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Sep 17, 2012 01:45 PM IST | Source: CNBC-TV18

Mkt moves to be tempered; bet on pharma, FMCG: Religare Cap

Gautam Trivedi of Religare Capital Markets believe the decision to hike diesel prices was a significant move indicating that the government was ready to move ahead. However, it is essential to see whether the reforms are actually implemented or not.

Markets got a new lease of life after the government announced a slew of reforms including a hike in diesel price and FDI in retail and aviation. Gautam Trivedi of Religare Capital Markets believe the decision to hike diesel prices was a significant move indicating that the government was ready to move ahead. However, it is essential to see whether the reforms are actually implemented or not.

Also read: Diesel price hiked by Rs 5/litre; petrol, kerosene spared

According to Trivedi, defensives are likely to underperform going forward. He recommends profit booking in FMCG and pharma. The current valuations of cement stocks are also attractive and pricing will improve, he added.

But, market moves are likely to be tempered from hereon, feels Trivedi. He also thinks that India focused foreign institutional investors (FIIs) have not seen significant fund inflows.

Here is the edited transcript of the interview on CNBC-TV18.

Q: It has been a terrific run in the last few days, what would you be telling your clients now in terms of approaching the markets?

A: Let us look at a bunch of things that are happening. I think there is obviously a potent mix of QE3, sudden reforms and the fact that the VIX is at a 5-year low of 15.4%. I think we clearly have all the ingredients for a big rally. Question is how long does this sustain and what are the other issues that are still to come.

If you look at the diesel price hike, that brings in under recoveries to about Rs 20,000 crore, which in a big scheme of things when the fiscal deficit is at 5 lakh crore, is obviously a miniscule number but it is a significant step, which until recently the government had shown no interest whatsoever to reduce.

I think this was probably one of the largest concerns, if not the number one concern among FIIs and domestic investors, on how exactly the problem of fiscal deficit can be tackled. I think the government has taken baby step towards that, hopefully we will see more coming over the next few weeks.

I think it is a bit of a wait and watch. I would not advice people to rush back into the market. Of course some of the names have opened up high today for obvious reasons of FDI in retail and aviation. Those stocks would obviously go up but, I think we have got to wait and watch and see what are the next steps from the government.

Also with respect to QE3, if you look at the previous three easings including Operation Twist, the first QE1 which kicked-off in November 2008 had a rally in both emerging markets like India and the S&P. But, subsequent easings did not result in any major rallies in emerging markets including India. I think keeping that in mind, you have to be careful about what QE3 means for emerging markets and India at this time.

Q: If this is a sentiment plus liquidities led tactical rally, what do you tell your investors to do in terms of approaching it, do you ask them to take profits in certain sectors and what kind of names would you advocate them to play it through?

A: I think profits in the FMCG and pharmaceuticals clearly is recommended at this point because if you look at the FMCG space, the stocks kept reaching new highs. A lot of these stocks are even now trading way beyond our 12 months target prices and hence, it was difficult to explain to people why these stocks were moving up.

But, I think that the real reason was the fact that there were lack of options and investors preferred to stay closer to defensives and safer bets versus getting adventurous. Now we are telling investors, probably starting this morning, to book profits in both these names and look at stocks like Jindal Steel and Power, stocks that are down as much as 40-45% caused by a specific event.

I think now it is a good time to look at some of these names. We also continue to like cement, we have over the next 18 months 11-state elections and of course demand-supply dynamics are clearly in favour of pricing. We continue to prefer Ambuja, Ultratech and also recommend two midcap names within the cement space, Shree Cement and JK Lakshmi Cement.

The other space we like a lot is media and that has obviously benefited from Friday's news on FDI in retail and hence we continue to pound the table on both Hathway and Dish TV.

Q: Any expectations from the Reserve Bank of India (RBI) today, do you think they can add to the cheer or is that expecting too much?

A: It is expecting too much. I was referring to the potent mix of a rally. It would be phenomenal if that were to happen. But, let us get realistic. Given last week's print of 7.55% plus the diesel price hike which would probably add at least another percentage to the WPI, it is very unlikely that the RBI will do anything major today.


Q: Any thoughts on any of these retail names and whether there will be material benefit for them, names like Pantaloon?

A: I think there will be material benefit. That is something which probably Mr Kishor Biyani has been praying for as well. What happened on Friday is a big positive for the whole sector.

Along with that, two other sectors will end up becoming beneficiaries at some point, one would be the CV space which will see increased demand after FDI in retail and I think that would be a longer-term rather than a near-term positive. The second effect of course will be the impact on real estate. Real estate stocks, especially ones which are in the mall space would do better. Provogue has done pretty well and I guess some other real estate names should also rally on the back of this.

Q: You would back something like a DLF?

A: DLF I think is too big and too nationwide to be impacted directly. I think there will obviously be some impact but, I would rather play names like Sobha Developers or Prestige. We have been recommending these stocks right from the start of the year and they have done pretty well. We continue to recommend these names.

Q: Do you expect the rupee to strengthen further in the kind of liquidity environment we are talking about and in that light how would you position yourself in IT from here?

A: I think if you look at the past few weeks, IT stocks have had a great run up. Infosys in particular has zoomed up. I think if the rupee starts to appreciate further from where it is now, that is 53.50, I would start recommending people to book profits in IT. I think that is one sector which will obviously not benefit from the rupee appreciation.

Having said that, I think we still believe there is a little more upside left in the rupee, the rupee can probably trend back up to 52 where we think it should finally rest.

Q: What kind of impulse do you see this time around given this headiness that we are seeing in the environment for the last couple of days, do you see any kind of irrational moves in the market, a dash to say more than 6,000 in the Nifty very quickly, is that on the cards or you think market moves will be tempered from hereon?

A: I think market moves will be tempered from hereon. People do need to understand a lot of the moves, especially the FDI news on Friday. Longer-term moves are not going to have an immediate impact on either our GDP or the fiscal deficit at all. I think there will be a tempered move.

There are two other factors to keep in mind that haven't played out yet. First is most of the FII investors that I speak to, the long-only FII investors have not seen a significant inflow into their funds. Even the regional funds are not necessarily allocating more money to India. Though, that might change starting this week but until Friday we have seen that the India-dedicated funds are clearly not seeing any money at all.

Factor number two which is required for the market to continue to play up is the return of the retail investors which clearly is not happening. I think with interest rates as high as they are, it is hard to expect retail investors to come back into the equity markets anytime soon.

Domestic mutual funds were big sellers on Friday. So USD 127 million worth bring in the year-to-date (YTD) total to USD 6 billion. I think it is necessary to reverse that trend for the market to have a sustained rally from hereon.

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