Ajay Srivastava, CEO, Dimensions Consulting feels that Karnataka election results, which will be announced today will give some buoyancy to market.
Karnataka Assembly elections recorded the second highest voter turnout in 35 years with a polling percentage of 71.29 in the May 5 voting.
He expects shares to give good returns in May and sees the Nifty touching the psychological 6100 mark anytime.
According to him, the current rally has the potential for another 150-200 points upside and investors should be positioned in large cap stocks where Foreign Institutional Investors (FIIs) are present and profit expansion is good.
However, given this euphoria, he cautions investors of getting trapped by investing in wrong businesses. "There are lots of stories which are ramping up purely based on domestic demand situations. Those companies are not going to benefit the way the market is perceiving it," he said in an interview to CNBC-TV18.
FMCG, pharma and OMCs are the sectors that Srivastava is bullish on.
He is not so upbeat on the rate-sensitive sectors like real estate and two-wheelers and is short on them. Investors should stay away from IT stocks now, he added.
Below is the edited transcript of Srivastava’s interview to CNBC-TV18.
Q: We have had a pretty strong run on the market bolstered of course with the kind of money we are seeing. What is the sense you are getting of how May may finally turn up?
A: We should not have gone away and we are all going away in May, that’s the bottom-line. May is looking very good and the results coming out of Karnataka elections should give a little more buoyancy to the market. However, there is a clear word of caution here that lot of stories that we saw ramping up yesterday are purely based on domestic demand situations. Those companies are not going to benefit the way the market is perceiving it. So, among this euphoria, there is also lot of froth building up and people who have joined the wagon now need to be extra careful because I don't think they are in for an easy ride for next 10-20 percent.
It is going to be a rough ride for them. They are buying into some of the wrong companies and so, one has to be careful where he/she is putting his money when the rally is at 6100.
Q: How much more would you give it because as you pointed out we are knocking on the doors of the highs we have seen this year?
A: We have predicted that the rally will take the previous highs out. It has happened much sooner than what we thought. We were looking at it to be closer to Diwali. It happened much before that. So 6100 is there for the taking right now.
The question is, which of the stocks will crack up first when the downturn starts? One has to be careful. This is a market wherein when one invests; he’s got to be careful as to where one is positioned when the rally stops.
The rally has got another 100-120 points leg to move on and if Supreme Court is little more benign today, one could see a lot more leg up to the rally. So, we have 120 points for the taking today or tomorrow if the Supreme Court is little more benign but one’s got to be careful as to where he is positioned.
One should be positioned in the mainline stock where the Foreign Institutional Investors (FIIs) are, where people are going to benefit and profit expansion is good. One has seen flat result sales and very good profits. So, this is one rally fueled by profit EPS expansion more than volume expansion. However, this is not broad based. All the companies are not getting the same benefit. So, the rally is 120 points but the selection of stocks is going to be much smaller.
Q: If most of the easy money has already been made, where do you put fresh funds now in terms of individual stocks?
A: Individual stocks-wise, we have seen the consumer story come back to the fore again. The profit expansion has been good and people are expecting some buys. We saw good action in Emami and Hindustan Unilever (HUL) has been a star. So, the consumer story has been good, the liquor companies have performed exceedingly well and pharma has done reasonably well. I think the block of pharma and consumer stories constitute a little more safer block.
I would still recommend shorting the nationalised banks because they are in for trouble, the results are already there to see and they are going to get into further trouble as time goes by. So, one’s got to short the nationalised banks, stay with the private banks but buying maybe restricted to an ICICI Bank which has not taken up the rally. That is the only one left out, perhaps it can catch up in the rally. So, there are very few select stocks now left to participate on a safe basis.
Q: What do you do with the rate sensitive’s as a whole because yesterday we did see the entire pocket moving not just private sector banks but you saw autos, you saw real estate, etc. This despite hawkish comments coming in from the Reserve Bank of India (RBI), how do you approach that pocket?
