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Experts see further correction in mkts

Published on Wed, Nov 21, 2007 at 18:10 | Source : Moneycontrol.com

Updated at Thu, Nov 22, 2007 at 09:31

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Nifty

BSE | NSE 09/02/12

Are Mutual Funds betting on Nifty?

Sanjeev Prasad , Head of Research, Kotak Securities , said the fair range for the Sensex is 16,000-19,000 based on FY09 numbers. "Can't rule out another 10% correction from current levels."

He feels hedge funds may be selling to book year-end profits. "India's relative outperformance may have triggered this selling."

Prasad feel hedge funds may be selling to book year-end profits. He feels India's relative outperformance may have triggered selling.

Technical Analyst Ashwani Gujral said the market might fall further if the Nifty goes below 5,470. "Nifty could go down to 5,000 levels if correction continues."

He feels we may see an intermediate downtrend if the Nifty falls below 5,500.

Excerpts from CNBC-TV18's exclusive interview with Sanjeev Prasad and Ashwani Gujral:

Q: Was it looking inevitable, this kind of cut after the midcap gains you saw over the last fortnight?

Prasad: There were some indications that India was outperforming the rest of the region. Most markets have already pulled back 10-15% from their peaks and India was the only one which was still hovering at more or less its peak. The Sensex peaked at 20,000. There were indications that you can't have a market performing in isolation compared to what is happening to the rest of the region.

The second indication was clearly with what is happening on the midcap space. When stocks, without any rhythm or reason, start going up 30-40% in a matter of few days, then it is clearly a dangerous signal. It is not as if these are undiscovered stocks and people haven't been following them. Suddenly, why should stocks get re-rated 50% in a matter of few days? I guess there were indications that there would be some corrections.

Q: There has been quite a bit of FII selling over the last couple of days both in cash and futures. Do you think it is on account of India's relative outperformance and that is why people are tactically selling this market or is there something else which could have precipitated such large selling because the figure yesterday was almost USD 1.5 billion in cash plus F&O?

Prasad: Investors should keep in mind the fact that we are heading towards the end of the year, so hedge funds and leverage funds may be just booking profits and closing out for the year. Nobody wants to go into December with large open positions in a market which is, if not overvalued, at least reasonably valued. Then you have a lot of issues on the global side. So, anything could go wrong anywhere. Why do you want to be exposed to a market which is reasonably valued? People are just booking profits before going into a vacation. People have made great gains over the years, so why not take some money off the table.

Relative outperformance of India versus others could have been the reason for people to pull back from here and then take a view later on.

Q: Do you expect more downside in the near term or the market just to consolidate in a range?

Prasad: Everything is possible. Our fair range for the market, based on FY09 numbers, is 16,000 to 19,000. It is not as if with the recent correction we have become very cheap. In terms of valuations, we are still at about 18 times March 2009 numbers, so it is still not a very cheap market. Another 10% is not a big deal from current levels.

Q: How are you approaching this huge midcap rally which has happened? Do you think some of the valuations look excessive or has it been justified? Do you expect no more than a small shave off from the top?

Prasad: Things were quite bizarre honestly. Stocks that move up 30-40% don't make any sense to me. I can talk about oil and gas stocks and the movements over there. For example, why should Petronet LNG be at where it is? People are assuming that Reliance will find lot more gas than whatever it has announced, ONGC has already announced big discoveries and so has GSPC . If you add all that up, we are looking at a tremendous increase in domestic supply. If that is the case, then where is the other case for a business model of Petronet LNG.

People are willing to give all such valuations since it going to enter into the power space. That is completely bizarre. If Petronet LNG is not in a position to sell, as imported LNG is expensive compared to domestically produced gas, where is the question of it selling power which is even more expensive than LNG.

Anything goes in a bull market. Similarly, look what happened in the pipeline company Gujarat State Petronet. We were talking about regulations being imposed on a sector which could cap returns. But the stocks have rallied 40% or more in a matter of days. All kinds of stuff are going on in the midcap space.

