Book profits in midcap stocks: Kotak Institutional Equities

In an interview to CNBC-TV18, Sandeep Bhatia, Kotak Institutional Equities says, liquidity is clearly pouring into the market. "The key driver behind these rallies is essentially fund flow. If you think that liquidity will continue to pour in, the market can trade up higher," he adds.

He would be taking profits in the market from 5% up from here. "I would take money off in midcap stocks, wherever there have been rallies," he asserts.

While defensives are no longer cheap, he thinks they would still be a part of anyone’s portfolio right now.

He expects private banks and FMCG to continue to attract flows. " HUL , ITC remain preferred picks despite valuations," he adds.

Reliance Industries , Bhatia says, is fully priced. "The stock will be in a trading range. We don’t see any earnings triggers for the business," he adds.

According to him, Tata Motors ' valuations are cheap as compared to Indian peers. " Mahindra and Mahindra and Tata Motors are our top two picks in the auto sector," he adds.

In the IT space, he prefers TCS , and HCL Tech .

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Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Q: It's been a good run that the market has had. Year-to-date, we are up about 15% odd. Do you think we will plough in some more towards the end of the year?

A: I think liquidity is clearly pouring into the market. We saw close to USD 2 billion in the last month. Quantitative easing hopes or low interest rate environment, atleast for the western economies, will continue for the rest of this year. So, the key driver behind these rallies is essentially fund flow.

I think earnings season is behind us. We have seen close to just 10% earnings growth for the Sensex. So, there is no big earnings trigger that I would expect. But the other trigger that the market expects is probably rate cuts. We think it will only happen from October-November, not on September 17. We expect rates to be flat. So, if you think that liquidity will continue to pour in, the market can trade up higher. But I would be definitely taking profits in the market from 5% up from here.

Q: Where really would you take profit? We have seen some extraordinary valuations being given for just the private sector banks and for the FMCG companies. Is that where you would want to take profit or are there other areas where performance has been questionable that profit taking is advised?

A: When we are in uncertain market zone, I don’t think that goes away soon. I think the issues that the West faces will continue for the next one year or so. So, I would take money off in midcap stocks, wherever there have been rallies.

As far as the defensives are concerned, while they are no longer cheap, I think they would still be a part of anyone’s portfolio right now. The market can easily see large corrections and that’s primarily when we see these stocks hold values. So, primarily in midcap stocks, the profits should be taken.

Q: Do you think that Reliance has atleast put a bottom in its place? Is there something that can positively trigger the stock from hereon?

A: Fundamentally, we think that the stock is fully priced. The stock will be in a trading range. We don’t see any earnings triggers for the business. The business it too large and policy environment is definitely not conducive. So, I don’t think we expect any new business or existing business to turn out earnings much more than expected.

We expect refining margins to be weak, even if there has been some short-term rise in refining margins for the business. There is a glitch of capacities across the world. Therefore, I would think that this is best a trading stock. I think the worst of its underperformance is behind us. But to expect it to lead a rally would be expecting too much.