Moneycontrol
Apr 15, 2013 02:28 PM IST | Source: CNBC-TV18

IT may see de-rating; continue to hold Tata Motors: Alchemy

Hiren Ved, Director & CIO, Alchemy Capital Management expects the market to remain rangebound unless earnings pick-up. “Earnings will keep a lid on the index. We will continue to be range bound for a while,” he said in an interview to CNBC-TV18.


Disappointing Q4 earnings by index heavy weight Infosys hit the market hard, pushing the Sensex down 300 points on Friday last week.


Hiren Ved, Director & CIO, Alchemy Capital Management expects the market to remain rangebound unless earnings pick-up. “Earnings will keep a lid on the index. We will continue to be range bound for a while,” he said in an interview to CNBC-TV18.


Also Read: Infosys a 'buy', says Motilal Oswal, sets Rs 2700 target


First quarter is seasonally a slow one as far as earnings are concerned, so the market may be biased on the downside going ahead. The soft patch seen in earnings is likely to remain for another quarter or two, he added.


Continuing his bearish tone on IT sector, he cautioned that the sector may be headed for a de-rating in days to come.


However, he feels IT giant Infosys problem is company specific and one should wait for Tata Consultancy Services (TCS) to announce its Q4 earnings before taking a call on the IT sector, he added.


Meanwhile, Ved holds his bullish stance on auto major Tata Motors, he feels Good performance by Jaguar Land Rover (JLR) is making the stock attractive.


Valuations are very reasonable. There is potential for the company to standout in this kind of a difficult environment. With many new models coming in in JLR, we will continue to see good momentum,” he elaborated.


Below is the verbatim transcript of Hiren Ved's interview on CNBC-TV18


Q: How would you approach Infosys and the IT sector now after what you have heard on Friday?


A: I would still like to believe that it is a company specific issue and would wait for the TCS results to come out to take a broader call on the IT sector. We are going to see far more volatility on a quarter-on-quarter basis in IT companies than what we saw in the past when there was a secular growth in the sector.

People used to extrapolate what happened the previous quarter and try to judge what the next quarter is likely to be. So, you will see divergence even amongst the IT companies in terms of performance and higher volatility in the quarterly results. We will see some de-rating of the sector and then people will have to take a call on name-to-name basis rather than trying to take sector call as a whole.


Q: The problem is that this was one of the few sectors helping the market stay afloat. Would you expect to see more pressure on the market because of what happened with Infosys and the turn in mood towards IT?


A: When you have such a large company with a significant index weight and most institutional investors having some kind of exposure to a company like that and the company does not deliver, it definitely puts pressure on the market. So the trend that we have been seeing over the last few quarters is that the market is getting more and more narrow. It will continue to be the case, until we see the broader market earnings bottom out and start to move up again and that is still sometime away. So, the market is going to get even more narrow and that will keep a lid on the index and we will continue to be range bound for a while.


Q: With the base around, do you foresee more pressure on the market?


A: The Q4 earnings season is generally a better quarter, but this time the earnings are not going to be too great. We are going to see one of those fourth quarters that will be pretty low in terms of revenue growth, profits and margins as well. Q1 is also seasonally a slow quarter, so there could be a downward bias to the market. We might consolidate here for a while till the earnings season is on and then people will take a call after they have seen most of the large earnings in this quarter. We are going to see a soft patch for one or two quarters more.


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Q: What have you made of the collapse in gold and what ramifications could it have on the stock market, the economy and investor sentiment per se?


A: From a macro standpoint, it is good that gold prices have begun to correct and that would mean that there would be less pressure on the current account deficit (CAD) at least in the short to medium-term. We do not know whether this is the end of the bull market of gold, but it would certainly help to put some pressure off the CAD in the short-term. Same is the case with other commodities and oil and therefore, it is good from an India point of view because oil and gold were the two big components of our imports. On an incremental basis, that is going to help the rupee and the CAD as well.


Q: What would you do with Reliance Industries? What do you expect to see from its earnings performance this time around?


A: Reliance is still in a broad range. I do not think that the fundamentals have now moved so significantly to change that view any significantly, but lower oil prices is not very good for Reliance unlike it is for most other PSU oil refiners. This is because that could also put pressure on petrochemical margins. So, it is going to middle around here at these levels. It is in a long bottoming out process that would take several quarters.


Q: What are your expectations from liquidity over next few weeks? Everyone expects this to be a difficult earnings season, do you think we may have to face some liquidity pullout through the process or will people remain committed?


A: Equities has not been the most preferred asset class for general retail investors. This is because over last four-five years, other asset classes like gold and real estate have held out. Given better returns, people have not put money in equity. So, whatever is left of it are people who are hardcore equity investors and will continue to hold on. As the markets have drifted down redemption pressures will also abate, because redemption pressures go up when the market tends to move to the higher end of the range which is the previous peak. People have a feeling that they need to bailout at those levels and will then get better opportunities to invest in. So, people who are now there in equities have seen this kind of market before and will continue to remain invested. There are always individual opportunities to make money in the market over the long-term.


Q: Once you get through one or two quarters of pain, you will come closer to elections being announced. Do you think that could be a phase where the markets might actually start turning around?


A: With the announcement of the elections, market could find some bottom, while the consensus would say that we should look at the elections, look at the results and then come back. For long-term investors that would be a great opportunity to at least start getting into the market. This is because if everybody wants to come in post the elections when all the uncertainty is over for people who are willing to take that uncertainty, they will also get better prices from a long-term perspective. This is not the first time we are seeing elections in India and every time there is elections we think it is a crucial one, so we should wait and watch.


Every election in India is crucial from that point and so there will be good opportunities. We are seeing that in several sectors, long-term valuations now come to levels that we last saw in 2002 or even during the height of the crisis in 2008-09. So between trying to see full certainty in the environment and valuations, there is opportunity for investors who want to take advantage of those valuations in a couple of quarters. We are tending to go towards those kind of valuations and there will be great opportunities to invest at that time.


Q: The big comeback from last week is for Tata Motors. How are you approaching that stock?

A: At this point in time and over the last several weeks, the most attractive part of the business is the Jaguar Land Rover (JLR) and that continues to do well. So we continue to be bullish on Tata Motors, the valuations are very reasonable. They still have to sort out their domestic passenger vehicle business which is floundering, but most of the value today is in terms of what is happening in JLR and some of the bigger markets like the US, we saw some numbers come out of UK that were pretty good. There is potential in that name to standout and holdout in this difficult environment. With many new models coming in JLR, we will continue to see good momentum there and continue to stay invested in the stock.

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