Q: What would you takeaway from today's trade and how would you approach trade now?

Gujral: We are still in that range of 5,500-6,000 on the Nifty. The previous intermediate bottom was around 5,470 to 5,500. If that gets breached, then we head into a deeper correction. The next level there could be 5,000 to 5,050. In case 5,500 is sustained on the downside, it is just another consolidation. Around 5,500, investors need to chance going long with a 40-50 point stop loss. Inspite of negative news, our markets have bounced back. In case, 5,470-5,500 gets taken out, then you probably are into an intermediate downtrend.

Q: How do you approach the liquid midcaps now? Stocks like TTML , IFCI , Chambal Fertilisers , among others that have been really creating trading gains?

Gujral: If you have gains left, you need to take profits. If you do not have them, just get out of the way because if the previous low gets taken out, then these stocks would take a much bigger punishment. Above 5,900, we had said that cats and dogs part of the rally is generally towards the end of an intermediate uptrend. That has sort of proven true. In case the intermediate downtrend starts below 5,470, you should be cutting your positions because these stocks are where futures are quite over-leveraged and could come down much further.

Q: What about stocks like Essar Oil and RPL which have also been re-rated and stocks like Bongaigaon Refinery and Chennai Petroleum from the standalone refining space?

Prasad: I cannot comment on Essar Oil because I have not looked at it at all since it was a delisting candidate. We never thought of bringing it under coverage.

Reliance Petroleum is still in the overvalued range. The fair value of the company should be around Rs 160-170. Our official target price is Rs 170.

Bongaigaon Refinery beats me. It is a company that will make losses forever. It has to survive on government subsidies and will get some 50% concessions on excise duties. The merger issue between IOC and Bongaigaon is also decided. Actually, it should be trading at a much lower price based on the merger ratio of 4:37 with IOC. I do not understand why it should be trading where it is.

Chennai Petroleum looks reasonable. If we do about Rs 55 EPS in the current year, I don't think that is a bad stock in terms of valuation.

Q: And MRPL ?

Prasad: MRPL is on the overvalued side. We are looking at an EPS of about Rs 8. Somewhere around Rs 70-80 is fair value for the company. Not more than that.

Q: The power lot has corrected quite a bit in the last couple of days. Can you see further correction in the popular power names like NTPC , Tata Power , BHEL , and Suzlon ?

Prasad: Very likely. If you do a reverse valuation and try and establish a fair value for what is the existing business or what is a fair value of the existing business, the implied value for things that these companies are doing in the future does look pretty bizarre to me.

For instance, NTPC has 28,000 mw of capacity plus cash and investments, so its fair value should be in the region of around Rs 120. Until yesterday, the market was implying about Rs 160 per share for the new things that they will do in the future. If you work that back, it effectively means that over the next 10 years, NTPC is going to add something like 3,000 mw of capacity. It is possible, but I think there are severe execution and regulatory issues in this country. Clearly, the stock is implying a lot of stuff that is going to happen in the future and everything is getting discounted today. Nobody is bothered about any execution, regulatory, or linkage risk.

Q: How are some of the highflying power names like Neyveli Lignite , Power Trading Corporation , NTPC, and the liquid ones on the power side for futures looking post correction?

Gujral: Easily 50% gains from the previous run could go. Neyveli ran up from about Rs 100 to about Rs 225. You could easily assume that it could come back to around Rs 150-160.

NTPC has strong support around Rs 235-240. Wherever you have seen those 15-25% type of gains, those stocks are going to get punished. People have to be very cautious. If they are leveraged below 5,470-5,500, they need to put stops on all their positions and take them.

Q: Would you say the odds are highest for going back to 5,000 Nifty or taking support at 5,500? What would you place your bets on now?

Gujral: Given the kind of global scenario and our relative outperformance, which makes us a perfect foil for probably more correction than other markets, I think 5500 may get taken out. We may find support at lower levels around 5,000-5,050. Today's action really shows that a lot of retail is leveraged. They are getting aggressive and institutions are selling. I do not think 5,500 will hold up, we may have to go lower.

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