Sectors, stocks to look at post Q2 results, mkt correction

Is it time to buy now?

Manishi Raychaudhuri, MD and Head-Research, BNP Paribas Securities, says the markets look attractively priced after correcting 10-12% over the last three weeks. "If we look at the one year forward P/E, the markets are trading around 15.3 times forward earnings." He sees significant entry opportunities now. "Even though the market may have corrected 10-12%, there are certain sectors and stocks within the market which have corrected a lot more. In those sectors and stocks, valuations are looking attractive. We would look at selectively buying at current levels. We expect Sensex earnings per share of Rs 870 and Rs 1,110 in FY10 and FY11, respectively."

Sectors to look at:

BNP Paribas, Raychaudhuri says, is underweight on global energy, metals, and real estate, and overweight on banks, infrastructure, and auto in their portfolio. "Equity issuances will dampen valuations of realty companies going forward."

In banks, he says the public sector banking universe offers a significant degree of valuation discount to private peers. "That valuation discount still exists even though some of the private sector banks have also corrected significantly like ICICI Bank . In a rising interest rate scenario, one should play banks that can pass on the higher interest rates in the form of higher lending rates. They would get the benefit of net interest margin expansion. These are banks which have a significant degree of deposit franchise in the form of high current account/saving account (CASA) ratio. Most public sector banks would fall into this category. There are some private sector banks also like Axis Bank or HDFC Bank . But if you combine the valuation advantage and the high CASA multiple, then it is possibly the public sector banks which have that advantage."

He sees opportunities in rural focused infrastructure companies. Frontline cement companies, he added, are trading at a discount to replacement cost and historical valuations.

Ambareesh Baliga of Karvy Stock Broking says realty and metals are still expensively valued at this point of time.

What to buy?

Raychaudhuri sees good buying opportunity in Maruti , Bajaj Auto , and M&M . He is neutral on Suzlon on concerns of order shrinkage and Indiabulls Realty . "In Suzlon, there is no significant recovery in the order pipeline till the middle of next year, maybe Q2 of calendar 2010 or so. Suzlon is also stretched in terms of its balance sheet, and in terms of the usual ratios like interest cover or debt to equity. If one strips out the value of its subsidiaries like Hansen or REpower, the core business is cheap at current valuations. 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." He has a target Rs 204 on Indiabulls Realty.

Gujral is bullish on Punjab National Bank . "PNB has been showing a lot of strength. It can be bought with a stop loss of about Rs 800 and target of Rs 904. Among midcaps, Oracle Financial Services can be shorted with a stop loss of about Rs 2,053 and a target of Rs 1,833."

Baliga advises investors to buy Reliance Industries , Ambuja Cement , Bharat Heavy Electricals , Bharti , Himatsingka Seide , and Vivimed on dips. "Investors can look at Ambuja Cement below Rs 90. One can continue to accumulate BHEL as we have a price target of around Rs 1,700-1,750. The worst in Bharti is already there in the price because billing rates cannot fall below one paisa per second. It cannot go down further from here."

He says one can look at DLF and Tata Steel if they correct from current levels. "I would be comfortable around Rs 240-250 levels in DLF because our NAV calculations is closer to Rs 220-230. Unless it cuts another 50% from here, you cannot buy that stock. Similarly, one can look at Tata Steel around Rs 350-370."