The valuations of current equities look attractive and the market may witness a snapback rally in next 7-15 days, says Sanjay Dutt, director, Quantum Securities, in an interview to CNBC-TV18. Currently, the market is trading in-line with emerging markets (EM) peers.
He further added, the Nifty is expected to trade in the range of 5600-5900 for the next six months. Expectation of a weak Current Account Deficit (CAD) number has already been factored in but midcaps will take time to overcome from the shock it has received in past few sessions.
Specifically, talking about stock and sector, he says DLF may not slip any lower from current level. The auto sector has been severely impacted due to internal issues rather than demand and offtake issues.
Below is the edited transcript of his interview to CNBC-TV18.
Q: The broader market especially saw a disappointing run this month. Where do you think is the market pushing?
A: I continue to remain negative. Positively, valuations have reached a extreme downside and some are below sub-2009 levels. So, value buying should come in. The risk reward now looks favourable on the long side and there is limited downside can be expected for some midcap and large cap companies. I am positioning myself for a snapback rally. However, I never saw such bad times on the Street that includes losses and sentiment that everyone has suffered with.
Q: The slowdown in the FII flows has been less pronounced than the slowdown in the domestic capex activity, which indicates that the FII sentiment is at least relatively better than the domestic sentiment with respect to India. Do you fear that there could be a cataclysmic fall or a pullout of money as we head into the year?
A: I don't think that will happen, the Indian market is behaving in-line with the emerging markets especially countries like Brazil etc. Many of these countries saw massive growth slowdown and other problems. India witnessed problems related to policy inaction and political flux. However, the flows across these markets have been sporty like they have been in the last few weeks. I don't see a possibility of a massive pull out. Unless complete risk aversion sets in to emerging markets and lesser developed markets like India, South Africa, Brazil etc, I don't see that to happen in near future.
Q: So, the premise of the market bouncing back for you is that it has been oversold over the course of the last few weeks and you would treat a pullback as a snapback for the market?
A: We need to take one step at a time, we are setting ourselves for a good snapback which may be short-term, it may not be backed much by fundamentals, may not show clear signs of turnaround and may not go on the uptick as yet. However, both valuations and oversold conditions show a compelling rally in store; it can happen in next 7-15 days, it is due any day.
Q: How much would you give the market because the latitude of the market looks narrow? The Nifty was never near 6000 or 6100 or the levels we generally associate with the market displaying strength again?
A: In terms of Nifty range, now one needs to live with a new reality. In terms of midcap indices, range will be there till fundamentals show clear sign of improvement and money is committed to the market which will take time. The Nifty may trade in a narrow range of 5600-5900 for next two-six months. On a positive side, the range will breakout if there is change in fundamentals like policy action and quick action. Right now, we are not set to breakout 5900 level even if we do have a snapback rally.
Q: How worried are you about the current account deficit (CAD) number which will come out today. According to you how many more quarters of macro economic pains are equity watchers factoring in before a bottoming out?
A: I think CAD is overhyped. The CAD in the UK has reached the worst number in the last 25 years. India is facing extreme situations because we are importers of many important things that matters to the country like oil etc. We are dependent on inflows and FDI has slowed down, it is a short-term problem and there is no need to panic. CAD is a problem but I don't think market should react to a really negative CAD number as it is already priced in.
The macros have bottomed out, we saw worst December quarter or have lived through the worst in this current March quarter. I don't think macro fundamentals to weaken further. I have faith in the statements made by the FM in the Budget, I think all commitments will be honored.
Q: The midcap space has been hit the hardest. Are you expecting to see a sizeable bounce or have cracks run too deep and that is going to take much longer to fix?
A: I think cracks have run too deep and it will take much longer to fix. The HNI, private client group, active trader and operators have lost huge amount of money. It will take time to heal and these are the people who provide key liquidity in these counters. Until, they come back into the system nothing much will happen. Of course, there will be value buying by some long-term investors, institutions, and some large players but it will take longer to heal the sentiment and wounds.
Q: In which sectors do you expect to see some value buying and could be durable relatively to this market?
