Market will be range bound for now and much upside or downside cannot be expected, says Amit Dalal of Tata Investment Corporation in an interview to CNBC-TV18.
The market in the first half of July has shown an upward trend. The Nifty regained the psychological mark of 6000 on Friday, and the Sensex ended slightly above 20,000 mark. Presenting his outlook on the market, Amit Dalal of Tata Investment Corporation says that the current scenario is better than June but expects the market to be range-bound. He also sees some buying interest at lower end.
He still prefers IT and pharma stocks over others. Economic slowdown has affected cyclicals such as autos, infrastructure, capital goods etc and things will not change in the next quarter too, he told CNBC-TV18. "Banking remains under concern because of the stressed assets value", he adds.
Rupee will remain in the 60/USD levels going forward as gold imports have come down and trade deficit numbers are also not very bad, he says.
From 1-2 years perspective, he is positive on Infosys despite rising employee costs hitting margins next quarter and the negative impact of the US immigration bill. The risk of underperformance by the stock has lessened, he feels.
Below is the edited transcript of his interview to CNBC-TV18.
Q: These are good days for the market. At least the first part of July has been. But could we nudge above the upper end of this range? We are sitting above 6000. But where do you see us head from here?
A: I don’t think that this is a market which can blow out of the range which has been created now for almost six months. So, one should not expect substantially more up moves from the market. We have had a period of the last one month which gave strength at the base. You had extremely bad news in the beginning of June. But still the market did not give way to a large extent.
We touched a low of 18,000 odd and in the last week or 10 days we have had good news from companies. Infosys came up with better than expected numbers. Even we came up with some order in the hands of a company like Thermax which complained for one and a half years that they were not getting orders.
So, maybe there is some more confidence permeating; you are seeing midcaps which had been beaten down to rock bottom perhaps finding some kind of buying interest at the lower end. That, in itself, is just the kind of picture that the market is drawing right now.
I would not paint the picture on a bigger canvas and say that we are in for some kind of a huge rally. But, definitely, it is a better month than June.
Q: Which one would you pay more emphasis on; would it just be more focused possibly on what is happening to the rupee hence domestic macro economics? Or would it be due to events on the global front despite the fact that things have now eased off in the US?
A: Last time there was a huge concern that rupee would perhaps depreciate even further from 60 and almost everybody at 62-63 on the drawing board for estimates. I felt even then that that was not going to happen. Going ahead, the rupee will remain in this range for a long time because trade deficit numbers aren’t coming as bad, gold imports have come down.
There was this trend or I should say a change in allocation process which started in June in favour of the developed world with capital moving out in large numbers from the emerging markets. That is why we had that USD 7.5 billion of pull out in outflow in June when you totaled equity and debt outflow perhaps in July we will not see that kind of situation arise again.
That gives some comfort to our markets at the lower end as we don’t see that much stock flow coming in with regard to the rupee not depreciating. Whether, it gives you some comfort in our economy, no I don’t think so.
I think economic slowdown is substantial in the cyclicals whether they are autos, infrastructure, capital goods and that slowdown will reflect in the results too. I don’t think that in the next quarter, things are going to change. So, the large story remains the same IT, FMCG, pharma remains the leader. Banking remains under concern because of the stressed assets value.
Having said that, I would say, that the change in the value of the stressed assets that is the percentage increased stressed assets has come down substantially. There is a feeling that we maybe reaching a bottom in terms or the top in terms of the total value of stressed assets in the system.
Q: How would you approach a stock like Infosys now? A lot of brokerages have up their target price on the stock. But do you believe that the 11 percent upmove on Friday was just a relief rally? Maybe much more of a concrete upside may not come through?
A: Whatever change in perception of Infosys when Mr. Murthy took over, it was felt that there would be still two or three quarters when you would see a performance problem in Infosys. Given the fact that they have said that the next quarter will see a hit on margins because of increase in employee cost, and perhaps you will even get a little more negative news in the next six months based on US immigration laws.
You may not see any major change on uptick of this stock. But the risk of underperformance on parameters, which it was being evaluated for the last two or three quarters based, as compared to its peers, is mitigated substantially.
So, if you take another one or two year view on the stock one has to remain positive. There is just no question about it.
Q: Would you have a call on a couple of these oil and gas stocks considering the amount of news that they have been reacting to in the past couple of days especially with this natural gas pricing issue. How would you approach something like Reliance as well as Oil and Natural Gas Corporation (ONGC) now?
A: Reliance is definitely a gainer of this policy. Further, Reliance has spelt out for the next three years growth programme, which was completely vacant for the last three or four years in Reliance’s balance sheet and Reliance’s own pronouncements. That, in itself, makes a big positive call on Reliance.
Finally, it is a huge company; a company with tremendous capabilities and controversies. But the fact is that for the last three or four years, there was no real growth programme, which the company has now spelt out.
So, going forward, think if they are able to get what they are saying and able to go ahead with their various capacities, which are expected to come online every six months or so, think people will look at that stock positively.
We are discussing the other government public sector undertakings (PSUs) and their impact on increased subsidies that may come around because of gas and perhaps even because of the devaluation. It is very difficult to take a call. But I have always remained more positive on the exploration side rather than the distribution side.
Q: Would you have a view on this and the news with regards to the Tuticorin plant (of Sterlite Industries) being able to remain open now?
A: I will put a disclaimer and say I don’t have a view on the stock and exactly what impact this particular order will have on its earnings. But I do have a view on the government's dictates which come in against companys like this in context of their plants.
These are huge plants, even when it comes to mining you can't close down units or tell them to produce less. It is a loss to our country in terms of production and in terms of our own Gross National Product (GNP).
If there is something wrong with that mine or the plant, it needs correction. You penalize the company in financial terms. You tell them that these are the things that they have to comply with within the next three months or next two months. Closing down units is resulting in too much of loss in terms of production etc.
I don’t think it is very responsible to behave like this. You need to find better corrective measures than just putting down dictates on what company should be doing because of certain problems that maybe surrounding those production units.
Q: I did not hear you mention the macro data. But do you think the Wholesale Price Index (WPI) numbers provided any relief to the market? We have seen it come in at sub-five percent. How would you map the macro data now?
A: I would like to say that there are two things that one should look at. One is whether the Reserve Bank of India (RBI) needs to respond to it as it is more concerned with current account deficit (CAD) than WPI now. So, to what extent that would change their view is perhaps more relevant over here.
Secondly I think where the individual is concerned Consumer Price Index (CPI) is far more important, what we are facing and what the average man is facing on the street is far different than a 5.5 percent WPI.
Q: Would you have a view on the Jet-Etihad deal and the amount of to and fro and the amount of thorny issues that have now come up?
A: My only thought on that subject is that I don’t think deal should be done like this. Deal should be done far more quickly, and should be done well thought out what foreign participants should be allowed and what he should not be allowed in a company way before the transaction is concluded. It is just India’s whole foreign direct investment (FDI) situation is just something that needs are lot of rethinking here.
Q: Can I get you in on one of these real estate companies like something like an Indiabulls Real Estate. Now that stock has moved all the way from Rs 60 mark till the Rs 75 odd level. Will you still buy at these levels? We have been seeing periodically the promoters have been buying 10-15 lakh shares odd?
A: I did not buy at Rs 60 also, so I can’t advocate buying at Rs 75 and I don’t follow that stock at all. But I think there is tremendous resistance to real estate buying in Mumbai and they are primarily in Mumbai right now.