Capital goods will remain star performers: Sharekhan

Excerpts from Bazaar on CNBC-TV18 Watch the full show » 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 BHEL BSE | NSE 25/05/12 Are Mutual Funds betting on BHEL? Other Stocks in this news Genus Power Infrastructures | WS Industries |

Sandeep Nanda , Head of Research, Sharekhan said that they are expecting the market to continue to remain volatile. "We are at that interesting phase where it makes more sense to be a longer-term investor," he said. He added that the markets are currently at a point where earnings are going to be slow but the market will be absorbing that.

 

According to Nanda, we are definitely going to see earnings begin to slowdown as compared to Q1. Commenting on the rupee appreciation, Nanda said, "I do not think that the rupee will strengthen a whole lot from here, but it is unlikely to weaken." He added that the markets will see a lot of re-rating in the domestic sectors.

 

Excerpts of CNBC-TV18's exclusive interview with Sandeep Nanda:

 

Q: What is the call on the market now, do you see significant upside from here or is the market just consolidating for a long time?

 

A: Beginning of August, we had come out with the note that we are expecting the market to be volatile. A lot of those events have happened, but the rest of this month is probably likely to continue to remain volatile. For people who are short-term, if you are looking at IIP numbers or second quarter previews, there could be disappointment on the Fed. Some of these could make the market volatile.

 

But if you are looking somewhat longer-term then clearly the market is going to do pretty well. We are at the point where earnings are going to be slow and the market will be absorbing that. But if the Fed cuts 25 bps and then keeps on cutting, then our P/E multiples would inevitably go up. We are at that interesting phase where it makes more sense to be a longer-term investor.

 

Q: The market has not quite started focusing on earnings for the current quarter yet but they will soon enough. What is your sense of what lies ahead for the October quarter, do you sense some disappointments coming or earnings will be broadly okay?

 

A: I think we are definitely going to see earnings begin to slowdown maybe about 4-5 points lower than what it was in first quarter where we had 26-27% growth in the index. So definitely the trend will be there.

 

We have started to come out with our previews, we came out with the first one yesterday which was on the IT sector. There we are looking at about 20% YoY growth with a stable exchange rate average compared to last quarter. You can already see that for one key sector, we are looking at slow growth despite strong volumes.

 

We are definitely going to see problems in the auto sector , we are going to see problems on that whole forex thing. So we need to see how the market absorbs it. There are also signs of general macro slowdown, whether that is loan growth, which has been about 1% year-to-date, or some other freight numbers. The market needs to start absorbing the fact that earnings are slowing down but definitely we are set for a P/E multiple re-rating.

 

Q: What is your top sell from IT lot and what have you penciled in as an average rupee rate to work on?

 

A: The rate is about Rs 40.6 for this quarter on average, and that is roughly what it was in the last quarter. So effectively, the volume growth translates straight in QoQ growth.

 

We felt that there was going to be political uncertainty, then we felt that the rupee would weaken and that might be a bit of a trading call on the whole sector. But with the way the political parties have reached to compromise, that concern has gone away. You can see that reflected in the rupee. BHEL to WS Industries and Genus Overseas . I would say that that whole basket of capital goods would continue to remain a star performer. People are simply going to be looking at growth and paying high premiums for it and they are going to continue to get re-rated up. We like the whole space.

 

Disclosures:

 

The information given is from publicly available data or other sources believed to be reliable. The investment ideas discussed may not be suitable for all investors. Analysts/clients of Sharekhan may have positions in the stock/sector.