Jan 22, 2013 04:53 PM IST | Source: CNBC-TV18

Mkt thirsts for rate-cut, mfg boost; buy HUL: PN Vijay

PN Vijay of explains on CNBC-TV18 that the market requires strength from positive events such as a strong credit policy and a turnaround in earnings from the hard-core manufacturing sector.

PN Vijay of explains on CNBC-TV18 that the market requires strength from positive events such as a strong credit policy and a turnaround in earnings from the hard-core manufacturing sector. Vijay adds Hindustan Unilever remains a strong favourite in his portfolio despite its attempt at transformation from a FMCG-brand company into one offering a considerable cosmetic range of products.

Sudarshan Sukhani of adds that the Nifty at current levels was not an intraday reversal. He reiterates that the market is in a trading range and will be choppy and unpredictable. "The market is now retreating towards 6,000. It may not reach there but the retreat will continue. So traders have to be alert and take trades only at extremes, which means near 6,100."

Below is the edited transcript of  PN Vijay's analysis on CNBC-TV18

Q: A word on the markets. At these 6,100-levels, it seems like some fatigue has crept in. What is your prognosis going ahead?

A: It is a typical case of a risk-off trade. So far, there was a risk-on trade for the last few weeks which means that people are booking profits as they are getting a bit nervous about the continued quality of results because some of the results have slightly shaken up people especially Dish TV which used to be a punter’s favourite even though it was making a lot losses. But this is natural.

The market needs some extra strength to take it past 6,100. Going past 6,100 is not going to be easy. The support needs to come in the form of a good credit policy and strong earnings from the manufacturing sector. So far, Reliance has been a pleasant surprise and NTPC wasn't too bad. But we need hard-core manufacturing to report some sort of an official turnaround, otherwise the rally has the potential to fizzle out for sometime till pre-Budget at about 6,100.

So, in my view the next 10 days, the manner in which the results pan out and what the Reserve Bank of India (RBI) announces are going to be extremely important or there may see a downward bias in the market.

Q: What is your expectation on what Hindustan Unilever's (HUL) results could deliver this quarter?

A: HUL will deliver pretty decent results. I expect decent year-on-year growth both in the top-line and bottom-line. Though there have been some cost issues in the FMCG sector, many of them have been able to pass on some of the prices. So, I am not unduly worried about HUL.

Whatever negative sentiment investors felt about the stock has already been factored into the price. I don't expect any damage to the stock post results and in fact if the results are decent like ITC's, it could trigger a minor rally.

Q: What is your opinion with regards to the hike in gold import duty from 4 percent to 6 percent? Do you worry that the government will be not be able to achieve the current account deficit (CAD) target for FY13?

A: It is a positive that the government did not wait till the Budget and initiated the hike using the special executive powers that it has. The hike is positive as gold imports have contributed very substantially to CAD after oil imports.

Q: What do you make of the results as the valuations for HUL have come off quite a bit in the last two to three months after the management started to get cautious about volumes. The stock too has seen quite a bit of a slide. How much of the cautiousness has already been priced-in and how much incremental damage would you expect going ahead?

A: What I heard about volumes was not surprising at all because at every opportunity the management has been cautious about volume. To some extent, the desire to keep earnings before interest, taxes, depreciation, and amortization (EBITDA) good with higher pricing power and lower volumes is a good strategy.

I am not too worried that the volumes are slightly going down as long as the EBITDA margins are sustained. The 0.5-percent increase in royalty does not strike me as significant. Generally, the Indian consumer is getting more brand-conscious and is prepared to pay a bit more.

So, HUL which has been a commodity-leader in the FMCG segment is now trying to reinvent itself and position itself more as a cosmetics company. If there was selling of HUL shares, it would be because of high expectations and probably some level of position building. I would continue to buy HUL as a blue-chip to balance my portfolio on every decline.

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