the monetary policy coming.

So, there could be a cautious approach before these two events to see how exactly these two events span out before a final trend reversal could happen in the short-term. In the short-term, we feel that there are more chances of the market catching up a very sharp trade coming because of short squeeze and some long buying coming in the market. There is a big possibility of that.

Q: If that short squeeze does materialize, and you do get that technical bounce that people have been talking about, what could be the extent of that, will it be 300-400 points on the Nifty or could go up all the way to 4600-4800?

A: It depends upon many factors like if crude continues to remain soft, inflation remains at about 12% or so, and if the UPA government scrapes through. Right now, we are seeing the mismatch between the current market valuations and what the first quarter numbers are coming out to be in most of the largecap stocks. So, if the things work out their way and all the jigsaw puzzles fall in the place, then we can be in for a 15%-20% of an up move on the index.

Q: What is your take on the political event on July 22 given the two outcomes what could be the extent of damage or relief for the market you feel?

A: There are political comments, which have been coming from different sections of media that there is a very good chance that the UPA government is going to pass this ‘vote of confidence’. In that event, we can expect some minor reforms being undertaken by the government in terms of residual stake sell in some of the companies where there has already been disinvestments or some reforms coming on insurance or in the provident fund things, which should be good for the market.

On the other hand, in case government fails to muster the vote and we are faced with the situation of an early election that too in my view would do away with a lot of uncertainty, which is there in the market. In that case there is going to be a fresh beginning in terms of policy measures. So, politics per se is not going to hamper the market sentiment too much but the event UPA goes through will add to the positive sentiment.

Q: On current reckoning; with all these factors in mind, do you think there is a chance this series might close up in the green?

A: That is what we are betting on, in fact we have stuck out our neck. As a house, we are of the view that, in the current quarter, the Nifty could be trading as high as 5000 levels. We believe that there is deep value in the market right now and our call is that the commodities primarily crude are going to correct. Inflation is somewhere near the peak levels, it might remain at double digits for a fairly long period of time but if the pace of growth was to increase, inflation peters out and valuations are on our side. Then we can see a substantial increase in the stock from the current levels.  

Q: You mentioned valuation mismatches between the four big tech companies and all four numbers are out now. Where do you see that biggest valuations mismatch and what would you go out and buy now?

A: In terms of relative valuations, Satyam stands out with 24% or 25% of an earnings growth on a YoY basis, it is trading at about 13 times. TCS is also trading at similar valuations but there we have an earnings potential of about 15%. In case of Infosys, it’s trading at about 15 times with an earnings potential of about 20%. So clearly, Satyam stacks up at the first order followed by Infosys and TCS.

What is to be noted is that the tech counters will continue to be outperforming sectors because this is the bad year for the tech industry because of currency fluctuations as well as the US markets not being too robust. In this year if the large companies are able to give you a guidance then you have a long-term horizon and in a long-term horizon, you are looking at the industry growing at 25% plus. If you are getting these stocks with proven management abilities and large scale sizes at about 13-14 times, they are definitely very good bets.