May 15, 2017 11:50 AM IST | Source: CNBC-TV18

Quantum says midcap, smallcap rally 'worrying', time to look at select IT, pharma

Sanjay Dutt of Quantum highlighted the price-value mismatch in midcaps and smallcaps space and suggests taking money off. He recommends looking at select IT and pharma stocks as they cannot grossly underperform

Highlighting the mismatch between price and fundamentals in midcap and smallcap stocks, Quantum Securities is sounding caution on these segments.

“Midcaps and smallcaps are worrying me now. Price-value mismatch is significant," Sanjay Dutt, Director, Quantum Securities, told CNBC-TV18 in an interview, saying investors should consider taking profits off the table.

Having said that, Dutt believes that this is a liquidity-driven market and not a fundamental one and investors’ money will move into largecaps. So, there won’t be much of change on how the market will move.

The public sector banking space, Dutt said, is still grappling with the problem of what will happen on the NPA front. However, one can still look at good names such as State Bank of India, Bank of Baroda etc. From a long-term perspective, he still prefers this space and believes one can make money here.

Meanwhile, capital goods and consumption space are sectors with high potential, Dutt told the channel. “The early numbers look nice there and capital goods is starting to show uptick,” he said.

Among his recommendations, he also said that it is time to look at select stocks in the IT and pharma sector. One cannot ignore these two sectors in the current economical setup, he added.

Below is the verbatim transcript of the interview.

Anuj: I wanted your thoughts on how the market has moved over the last three or four months. Absolutely no correction, just one way linear move, do you think this pattern will continue, you will have to buy at these levels or do you think a significant dip could come?

A: I don’t think so and in fact I would like to divide the market into two parts at this point of time. One, being the largecaps where substantial liquidity from large investors, particularly overseas, foreign portfolio investors is going to be focused on and the second being the midcap and the smallcap space. In fact I really want to sound a word of caution for the midcap and the smallcap space right now. I see a large number of smallcap and midcap stocks built up phenomenal amount of froth which is way ahead of the fundamentals. So, the price value mismatch is very significant in that segment of the market.

However, at the same time, the fact remains that it is a liquidity driven market, more than purely a fundamentals driven market. Money would continue to flow in but I think a good amount of money would now flow into largecaps. However, at the same time, you will not see a substantial change in the Nifty, or change in the topline indices because within the indices you will see a rotational kind of movement which is typical of bull markets. The stocks that have run up substantially even in the largecap space, some of them have run up 20-40 percent in this year itself, in this calendar year. They would take a break or correct. The ones which are laggards or who are showing early signs of fundamentals picking up would actually do the catching up.

So, to cut the long story short, from an index standpoint, the worst kind of correction you would probably see barring unforeseen black swan events, would be 150-200 points in the Nifty. However, I think the midcap, smallcap space is really worrying me right now and that is where one needs to be extremely cautious as to where one is putting money, where one is holding in fact, you may actually want to take a good amount of profits off from there also.

Sonia: I wanted your thoughts on how one can approach PSU banks now. A lot has happened over there, there is the NPA resolution mechanism that could be finalised by the end of the week, etc. is this a space that one can still jump into or would you advice caution here?

A: I am glad you asked me this question and more so because we have Latha on the show; there is no one better than her to actually comment on the banking space. Banking is really the elephant in the room as far as the market is concerned. We started with the Gyan Sangam and Indradhanush, and the banking bureau board and now we landed up with NPA Ordinance and giving powers to RBI to actually micro-manage individual accounts, that is one space where there is phenomenal potential, there is good amount of undervaluation also in a lot of PSU banks, but I am still not able to grapple with the macro picture that is panning out with regard to the huge NPAs.

What exactly is going to happen, we have committees over committees, we have had so many deliberations over the last three years, so, on- balance and then last weekend we had this bomb thrown at us on the private banking space two, three private banks, their NPA figures not matching the figures reported as per as what RBI said.

So, to cut long story short, I think this is a good time to look at the PSU bank space, no doubt about it. Look at the tier-II PSU banks which I think would have done 99 percent of the clearing up once all of them finish announcing this quarter results i.e. March 2017 results. So, even a State Bank of India (SBI), or a Bank of Baroda (BoB), or Oriental Bank of Commerce (OBC) these kind of places I think are safer bets to look in because you can’t ignore the financial services space, you can’t ignore the banking space.

However, understand the risk. You are still grappling with the big problem as to what exactly is going to happen on the NPA front. So, there would be surprises coming up there so you will have to live with them. However over the longer term, you will make money in the banking space, no doubt about it, and I definitely prefer the PSU banking space still like I did about 1.5-2 years back.

More to come...

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