It's a relief rally, Q3 results decisive: Purushottam

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Opinions are mixed on the credit policy expectations. While opinions are mixed, some feel that the RBI is likely to cut cash reserve ratio (CRR), many still feel that for now the central bank will maintain a status quo with a dovish outlook.

Sangeeta Purushottam, MD, Nine Rivers Capital feels that there may be a bout of profit booking unless the policy throws some surprise. In an interview to CNBC-TV18, she says that the market will take directions post the policy.

According to her, infrastructure space will also react to the policy primarily because many of these companies do have a fair amount of debt. "That's where the rate sensitive nature comes in. I think there will be some impact on the infra stories as well,"she adds.

Here is an edited excerpt of her comments. Also watch the accompanying videos.

Q: What do you think? Is there more upside for stocks post policy or do you think markets will turn from here?

A: I think there could be some element of profit taking which comes in because we have seen a fairly sharp move. A lot of the policy expectations have been partly built into the manner in which the interest rate sensitives have moved up. So unless the policy really surprises or goes beyond market expectations, my own sense is that post the event we could see a bout of profit taking. I think then the market will take direction from there.

Q: What exactly does the market has baked in, in terms of policy expectations because right now it seems to be working with all options that they will move a little bit on the SLR or CRR, they will not say anything but the tone will be dovish? So what is the disappointment and what is the positive you think?

A: I think there is a section of the market which believes that there will be a CRR cut, the tone will be fairly dovish. If something happens beyond that which would really be like say an SLR cut also and a CRR cut - that would be taken positively. If for example the tone just remains dovish and we don't see a CRR cut then that is going to be somewhat disappointing.

Q: Banks will react of course but how do you think infrastructure will react to what the policy has to say because many of those stocks have had sizable rallies this month?

A: I think in infrastructure it has been a couple of factors. One is that the stocks were beaten down. So, this whole trade that we have seen over the last month has really been completely in the sectors which were out of favour. So, many of the relatively more defensive plays have actually not moved that much at all. So there was that element to that trade. Then there has been a bit of interest rate expectations also built in.

I think the infrastructure space will also react to the policy primarily because many of these companies do have a fair amount of debt. That's where the rate sensitive nature comes in. I think there will be some impact on the infra stories as well.

Q: Generally speaking, are you reading this as just another powerful relief rally or do you think something has changed in the environment and maybe the market is slowly bottoming out?

A: I think at the moment I would say it is more of a relief rally because it's a little hard to say whether we are at the bottom or not. But a lot of things are getting priced in particularly on the domestic side.

So, a lot of the bad news is actually out, it's in the open, in a sense it's digested. If anything is now through this year there could be room for some positive surprises if action happens on a whole host of fronts.

Also as far as the earning cycle is concerned, my own sense is that Q3 and Q4 will create the bottom for the earnings cycle and that lower base effect itself will provide some cushion as we move into the second half of next year. We need to remember that in Q3 in the numbers we are seeing the impact of both - mark to market losses on forex as well as the impact on raw material prices wherever there has been import parity in the pricing. There are two things which are getting priced in and we have seen strengthening of the rupee post that. So I think Q3 and Q4 should provide the bottom at least as far as the earnings growth is concerned.

Q: Private Banks have led the way but yesterday we saw some buying in the ignored public sector banks, even the smaller names. Would you start taking any contrarian buy positions there?

A: Actually as far as the public sector banks are concerned, I have said earlier also that they were representing a lot of value. We have seen reasonable moves in at least some of the larger ones there. I think the smaller banks are now really essentially playing catch up to the move that we have seen in the larger ones. So that trade will work for the distance that the larger ones have to go. As a trade it would make some sense now.

Q: What kind of range? Do you think Reliance may settle into now with the buyback and the earnings out of the way?

A: I don't expect the buyback impact to last for too long. At best it sort of provides some cushion on the downside. In terms of value the amount looks large, more than Rs 10,000 crore. But as a percentage of the stock which is being bought back, it's really not that significant. My own sense is that the buyback will get forgotten over a period. If the stock falls too much, there maybe some cushioning effect but the focus will then move back to the fundamentals.

Q: The sector that has far more split apart in terms of performance is the autos. What leg of it do you like now and would you buy?

A: I think the consumer vehicle side is something I would actually avoid for the time being. Given that we will go through a certain soft phase in terms of the overall economic growth. I still like selectively some of the two wheeler names particularly Bajaj Auto .

I think that's a stock which has come off and from a longer term perspective it looks good. It has been throwing up cash.

I think it is those kinds of stocks that I would rather go with. The rural consumption piece has come under some cloud with the softening in the prices of many of the Agri commodities. That is a section of the market which may not perform very much till those concerns really get played out.

I think within that it's really the, in some sense the pieces which are linked to again the fundamentals, you have good cash flows coming in, it's not so linked to rural consumption. I think those are the pieces which would do better.