A: in steel space, Jindal Steel and Power Limited (JSPL) has been plagued with raw material issues, once their issues are resolved this stock will be picked up as this company has the asset values of these companies are very compelling. Once there is an uptick in cycle, projects clearance by the government and proper liquidity then stocks in the manufacturing and capital goods space will pick up.
Q: Oil and gas space was very volatile last week. How would you approach this space but as a whole there are some positive comments and brokerage views with regards to the diesel price hike, the sustenance of that. How should one put money in this sector now?
A: I am positive on this sector particularly on Reliance Industries. We doesn’t necessarily have oil and gas as a play, but have other exposures also now building on slowly and which will start generating money over the next few years. So, oil and gas does look good. The people and the government have accepted the reality that they need to live with market-related prices of oil products.
Therefore, there is lesser resistance now to whatever nominal price hikes are coming about. Therefore, the balance sheets would be set right over the next six-twelve months; this is a major positive for these companies. If oil prices soften a bit across the world, then these companies would be the biggest beneficiaries. So, I am positive on the oil and gas space.
Q: Is divestment becoming an additional irritant to the market where a lot of the domestic money that could have got into the market is basically getting routed and reserved for some of these issues?
A: Yes and no. Yes, because whatever liquidity is there in the market it has been sucked out by these flows. No, because ultimately the government has to sort out the finances. Also one is getting a chance to own these companies at compelling prices. Some of these companies are very attractive so therefore it is a positive for people who want to invest and sit on these for relatively long period of time.
But without doubt, liquidity drain is impacting the market, the liquidity could have gone into better private sector companies. And could have gone and fed the much needed equity infusion in the form of offer for sale, or in form of IPOs etc that the companies badly need to set right the debt-equity balances. But one has to live with this reality, government also has no choice, there is no other way out.
Q: How do you approach DLF, it was a stock that could not be touched by the damage the rest of the real estate space was seeing for a long time but now DLF seems to be under pressure?
A: There is some amount of selling. People were looking forward for easing of rates which effects the mortgage business directly and therefore also effects real estate balance sheet. The RBI also made a statement that they have very little room ahead to cut rates. We are just about a 25 bps cut, real estate is the first sector to be impacted and therefore obviously the leader in there.
There has been some amount of selling in the last few weeks mainly on account of end-of-year consideration. I think there is limited downside from current levels because once the sector bounces back, the leaders will start to look better and DLF will look better, it is in a much better position compared to other companies.
Q: Trade in IT space makes one nervous. Will earning season bear that through or are you a bit cautious on this space now?
A: I hold a very cautious view on this sector. This is the safe haven where people have been hiding, right now the prices are reflecting on the fundamentals. Slight disappointment and issues related to guidance with some leaders will lead to a problem with all portfolios. Institutional portfolios have been hiding there for quite some time. So I would be a bit cautious, I maintain a tight stop losses and book profits if I have been holding on to the stock because we have seen massive outperformance in the sector.
Q: How would you approach the auto sector now? Stocks like Hero MotoCorp are sitting at 52 week lows but some people on the street believe that although the short-term trend is plagued with the slowdown, the longer term looks more favourable. Do you find an opportunity in that adversity?
A: I don't think so. I think sectors also have to deal with other set of problems then only demand and offtake. Some companies located in North India are facing many labour related problems, cost pressures plus the demand has been very weak. Unless there are structural changes in these issues in next few months which both the government and the managements of these companies need to be nimble footed and understand these problems.
We need to live with a new reality, new terms of labour issues particularly after Maruti incident and our experience at the renegotiations at Hero etc, those got to be rapidly resolved. Once those issues are resolved then there is a long-term compelling reason to buy them. Till then, they will struggle for a while.
Q: How do you see the market trend for next three-six months? Will it be similar to the first part of the year? Will it be by and large range bound with focus on some of these macro and global issues?
A: The last quarter was worst. We may struggle at the current levels and volatility will die down a little. Probably, there will be some amount of constructive market action in various sectors where buying will come in. Some value investors now are waiting to jump in as soon as they get opportunities in select stocks and sectors.
Positively, long-term investors are looking at opportunities to buy. There are of course dark clouds related to politics and other issues but these give opportunities to buy into companies because irrespective of what political framework that falls in place over the next 12-18 months, companies are here to stay.