Budget Expectations: UP elections, LTRO II, Budget can push mkt up: Dalton Cap

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UR Bhat, the managing director of Dalton Capital Advisors tells CNBC-TV18 there are strong reasons for the market to see a correction and is at completely overbought levels. According to him, a 20% movement on the indices since the start of 2012 is probably the reason.

The quantum jump in crude oil prices, nervousness around the results of the UP election and with the Union Budget just around the corner, there are a lot of cues for the market to look forward too.

All eyes are now on the European Central Bank's (ECB) liquidity infusion expected on Wednesday. This second tranche of long-term refinancing operation (LTRO) is helping to shape global sentiment, he says. The market can then begin to focus on the positives and increase its risk appetite again. "The second quantum of LTRO can determine an upside in equities."

Below is an edited transcript. Watch the accompanying video for more.

Q: Do you think yesterday was a U-turn or is it just a big correction of the one-way rally that we saw from the start of the year?

A: I think it is a bit of a correction because 20% movement in less than two months is something that's probably too fast. There was certainly a case for correction and probably oil was a trigger that made it happen. Plus the consensus that a favourable outcome will come out of the UP elections is now in doubt a bit. Therefore, that was another trigger for the market to correct.

The fact is that quite a lot of the early investors have made something like 20% in a very short time so they had to take profit. The only plus point is that we have the second tranche of LTRO coming up probably tomorrow. Given that the expectation or the quantum is above 600 billion euro, then there can be further inflows into the country.

For the first year-to-date (YTD), we have something about USD 7 billion that has come in and that is probably the most important cause for the market to rise. With LTRO II, further money coming in the market can see a bounce back with probably some impetus given from the UP elections and the budget.

Q: There was consensus stepping into this month that March would be much trickier than the first two months of the year. What would you set as the markers for the market now as to how much more downside risk you see? Can we get back to 5,600 or do you think there is more potential there?

A: I think 5,600 is the top end of the range based on the quantum of the LTRO II that we will probably see by the end of the day tomorrow. That is a very important variable for 5,600 to be breached sometime in the near future and of course a favourable outcome in the March 6 results could be another thing that can probably take market up. But going dramatically above 5,600 will require a huge inflow, much more than the USD 7 billion that we have seen over the last couple of months.

Q: Would you use this period of a correction to increase exposure to high beta names that have bounced the hardest in the first two months or is that game done?

A: That game is based on tomorrow's outcome of LTRO II. One needs to watch that space very carefully because the number that people are talking about varies from under 500 billion euro to as much as a trillion euro. If it's a trillion euro, there is a lot more of bounce that you can expect and that is when you should concentrate on the high beta names.

Q: Right now what is your approach to the market - keep buying the dips because we are not quite done with this liquidity fuelled uptrend?

A: It is worthwhile to keep buying the dips as long as the market doesn't fall dramatically below 5,200 which is nearly the 200 day moving average (DMA) and if it doesn't fall dramatically below that then there is the possibility of a bounce back given that there are so many important events that are scheduled in the next few weeks.

Q: Sesa Goa fell 10% yesterday and there has been lots of mixed opinion on that. What is your take on the deal? How do you see these names moving from here?

A: Difficult to comment on a particular stock but generally people seem to be sort of evenly distributed on the scale of good or bad. So on balance probably the market's view is a right view but barring that certainly there is some sort of a consolidation happening there and whether it is in interest of minority shareholders is something the market has already formed its opinion.

Q: How do you think banks will perform in this period around whatever happens on the macro area and what happens with the budget and then policy?

A: The economic fundamentals have not changed dramatically over the last two months for the markets to warrant a 20% upmove. Banks have also participated in this upmove except for yesterday and given the fact that the pressure on NPAs and the pressure on margins continue to be quite serious, the March quarter results would be the worst in recent memory as far as the banking sector is concerned.

Therefore post that if the budget addresses most of the issues that seem to be bothering the market then that would probably be the time for the banks to bounce back if you have probably a two-three quarter view. Post March results are the time the banks can bounce back.

Q: Is sentiment still receptive of any public paper that may come in? We haven't heard word on ONGC yet but do you think that should go through comfortably?

A: I think it is quite possible. It can go through given the amount of interest that FIIs have been showing in the Indian market and the speed with which something like the HDFC offering was absorbed except that whether the huge issue there will be certainly some reallocation of portfolios so therefore some selling would happen as a consequence of that big issue of paper but barring that there should not be too much of a problem absorbing that given the interest that FIIs have in the Indian market as of now.

Q: For the first couple of months of the year we didn't have too much supply of paper. The USD 6 billion largely came into the secondary market. Do you think now the momentum might flag a bit if such large issuances keep coming and a lot of the FII appetite is met by that?

A: There will certainly be reallocation. If you have to invest a couple of billion dollars for each of these issues, there will not be so much of new money coming in suddenly. So there will certainly be reallocation of portfolios. Even yesterday's fall was probably because of the huge amount of HDFC paper that was absorbed within a very short while so there would be certainly some eventual reallocation of portfolios where funds will sell something in order to pay for all those purchases.

Therefore, to the extent that this money would not come into the secondary market there will certainly be some pressure in the market. But finally the paper has to be reasonably priced, the particular sector has to be of interest to FIIs and to the big investors and only then these things get placed.

Q: Domestic investors have been sellers to the tune of more than Rs 20,000 crore over the last 15-16 sessions. Is that money likely to come in this correction?

A: Domestic investors have been substantial sellers largely due to the sort of divestments and the sort of recapitalization of public sector banks that is required. The biggest domestic investor of them all must have been a big seller because even if say for example the ONGC divestment happens, all that has to be taken up by the biggest investor quite substantially.

So he has been sort of reallocating the assets. Therefore they have been big sellers in the market. But it's more than compensated by foreign inflows which continue to be robust. So on balance the one that is going to really decide the direction of the market is going to be the foreign institutional investor.