A: We started to short the auto stocks and two-wheeler stocks yesterday. On Hero MotoCorp, we are running a short position at this point of time. The froth is going to do sectors which are not going to perform. Now, we recognise the fact that two-wheeler market will show a profit expansion but they will also show a severe volume depression in this quarter as well. So, two-wheeler stocks and real estate are two sectors where we are actually running short positions because both the markets will get affected.
With the hawkish comment of RBI and the demand being an issue real estate is sitting on a time bomb of huge amount of sell orders with no buying interest. One has to go to the market to believe that there are about a 100 sellers to one buyer in the market today atleast in the NCR region. And this is true for Mumbai and may not be so true for Bangalore. However, that is the real estate market. So, people who are getting on to the band wagon and we may be proved wrong, are asking for trouble because this is one market where the fundamental factors are telling a different story than the stock market.
Q: What is the way to approach this market move? Is it looking like another big trading rally pushed on of course by a fantastic liquidity environment and that is the way to play it almost with the footboard mentality or are you getting the sense that something is changing and this could be the early makings of a longer bull run for our market?
A: Fundamentally, we are a lot better than what we were six months back both on the fiscal deficit side as well as the fundamental cost factors. The biggest cost in India is the people cost thanks to the recession environment in the country. The attraction is down, so people are able to hire and retain people with lower salaries. So, cost wise, we are getting much better but demand wise we are getting poor off.
Fundamentally, there is a shift and there is no doubt about it, but the question is, which of the companies will benefit more than the others? It is not going to be a situation where everybody comes to the party at the same time. In a rally everything rises but one has to be careful. So yes, fundamentally things have changed but the caution is the food security bill is in and the next step is going to be a loan waiver for the drought states.
If the Congress wins in Karnataka, which it should, it will put a stop to saying ‘we must win the next elections so you will have a loan waiver coming, you have a food bill on the horizon.’ So, the fisc and the RBI governor is apprehending that it might start to slip again and we might roll back to circle atleast till the next elections.
Q: Last time you weren’t positive at all on the entire IT space. Since then some buying has emerged in that sector. Would you buy the dips or that is not a space you are betting on?
A: The way we see it, IT has got one big positive and that is the cost pressure on them has disappeared. The attraction is low, they can afford to keep people at lower cost and hiring is hardly anything. So, they can be choosy. Cost-wise they are very good but on the demand side, they have a problem sitting there.
First problem is that their model is not working. Secondly, when you allocate capital look at the Indian economy as a market sector, I could tell 100 stocks or industry which could do better than IT. So, it is not only about IT performing or not performing, the question is relatively can you make the money work better somewhere else and in that logic I keep saying that we need to stay away from IT till about two weeks before the result because that could be the time to enter rather than now.
Q: Do you expect to see any improvement in the oil and gas space because now we hear that there is some trepidation with respect to the gas price hike issue that may not come through as early as expected. If there is some leadership from the oil and gas space then what would that be predicated on?
A: Gas pricing is an issue as one goes into the elections. How much of this is the subsidy burden which still come back to them. What is going to happen to the rural theme, will the scheme come up? All these are questions that need to be answered. Therefore, one sees very tepid buying in the oil marketing companies.
Fundamentally they are priced beautifully, there is no problem with the stocks. They need to be bought into. One must have them in the portfolio because when the run-up starts, it is going to be good. So, I am not sure what transpired but people are feeling at this point of time that wherever there are government companies, will they necessarily come into market performance mode in the next six months. And they are all waiting to see the results, to know what is the net impact of the price increases, is it coming commensurate to this one.
Last point is gas price increase. The direction relationship of that issue is with Reliance Industries. Whether they get the price increases or not is not something we are going to know before the elections. So, it is tepid but this is a time when one starts buying into these stocks because they run up a lot, they corrected little bit and they are steady right now. So, we are recommending that we must have it in the portfolio but more on the OMC side rather than the production side.