Market could touch 4730-4725 on lower side: Prakash Diwan

In an interview with CNBC-TV18, Prakash Diwan of Asit C Mehta Investment said that it was more of a relief rally triggered by the postponement of the Greek crisis by a month or so. Although, he feels that things could take a turn for better, according to him, "We should accept the fact that 4800 could be a point that should be tested and it is only after that things could take a better shape."

"The range that we could test can be 4730-4725 on the lower side and it could be a sideways market for the entire quarter. I wouldn't be surprised if that were to happen," explains Diwan. He is also of the view that it will be a very good opportunity for long-term stock pickers to start nibbling into markets at those levels.

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

Q: How do you read the movement on the markets, the pullback have not lasted?

A: What we possibly saw in the early morning was more of a relief rally and it is thanks to the kind of softness we saw in terms of the declaration in Europe. We heard about postponement of the Greek crisis by a month or so. People thought, we at least have a breather of sorts. But, the moment the European markets opened up, we realized that things aren’t so great after all.

Essentially, even the kind of discount to the future is still significant at 14-15 points, which has been there throughout the session. This clearly indicates that nobody is in a hurry to cover the shorts. The shorts are still in the system and in the face people would be happy to go short in higher levels. That is exactly what has happened. My sense is we should accept the fact that 4800 could be a point that should be tested and it is only after that things could take a better shape.

Q: Are you getting the sense that Q4 is perhaps the worst earning quarter or are you now getting the sense that the trough will take some time which is the Q1 or Q2 of FY13, where the earnings trough may hit?

A: What happened on the last quarter results, the Q4 FY12 numbers, is that as compared to the expectations, it has not been so bad. You have had all the difficulties that one could imagine like high interest costs, high input costs, slowdown in growth. If you look at the topline, we haven't seen so much of a growth, still at the end of the day, the industry has been resilient enough.

We have seen numbers being fairly okay and in line with expectations. My sense is that Q1FY13 will probably not be as bad as we had earlier expected. It itself is so muted that you really cannot go wrong from here on. Things could start improving because we have seen a situation where companies have brought down their costs, they have made themselves much more efficient.

The cost of funds actually starts coming down effectively where the reporate cut have not yet percolated, the transmission is still due. I think Q1, Q2 will be far better than what we expect.

Q: What happens to the stock markets? Does any of that get factored in or is it that because of the macros and for whatever reason you are probably going to see more lows before this kind of a sentiment gets factored in? What is the range you are working with?

A: Interestingly, if the market would not have discounted the possible improvement, you would probably start seeing valuations come down from a pure PE multiple perspective. You would probably see PEs in that range of 12.5-13 levels. Earnings continue to be maintained even if they don't improve or don't go further down.

The prices keep on coming down because of the overall headwinds that we are facing. I think it will become a very good opportunity for stock pickers, for long-term stock pickers to start nibbling into markets at those levels.

The range that we could test can be 4730-4725 on the lower side and it could be a sideways market for the entire quarter. I wouldn't be surprised if that were to happen. But, it is actually from there that you could see a sharp rebound once the reflection of improvement in earnings start happening.

Right now, what you are seeing is more of a globally induced rupee weakness, which could change dramatically if people were to factor in improvement in earnings in Q2.

Q: How do you expect the performances of pharma and FMCG would be? Do you fear that people thinking lower levels are likely to sell into these stocks, book profits or there might be a flight to safety to these stocks where you do see earnings stability and hence, these stocks will rally from hereon?

A: I do not think people will sell into these stocks even at higher levels. In fact, if you see the behaviour which is visible within Divi's Laboratories, Lupin, they have made new highs and people are not willing to sell out and book profits as yet. This is so because in this market, it is very critical. I wouldn't mind paying scarcity premium for stocks that have visibility of earnings because to stay in cash is equally not productive.

I might as well stay in these kind of stocks even if they sound a bit high cost at this point in time. But, I do not think people are going to move out of this. FMCG could be a different ballgame because there is enough to rotate out of the bigwigs, the heavyweights, where you could take some profits into the smaller ones. But, pharma is going to be very difficult to exit, even at higher levels.