SENSEX NIFTY
Jan 26, 2013, 08.56 AM IST | Source: CNBC-TV18

Brace for correction; cherry-pick promising midcaps: Expert

Dilip Bhat, joint MD, Prabhudas Lilladher explains on CNBC-TV18 that investors need to brace for a market correction probably towards the end of January or the first week of February. He advises investors to be cautious and look for an opportunity to buy at a dip rather than rushing in and trying to commit funds at current levels.

Dilip Bhat, joint MD, Prabhudas Lilladher explains on CNBC-TV18 that investors need to brace for a market correction probably towards the end of January or the first week of February. He advises investors to be cautious and look for an opportunity to buy at a dip rather than rushing in and trying to commit funds at current levels.

Bhat concludes that though the midcap sector continues to be vulnerable, it still offers stocks with sound fundamentals and providing steady returns. But investors, he adds, should be extremely selective and choosy while picking these stocks.

Technical expert Sudarshan Sukhani of s2analytics.com recommends traders split their position and take profits but carry it because the Nifty is in a trading range. "However the very fact that it bounces again and again from 6000 offers some conviction that perhaps Monday could be better. So book half the profits now and take a risk on the other half."

Below is the edited transcript of the Dilip Bhat's analysis on CNBC-TV18

Q: By and large, this week has been extremely flat although there has been a lot of intra-week volatility. What is the prognosis now? Would you put in fresh money on the Sensex at this 20,000-level or are you be cautious in the run-up to key events like the RBI policy?

A: I think on the tailwind side there is the FII inflow which still continues to be very robust and of course everybody is expecting that at least a 25-bps cut will happen as far as the RBI goes. So, as far as the momentum is there, it still continues to be in favour of the bulls. However, I would feel that one should brace oneself for some kind of correction from hereon. Maybe towards the end of January or the first week of February onwards the markets could peak out post all these events really happening.

So, the right strategy would be to exercise extreme caution from the current levels and look for an opportunity to buy at a dip rather than rushing in trying to commit funds at these particular levels. Though the first set of corporate results have been pretty good, the subsequent results are yet to be seen. So, I think all said and done, one has to be a little more cautious.

Q: What about a stock like Maruti ? How would you approach that after the announcement of results?

A: As far as Maruti’s results are concerned, it has been ahead of the street’s expectations in terms of EBITDA which has been up 0.5 percent more than what the street was expecting. So the net profit too is a tad higher than our expectations at Rs 500 crore, we were expecting about Rs 470 crore.

Going forward, what possibly may happen in Q4 is that the volumes probably may fall 7-8 percent lower and we expect that in Q4 it will end up with a profit of something like Rs 700 crore. So, on an overall basis, Maruti is trading at something like 15 times, if I were to take a Rs 107 earnings which is what we are expecting for FY14. So, it is not cheap but if one were to stretch a year beyond that, maybe it could offer a price of around Rs 1,700 over the next 8-10 months.

Q: Realistically, what is your expectation from the Reserve Bank policy this time around? And in the run-up to the policy would you be positive on any sector?

A: I think to expect a 25-bps cut is something is realistic while looking forward to a 50-bps cut is being a little too optimistic given the fact that the economy is still not out of the woods as far as the inflation is concerned though it has shown all signs of sobering down.

So, focusing on the interest-rate sensitive sectors, I would still play the infra sector, the construction and the engineering sector and the real estate sector. So, DLF and Unitech will top my list. Though lesser-known companies in the real estate such as Sobha Developers are already doing pretty well, I think the rate-cut would provide some relief to badly debt-trapped companies in the construction sector like IVRCL or Nagarjuna Construction and their intrinsic value also in terms of the BoT projects will go up. So, in that sense these stocks probably will see a relief rally. The auto sector could also probably react in a slightly positive manner from current levels.

Q: Would you buy Maruti at Rs 1,600?

A: Since my stance is going to be a little more cautious, I think Maruti is one stock that needs to be played a little more on the defensive side. It should be a part of one’s core portfolio and considering the fact that the next one year is going to be much better, I would really extend my horizon to say may be FY15. Taking that into account, I would buy Maruti both as a defensive and a stock that one could expect slightly better returns from.

Q: Tata Motors has lost 8.5 percent this week. Do you think its reached attractive levels from an investment point of view?

A: If one were to consider the warning which the company has issued and continuance of the weak commercial vehicle (CV) cycle, the stocks will be more of something like a trading play which probably one will have to do in this particular stock rather than take a slightly secular long-term bet. So, for the time being I would still wait for the correction to end rather than enter the stock at current levels.

Q: What do you make of the course of events that took place in the midcap segment on Thursday?

A: Typically, the mid-cap space is always remain vulnerable and a lot of mid-caps really move up based on some kind of information most of which may not be correct and quite a few stocks may have been pledged. So, it is very difficult to make out the stocks moving on fundamentals from stocks driven on news. So, the mid-cap will continue to be very treacherous.

However, there are quite a few mid-cap stocks which investors can buy on a fundamental basis. But one has to be extremely selective and choosy when it comes to mid-caps to avoid the risk of losing a lot of money.

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