Cement, infra Q2 FY11 results may disappoint: Elara Capital

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Harendra Kumar of Elara Capital is not expecting cement and infrastructure  sectors to produce strong July-Septemeber quarter results in FY11.

In an interview to CNBC-TV18, he said, "We expect cement and infrastructure companies to probably be giving out the worst quarterly numbers. But we see execution and pricing for cement companies picking up from hereon. To be on the safer side and probably play out the margin of safety and outperformance is where we will look at these sectors."

Kumar advised that technology and pharma sectors are where he would probably lighten ourselves a bit post this run up.

Below is a verbatim transcript of Harendra Kumar's interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Also watch the accompanying video.

Q: What is your call on the Nifty today?

A: Our sense is the market is closer to topping out in the midst of the quarterly numbers. This trend is what we have seen over the last three quarters where we had a significant run-up to the numbers.

Probably in the post numbers announcement we have seen the market correcting significantly which is pretty much the same now. The Infosys numbers or technology numbers through the markets could probably top out and we would be using this run-up probably to reduce our allocations.

Q: What are you all factoring in terms of an EPS growth for Sensex or the Nifty or your universe of companies and where will be the pockets of surprise performance, where you may still see the markets willing to give value?

A: If you see, you have seen autos, technology and FMCG run-ups. This is where obviously the market was pricing in significant earnings growth. What we would be looking at is when the numbers come out probably to reduce the exposure because they are looking to top out and probably to look at sectors where the numbers are going to be at the bottom.

We expect cement and infrastructure companies to probably be giving out the worst quarterly numbers. But we see execution and pricing for cement companies picking up from hereon. To be on the safer side and probably play out the margin of safety and outperformance is where we will look at these sectors. Technology and pharma are where we would probably lighten ourselves a bit post this run up.

Q: Where do you think outperformance can come in terms of unexpected sectors? You did say you will see topping out in automobiles and such. Where do you think the positive surprise will come if you had to prepare ahead of the earnings season?

A: I think it's pretty much factored. People are looking at Jaguar or Tata Motors ' numbers and Tata Steel . The weightage to these companies' numbers in the current is disproportionately high. Any negative surprises could probably dampen the sentiment but on the positive side we see only in the mid and smallcap companies is where we see outperformance coming up.

Q: How exactly are you reading the primary market and all the spat of issuances that we have seen and also a word on Coal India?

A: Coal India is reasonably priced in. The verdict is out already, it's a legacy issue, a stock that you need to own and there are tremendous upsides so I am sure that the interest will be very. Our interactions with fund managers show there is good appetite for this issue so we don't see any reason on that.

On the mid and smallcap companies that are hitting their premium and are getting charged, we are slightly uncomfortable but this is typically the nature of the market. So we are not unduly perturbed about that. With peak valuations and large issues hitting, we would be little cagey on the where the markets are today.

Q: What is the view on the market generally? Do you expect that this midway through this earning season in the market itself tops out and its better to start taking profit or do you expect this merry liquidity run would continue for a bit more and that new highs are awaiting us in 2010?

A: Yes, the new highs are not too far away. You can see another 5-7% upsides from hereon. That is where the market is today. Yes, we are saying new highs probably but its time to take out profits.

Q: Any picks in terms of earnings which you would have probably from the midcap to smallcap space at all which someone could probably play before earnings?

A: We are looking at Patni in the technology sector to probably do better than some of its peers where the run-up in the stock price has not come up. We see probably the hospitality space doing better and some of our picks in terms of infrastructure plays.

Q: Anything specific in the infrastructure space - its not quite participated in the current run up?

A: We like Hindustan Dorr-Olive and Era Infra , and some of our regular plays. That's where the execution is picking up.