Moneycontrol
Dec 11, 2012 04:48 PM IST | Source: CNBC-TV18

Budget, politics may play on market's mind from Jan: Emkay

Krishna Kumar Karwa, managing director, Emkay Global Financial Services expects the Nifty to consolidate around current levels.


The Nifty moved up by 31.10 points to 5,940 today morning. Fresh round of buying by major players on hopes of an interest rate cut by RBI on December 18 amid a mixed trend in Asian markets are possibly the reasons, which helped to maintain the sentiment.


Krishna Kumar Karwa, managing director, Emkay Global Financial Services expects the Nifty to consolidate around current levels. Markets could be buoyant for another four-five weeks, but decisively breaching 6,000 and moving beyond could be a challenge, he said in an interview to CNBC-TV18.


From January 2013 onwards, the focus of the market will shift to the Union Budget 2013 and how things pan out on the political front. These two factors could pave way for market's movement early next year," he added.


Meanwhile, Karwa is bullish on midcap stocks like Dhanuka Agri, Kajaria, LIC Housing Finance.


Below is the edited transcript of Karwa’s interview with CNBC-TV18.


Q: What is your orientation for the rest of December? Do you see more upside?


A: No, markets on overall basis should consolidate. We have had a sharp run up and the price moment of late on the Nifty itself does not suggest that there should be a further rally.


However, having said that, the breadth of the market seems to be very good. Lot of individual stocks in the midcap and small cap segment are performing very well on the back of various expectations. There will be a buoyant sentiment around, but for Nifty to decisively cross 6,000 and beyond could be a challenge.


Q: Yesterday it was all about PSU banks and today too the smaller banks have opened up well. How bullish would you be on that space?


A: In terms of valuations, in public sectors banks there is a substantial discount versus the private sector banks and for a reason, but the valuation gaps have increased substantially.


That is the reason I believe that some of the public sector banks have kind of played catch up. Apart from that, there were some legislations in parliament related to recover bad NPAs etc.


For these reasons we are seeing some catching up being played in public sector banks. As far as the old generation private sector banks are concerned, there are expectations about new banking licenses or mergers etc.


These are events are more of expectations than actual reality. The old generation private sector banks can move up, but finally valuations will come into play. If events do not pan out then they should languish.


Q: Have enquiries increased from your retail crowd? Are you feeling confident to tell them that next year will be about taking out the previous high and making new highs?


A: The mutual fund transactions for the last so many months, as well as everyday are net negative. Retail investors that play through the domestic mutual funds and through insurance etc the redemptions pressures are still there. As far as direct retail is concerned, for the last one year we have seen that it is only the HNI and super HNI segment, who understand the markets reasonably well have been very active.


The hardcore retail has still not come in though of late volumes have picked up. The retail crowd is still a bit iffy as far as the strength of the market is concerned.


Q: What is your sense of how the tail end of this year may shape up? Is it still looking like we will cross 6,000 and go in quite buoyant into January or was the run that we saw the last month and a half about it?


A: It is human nature to be impacted most positively by the recent events. Looking at the momentum, the feeling is that January should also be a decent month. But there are global events, which will play on the minds of the investors and you also have the upcoming Budget etc.


So you could see some buoyancy for the next 30-40 days. Later, how Gujarat State Election plays out, what kind of Budget expectations get built in etc will be important factors to determine the longer course of action.


Q: What level of interest are you sensing in the primary issues of CARE, PC Jewellers and Bharti Infratel which starts today? What would you be telling your clients to do in these issues?


A: We are positive across the board. CARE is a very good issue in terms of valuations, in terms of the business opportunity. We are seeing a decent amount of interest from retail or from investors in the CARE IPO.


Bharti Infratel is more of an institutional kind of a stock and retail investors typically look for listing gains. There is no doubt that on a long-term basis Bharti Infratel will give decent returns to investors. It is a challenge to explain the business model to retail investors. So, we are not seeing very aggressive interest in Bharti Infratel from retail investors.


As far as PC Jewellers is concerned, the jewellery space is under-penetrated as an organized sector. Overall there is a sense of bullishness and we should see a decent amount of retail interest coming in PC Jewellers also.


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Q: You spoke about the private sector IPOs. What about the government offerings like NMDC and NTPC? What kind of appetite do you expect to see and what would you tell your clients to do there?


A: As far as NMDC is concerned the price band of around Rs 145-150 levels which they have announced, at these prices the valuations are very attractive. We feel that the fair value of this company is around Rs 200 odd, and this offer for sale is coming at a substantial discount to fair valuations. So we are recommending our institutional investors and HNI investors, to apply for this issue. It is a very attractively priced issue according to us. With regards to NTPC, we are not so bullish in terms of the valuations etc.


Q: There has been tremendous interest in the midcap side of the market, but on some of these specific stories like Sintex Industries, Jain Irrigation that have been struggling on debt issues or otherwise, would you start making purchases now or is it still a leap of faith kind of story?


A: As far as the midcap space is concerned, I think it is best to stick to top quality names. Just because the market is buoyant it would not be right to reduce the quality of your portfolio. Debt has also been a major challenge for some of these companies that you mentioned.


We have been recommending our investors, not get carried away with this rally, and not to downgrade the quality of their midcap portfolio. Although the momentum is good, we are advising our clients to be very careful as far as new purchases in the midcap segment is concerned.


Q: Do you have a list of five or seven big ideas from the midcap space for next year?


A: Yes, and we circulate it to our investors, clients. We have been recommending some of the midcap, small cap ideas that have done well and which we are very confident will continue to do well. Dhanuka Agritech or Kajaria Ceramics are some of stocks that we have been recommending to our investors.


LIC Housing Finance is not a very large company. It is more of a large midcap. It is also a stock that we have been recommending to our investors for 2013. The disclaimer is that all these stocks are under our coverage and part of our recommendations.


Q: Dhanuka Agritech is the least known of the three names. The other two are fairly well covered. Why do you like that story?


A: Dhanuka Agritech is an agrochemical company which is more into the formulation space. So it is a very asset-light model that they run and the key strength of the company is its distribution strength across the country. As far as the valuations are concerned, it is currently quoting at around 7-8 times earnings and return-on-equity (RoE) is around 25 percent. Because of its asset-light model, strong distribution reach and the ability to attract innovators to launch their molecules through them are the three key reasons we believe Dhanuka could be a good story for investors.


Q: What kind of downside risk are you warning investors for next year because the mood seems drastically different from where it was in the middle of this year, in terms of the fact that downside is very limited for this market?


A: It is always hazardous to make guesses on the Nifty because it is driven much more by global events and global flows than local events. Who would have imagined that we would have seen inflows of USD 21 billion plus at the beginning of the year, and this happened despite all the policy negatives that we could have imagined.

Having said that, the Nifty for the year is up by around 28 percent, whereas for the calendar year 2011, it was down 25 percent. So, making a guess on the movement of Nifty is always challenging. We have always been recommending that it is good to be on bottoms-up of stock picking and continue to stick with good ideas.

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