Market in a fairly valued range, says First Global

According to her, the market would be close to the fairly valued range. “We don’t see a very big move on either side right away,” she adds. She further says, 2011 is more likely to be a down than an up year.

Also read: Will Nifty cross 6000 levels this week? Udayan says likely

Below is a verbatim transcript of her interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: How have you read earnings so far?

A: The only sector where you had multiple earnings numbers of any size or significance coming out has been technology and the IT sector; ofcourse you have had two-three banks as well, one-two large ones. So, it is a little early in the day to make a call on that.

In the IT services, there has been a dichotomy in terms of the numbers that have come out with TCS and Infosys being somewhat within a range, at two-ends of the scale. Reliance has been in line with what we had expected, though it was a trifle below the street’s estimates.

As far as manufacturing is concerned, I think you will continue to see some margin pressure which you started to see in Q3. Overall, this quarter I don’t see very big positive surprises for the market as a whole.

Q: To scratch that point about Reliance, what are the key disappointments for you? How do you expect the stock to move from here?

A: Reliance, we were relatively on target on the earnings. But having said that, that is a company of which we find the earnings to be quite unpredictable. Their gross refining margins (GRMs) don’t seem to follow any kind of publicly available GRM trends that you see, whether it is Singapore or elsewhere and that is not so much directly impacting earnings just now. Even in terms of future outlook on the gas output, you hear all kinds of things and then denials and then changes, so that is the company where I would say that the visibility is always poor.

It is not a stock that we have loved. It has been a big underperformer. If you look at the index being at 19,000 odd, Reliance is where it probably was when the index was last 12,000-13,000. So, for us, the stock goes from market perform to slightly under perform kind of range.

Q: How do you expect the market to move from here on? There has been this debate about which sectors lead or lag, how do you think that sectoral break up will look?

A: This market has been very skewed sectorally, not just for a short period, for more than a year and a half. It has really been two different markets. If you look at 2010, market was up 16-17%, but there were few sectors mainly auto, pharma, parts of banking that were up between 35-45%. And then you had a slew of sectors that were actually down, not just underperforming, but were down in absolute terms, whether it is infrastructure, construction, real estate, the metals etc.

Now, you know what could have happened is that if that underperformance was undeserved then those underperforming sector could have taken up the market leadership and now started outperforming. But if you look at year-to-date (YTD) in 2011, it is more or less the same sectors that are still in the negative territory and we think with good reasons. So, that skew still remains very dramatic.

The other side to that skew, is that the stocks that have done well, which have taken the market up, probably deserved to go up. And the stocks that have not done so well did not deserve to do so well. So, if you look at the market and the individual sectors and companies, it would be probably close to the fairly valued range. And that is why it is difficult to make a big bet on either side. We don’t see a very big move on either side right away.

If you look at the horizon, things look a little murky in terms of the growth outlook, in terms of the inflation outlook. You have had pretty poor Index of Industrial Production (IIP) numbers for the last four-five months and inflation means margin pressures. And in trying to control inflation, you pushed up interest rates, which means pressures even below the earnings before interest, taxes, depreciation and amortization (EDIDTA) line. So, those remain the concerns.

Also, one other part is that if you look at the longer term, the market when it last made a high was about three to three-and-a-half years ago. Right now, it might be down 7-7.5% from that point. But adjusted for time it is down 30-40% because you have fixed deposits giving you 10% per annum on a risk free basis; risk adjusted, it is probably down 50%. So, the correction has happened more through time than through the price moves and it really mattered where you were in the market. This has been a clearly one of those times where the sectors and the choice of companies really mattered.