Fundamentals solid; need reforms to lift mkt: Dipan Mehta

Technically, the market has improved after breaking out the decent narrow band. So, we may see more upside for the market.

Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video.

Q: How much upside potential do you see for the market from here considering global events happened in last 10 hours?

A: Fundamentally, nothing has changed for India except the risk-on trade has resumed therefore, we may see more FII liquidity coming into our stock markets. Apart from that, we are still waiting for any major news from the finance ministry. But, broadly nothing much has changed. We may see an extension to this rally in coming trading sessions.

Technically, the market has improved after breaking out the decent narrow band. So, we may see more upside for the market. But, for the Nifty to break 5400 barrier, we will need some solid news flow from New Delhi and renewed sense of confidence coming back into Indian corporate sector and Indian equities per se for the markets to rally beyond those levels.

Q: Are you encouraged by the recent news flow which has come through whether its from the PMO on infrastructure and power, both these sectors and how would you approach them now because they have already put in quite a bit of a rally?

A: That's now enough. Right now we are looking for some tough measures to come from the finance ministry, especially, with regards to diesel price hikes, management of subsidy and more explanation on taxation as far as foreign investments are concerned.

These are all tough choices and that perhaps will mark the inflection point for this Congress government if they are able to bite the bullet. So far the signals are neutral to slightly positive, noises coming in are positive.

Let's keep our fingers crossed that sound minds will prevail and we will have some kind of policy action as far as managing the subsidies are concerned. That can change the entire landscape for our markets, for our country and give a further up move to the stock prices as well as the sentiment.

Q: Do you think the market will increasingly start pricing in expectation and hope for any government action which can result in the markets moving higher before even any kind of an action comes through from the government?

A: That could give some temporary support to the market. If reforms don't follow through then that could be a disappointment which could be quite harmful to the markets. The situation is fluid as far as global markets are concerned. Not just reforms, the market need to be very watchful about events like how the global market problems will be resolved, affect of monsoon, upcoming corporate result, where there may be few disappointments.

Q: If one wanted to take advantage of both these global and local positives how would you position your portfolio now? Where do you see the maximum amount of gains either on individual stocks or on specific sectors?

A: Our preference has not changed. We have good quality companies in private sector banks, pharma companies, midcap technology and capital good manufacturers which can outperform over the short to medium term and any of the positives coming through will benefit either of these sectors and maintain their outperformance.

An investor should structure his portfolio in such a way that there is fair amount of exposure to interest rate sensitives and export oriented companies. For the upcoming quarter, the export oriented sector can provide some upside surprises considering the way the rupee has depreciated and although we do not know exactly what quantum of exports has been hedged. Those companies rupee earnings could be quite interesting and they may appear to be cheap on a trading 12 month basis EPS as well.

Q: In which stocks or sectors do you see there is a possibility of an earnings disappointment and hence you will recommend any investors cashing out of their existing positions?

A: There may be problem in the auto sector and thereafter some usual suspects like capital goods manufacturers, infrastructure companies some PSU banks, considering that this last quarter has not been good, so there will be pressure on NPAs.

So, no major new sector coming up for disappointment expect maybe auto. Of all the other sectors, the market is pretty well aware of what the problems are and they in any case have been huge underperformers, but maybe that and few commodity stocks could disappoint, but I think that largely those kind of disappointments have got priced in. The bigger problem would be large cap IT companies, PSU banks or even the private sector banks disappointing that’s the worry, which the market has not discounted as yet.