Jul 05, 2013 12:38 PM IST | Source: CNBC-TV18

FMCG, pharma overvalued; IT safe bet: Sangeeta Purushottam

Market will be volatile due to the narrowness in the breadth, says professional investor Sangeeta Purushottam. She told CNBC-TV18 that the earnings of companies will take a hit with the recent rupee's fall.

Professional investor Sangeeta Purushottam expects the market to remain in the range of 5600-6000 (plus or minus 100 points) for now. She told CNBC-TV18 in an interview that the narrowness in the market, with very few stocks giving positive returns is  a worry.

She sees the volatility in the market to continue throughout the upcoming first earnings season as there will be some negative surprises from some companies. The depreciating rupee may impact the balance sheets and P&L accounts in the next or subsequent quarters, she adds.

Purushottam believes that IT stocks are a good place to hide in the current market conditions. She is not too upbeat on fast moving consumer goods (FMCG) and pharma names as they are highly overvalued now.

Also read: Warning bell! Deutsche downgrades 34 cos earnings estimates

Below is the edited transcript of her interview to CNBC-TV18.

Q: We have had a slightly volatile run through this week. What is your sense of what the market is pushing to do? Is it trying to build a base for itself? Or is it still inherently weak from what you have seen?

A: The market essentially remains in the range of 5,500-5,600 on the downside and 6,000 plus or minus a couple of hundred points on the upside. There really is not yet a story to take the market up on a sustainable basis. As the news flow remains mixed, we tend to just broadly oscillate in this range with some level of sector rotation happening within that.

The market breadth is rather poor, which is worrying. On the face of it, the index is pretty much at levels that we began the year with. But there are just very few stocks which have given positive returns.

When you step out of the front-liners, that ratio worsens further. All this is not really indicative of a very strong market. And we are likely to trudge along in this fashion through most of the year.

Q: Which direction will earnings season push the market in? Is any disappointment already priced in or it is going to be a bit uglier than people imagine?

A: There could be some surprises coming through on the negative side in terms of what the impact of the exchange rate- both on balance sheet and on profit and loss (P&L).

All of it is not going to come in this quarter as part of the depreciation of the rupee happened through the month of July. But that is something to watch out for and that is going to be the primary driver of volatility.

Overall, if you can take that aspect aside, then the earnings season will be pretty much similar to what happened last quarter. We really have not yet seen any of the macro indicators in terms of either Index of Industrial Production (IIP) growth or the gross domestic product (GDP) growth show signs of a clear upturn. So we are going to be trudging along in a similar fashion.

Q: How would you approach the Hindustan Unilever (HUL) stock now? The open offer got subscribed 67 percent or so. How do you see the stock move from hereon?

A: It is not just HUL but the entire fast moving consumer goods (FMCG) pack. On valuations they look very expensive. It is a little worrying that this pack continues to rally because it just indicates the lack of choice that investors feel they have.

In the near-term, these stocks could hold up and maybe even head a little higher. But for longer term investors, it is scary getting in at valuations which are 30-35 times plus.

Q: What about the IT stocks? We saw some good gains come in on those stocks yesterday. There is a thought that some of them are inexpensive and do benefit from the forex movement, the US market recovery etc. Would you put your money in any of those names now?

A: They are a safe place to hide in a market which has a certain dearth of conviction across many sectors. The fact that the rupee has depreciated and the overall prognosis on the rupee is still fairly subdued or negative, is what is really supporting these stocks.

Their valuations are not as high as some of the other pockets which show relative stability in earnings growth; be it FMCG or the pharma pack and that is really what is supporting the performance of the IT stocks.

However, if we look at the underlying issues in terms of demand growth; they do remain. But these companies do benefit from the rupee depreciation and that is really what is driving it.


Q: From the earnings season, in specific, what is your expectation from individual stocks and sectors? Where would you be more sceptical about the earnings and the revenue growth coming off this time?

A: The defensives essentially will do well, which is the FMCG pack, IT to a lesser extent, and pharma. So, their results should be broadly in line with expectations.

The piece really to watch out for is going to be companies with a large amount of foreign debt. That is really where the balance sheet issues will start hitting the P&L and that is really where the surprises are likely to be.

The auto pack will be relatively mixed. The metal pack also will be fairly mixed, but that is broadly the way things will pan out. As far as capital goods are concerned, I do not yet see any signs of a turnaround in this quarter. So, overall results will be subdued. The point to watch out there is going to be what is happening on the order books.

Q: Is the best behind Tata Motors in the near-term or could a case still be made to buy that stock?

A: In Tata Motors, there are concerns. I really would not rush to buy it right now. Firstly, the domestic business is still not showing signs of revival and the downturn could continue for a while.

Although we are not seeing the impact of China’s growth concerns in the Jaguar Land Rover (JLR) numbers, it could be a potential risk going ahead. So I think it is best to wait a while and not rush in.

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