In an interview with CNBC-TV18, Manishi Raychaudhari, Managing Director and Head- Research of BNP Paribas Securities, spoke about his reading of the market and his outlook.

Below is a verbatim transcript of an exclusive interview with Manishi Raychaudhari on CNBC-TV18. Also watch the accompanying video.

Q: Would you be on the buy side at 15,000 Sensex or do you think you will get better prices over the next few weeks?

A: After this correction of about 10-12% over last three weeks, the markets clearly are reasonably more attractively valued right now. If we look at the one year forward price-earnings ratio (P/E), it is possibly at about 15.3 times. At the recent peak, it was somewhere around 17.3-17.4. Quite a few frontline stocks within the sectors were trading at rather rich valuations. At the current level, the market is actually close to its long-term average. If you look at the last 15 years is about 15.1. So to that extent, the market in definitely more reasonably valued.

According to me, there are significant entry opportunities in this market right now. I would also like to mention that even though the market may have corrected 10-12%, there are certain sectors and stocks within the market which have corrected a lot more. So in those sectors and stocks, valuations are looking attractive. Selectively, I would be a buyer in this market.

Q: Have you scaled down your earning per share (EPS) targets though for FY10 and FY11 after Q2?

A: Not really. Our EPS target for fiscal 2010 as far as the Sensex is concerned remains at about 870 and for fiscal 2011 we are at somewhere around 1,110. So over the last two quarters in general, it has moved up. For FY11, for example, it has moved up almost about 9-10%. According to me, during this result season, the pace of upgrades was relatively slower than in the previous result season. During July-August period, we had a spate of upgrade and out of this 9-10% upgrade almost about 5% came during the July-August result season itself.

In this particular quarter, the result season has been relatively mixed. There are a couple of quarters like telecommunication properties where we have seen disappointments across the board. I believe the sectors that have outperformed compared to expectations are banks, automobiles and engineering and construction has been pretty much in line. So this result season has been relatively mixed compared to the previous one. However, in general the direction of earnings estimates has still been on the upward side.

Q: What would you buy now from telecom?

A: In our portfolio, we have a neutral recommendation of telecom. This sector’s fundamentals have been harmed very badly by the competitive intensity in this. At the present point, the only stock that we have in the portfolio is Bharti. Bharti has the advantage that it operates at higher capacity utilization. So it does not need to get as competitive in terms of price cutting as its primary competitors are. So to that extent, the impact on Bharti would be relatively cushioned. At the present valuations, a large part of the negative influence is already discounted.

Q: High beta has sold off most expectedly. What about the commodity space? Reliance is back down to Rs 1,800 and Hindalco (price link) has fallen to Rs 110. Would you buy any of these commodity stocks now or not quite yet?

A: Some of the commodity stocks that you mentioned both in energy and metals are looking interesting. As of now, we are still underweight on both these global commodities like energy and metals even though valuations have declined. They are looking more interesting than they were earlier. In fact, on energy in particular we have had an underweight recommendation for last two-three quarters and it has actually stood us in good stead it has led to a significant degree of outperformance on the part of the modern portfolio. The only commodity which possibly is providing some degree of upside over the longer-term as well is possibly the domestic commodity of cement. Here, the concerns were significant degree of price correction. If you see the valuation correction, on the part of the leading companies like Ultratech, Grasim or India Cement, they are possibly trading at significant discount to replace the cost and to their historical valuation ranges as well. So we have a neutral stance on cement right now. However, on the global commodities, we still retain underweight.

Q: Do you have Suzlon under coverage because that stock tanks 36% in the last few weeks from Rs 91 to Rs 58?

A: We do cover Suzlon. We currently have a neutral recommendation on it and we are cognizant of the fact that the valuations have corrected significantly. The concern on Suzlon relates to pretty much the order pipeline shrinking significantly. Possibly, there is no significant recovery on that till the middle of next year maybe Q2 of calendar 2010 or so. Suzlon is also stretched in terms of its balance sheet, usual ratios that one looks at like interest cover or debt to equity. So these are the factors that have played in terms of depressing the valuations to that extent.

However, I agree that at the present level of valuation if one strips out the value of its subsidiaries like Hansen or RE Power, the core business is cheap but one has to figure out how the core business is going to pan out over the medium-term before taking a stronger call on that.

Q: You were saying that some clusters now present buying opportunities. Which sectors do you think have corrected enough or present some kind of interesting valuation entry points now?

A: If I look at our own modern portfolio, the key overweight sectors are banks, infrastructure, which encompasses both engineering and construction, capital goods and also consumer discretionaries essentially autos. In banks, currently the public sector banking universe offers a significant degree of valuation discount to the private sector universe. We have been talking about it for some time and I think that valuation discount still exists even though some of the private sector banks, like ICICI Bank, have also corrected significantly. In general, the valuation advantage is still provided by the public sector banking universe. If we believe that we are going to be in a rising interest rate scenario, then one should play those banks which can take advantage of it in passing out on the higher interest rates in the form of higher lending rates. So they are the ones who would get the benefit of net interest margin (NIM) expansion. These ones are the banks, which have a significant degree of deposit franchise in the form of high current-account-saving-account (CASA) ratios. Most of the public sector banks would fall into this category. There are some private sector banks also like Axis Bank or HDFC Bank which can fall in the same category. However, if you combine valuation advantage and the high CASA multiple, then it is possibly the public sector banks which have that advantage. The second sector is infrastructure. Here also we have seen significant degree of correction. Possibly, the frontline companies are still fully valued right now but there are opportunities in the roadway space also in companies which do a lot of rural and irrigation projects, etc. The third area is consumer discretionaries and this sector actually started correcting even earlier than the market. The auto stocks have underperformed for almost last one to one (-) and a half months. However, we think that the demand environment is still strong. So the frontline companies like Maruti, Bajaj Auto or Mahindra & Mahindra (M&M), offer significant buying opportunity at these prices.

Q: Which of the high-beta sectors who have sold off and are bouncing back would you have the highest conviction buying between the clusters of real estate, metals, etc?

A: Our core overweight positions are still in banking, infrastructure and consumer discretionaries. However, as far as real estate and metals are concerned, we are still underweight. I spoke about metals earlier. In case of real estate, the results have disappointed that is a reason number one. Secondly, I would also point out that the kind of valuations that we were seeing recently not maybe today but even couple of weeks back. They seemed to have factored in a lot of the fundamental positives that had come into the sector in terms of larger number of transactions and higher prices in the cities. Thirdly, I must also point out that you still have a pretty large pipeline of equity issuances going forward. If you look at the private sector companies which have announced equity issuances, it adds up to almost about USD 7 billion. Close to 60-65% of those issuances are in the real estate space, which could act as some kind of a dampener to valuations in the secondary market for that sector. So that is the kind of concern that we have right now.

Q: Do you have coverage on Indiabulls real estate?

A: Yes we do. We have a neutral recommendation right now, with a price target of Rs 204. Indiabulls has a relative advantage compared to its peers in the sector because it also derives some value from the power subsidiary. However, we are slightly cautious right now on the sector.