Banks, pharma, auto, FMCG rally to pause: Fortune Fin

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Nifty ends above 5500: Where is it heading? Check out: Quantum AMC's top sector bets JPMorgan sees new high for mkts; bets on engg, IT Baer Capital sees Sensex rising to 21000 by year-end ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 23/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news Reliance Industries | UltraTech Cement | Grasim Industries | Bharat Heavy Electricals | BGR Energy Systems | ABB | Larsen and Toubro | State Bank of India | Vijaya Bank | UCO Bank |

The sharp upmove of the bourses evidently proves the irrelevance of global cues here. Despite the negative signals that have been pouring in from world over, the Indian indices have been holding firm, in fact have been rallying.

But a cautious Abhijeet Chakraborty of Fortune Finance told CNBC-TV18 that he feels this 700 points rally on the index is a result of a concentrated move by a few sectors including pharma, FMCG, banking and auto. "And they now look stretched in terms of valuations. There is very little left on the table for these sectors," he says.

He feels it is time for markets to take a pause here and advices investors to buy out of money put call at 5,400 levels. He sees the Nifty trading in the 5,400-5,600 range in the immediate term. However, he also believes that sectors including cement, capital goods and infrastructure spaces can take the markets up.

Below is a verbatim transcript. Also watch the accompanying videos.

Q: What do you think after the breakout of last couple of days, can we take it higher?

A; No, I have my misgivings regarding markets scaling up convincingly higher from here. The market is now getting into a zone of euphoria. Especially because this entire movement in the market last 700 points has been a concentrated move by a few sectors basically pharma, FMCG, banking and certain other auto sectors. These sectors are now looking stretched in terms of valuation. There is very little left on the table on these sectors.

The market will have to find some new sectors for it to scale up. The other big constituent of the market RIL has not been performing. Between Infosys and RIL constituting about 20% of the Nifty weightage and they seem to be fairly priced and no real triggers over there.

Some of the sectors which have been leading the rally seem to be building in a perpetual euphoric valuation kind of scenario. I would suggest that the market should take a pause over here. My recommendation would be to buy some out of the money put calls maybe at 5400 levels.

Q: How do you think it will play out? Will the market get stuck at this level again or are you pricing in some kind of a deep downside risk, something to the tune of 10-15%?

A: No, I am not unduly worried about the downside, because the macro factors are very strong. The foreign investor flows (FII) flows continue to be very good. I do not see a possibility of a significant correction in the market. But I do feel there could be a pause coming in the market because of the lack of strong upside potential in several of the largecap counters.

Across the board, I see a lot of euphoria getting build up in terms of embedded value now being talked about and people are giving a valuation to stocks which is assuming that this kind of supernormal growth is going to continue for ever. These are built up of euphoria and the entire movement in the market has been led by a few sectors. Those sectors need to correct.

It might alternatively also happen that the Index might not correct too much, some of the sectors correct and some of the other emerging sectors come to take the market at a stable level. My feeling would be that maybe 5600 at the immediate level and at the downside some kind of corrections we could see something about 5400.

That is the kind of range we are looking at. Going forward the way the market can go up, is the emergence of a new sector and that could be one way we have already seen the movement in cement. The other big sector that can take up the market to fresh highs is capital goods and infra space.

From now to about next 12-15 months, we are expecting huge order flows because of the current five-year plan order outflows because of this planning commission to the power sector, transmission sector, infrastructure and road sector are yet to be given out. I am expecting a lot of order flows to come out in the next 12-15 months time which can then give a fillip to the banking sector as well as to the infrastructure companies and capital goods companies.

Q: What is your top pick from the cement space?

A: We like the cement space as a whole. My top pick would be UltraTech and Grasim . What we feel is that from the second half of the calendar year there is going to be pickup in demand, which has been an issue for the past few months. The capacity addition is going to be an issue only for the current year. From next year onwards there is going to be a muted kind of incremental capacity addition. That should be able to take care of the profitability of the companies.

 

Even in the current calendar year we are not expecting the companies to report anything less than Rs 800-850 earnings before interest, tax, depreciation and amortization (EBITDA) per tonne which is a very significant amount of profitability even in a down cycle.

Grasim particularly we are very bullish because not only it benefits from its holding in its group cement companies, but also its viscose staple fibre (VSF) business is doing very robust business, especially with floods now in certain parts of Pakistan and India. The cotton production is going to get impacted which his going to in turn impact the prices of VSF positively.

Q: What do you think can infra join the party? Aside of banking, it is the other big heavy weight cluster which can drive the index higher?

A: Some of the sectors which have been leading this rally are showing signs of extreme valuations, stretched valuations and tiredness. Some new sectors will have to emerge and that can happen only when we see a spate of new order flows coming from the government bodies that have to meet the deadlines for giving out the orders as per the current Planning Commission targets.

 

That can percolate down to both infrastructure companies, road companies, power and power related sectors. I think whether it is BHEL , BGR Energy , Thermax , ABB , L&T , all of them, do stand to benefit. That could only take the market to the next level because that is a sizeable piece of investment and the constituent of the market.

 

Q: Some of the smaller public sector undertaking units (PSU) banks like UCO Bank , Vijaya Bank which had been flying high, have run into a bit of pause. Do you think they are done with their rallies or is this just a temporary lull?

 

A: The smaller PSU banks were running up on the news of capitalization being taking place because of funding that is going to come from the government of India. That had contributed to the run up in these stocks. But overall as a sector if I have to say that these banks will be harder pressed to maintain their profitability in this current quarter, simply because of the fact that the deposit rates are going up and the lending rates have not gone up commensurately though selectively some banks are raising the rates.

 

And in the credit growth profile, these are the smaller banks which do not matchup or get the same market share in terms of credit lending. These smaller PSU banks are going to face a little bit of pressure on profitability in the second quarter. Therefore they could be stagnating at this particular level.

 

The larger PSU banks for instance State Bank of India (SBI) given its huge current account and savings account (CASA) deposit shouldn't be facing too much of a problem and there are other corporate actions being planned over there. SBI would continue to be a major gainer on the index and out performer. But smaller banks time to be cautious.