SENSEX NIFTY
Jan 25, 2013, 08.52 PM IST | Source: CNBC-TV18

Midcaps still a buy opportunity for investors: Anand Rathi

Sandeep Shenoy, research analyst, Anand Rathi, says that he feels that the market in the short-term have run a bit ahead of fundamentals and that is more or less evident from the shocks that we have been witnessing in the last few days. He does nt feel that it is an end of midcap story.

Sandeep Shenoy, research analyst, Anand Rathi, says that he feels that the market in the short-term have run a bit ahead of fundamentals and that is more or less evident from the shocks that we have been witnessing in the last few days. He does nt feel that it is an end of midcap story.

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Below is the edited transcript of his interview to CNBC-TV18.

Q: What is your view on the midcap carnage that we saw is this warning bell that the market has probably extended them or is it just a routine correction?

A: I think the market in the short-term have run a bit ahead of fundamentals and that is more or less evident from the shocks that we have been witnessing in the last few days. I don't think that it is an end of midcap story.

Till now, the better-run midcaps are exhibiting a decent number flow. So balance sheet issues on those midcaps are coming to the fore, especially on the funding side or on the debt side, and those are getting trashed. However, once the trashing phase is over, the better-run or the well-run midcaps or the midcaps with strong balance sheets will come to the fore and that is where the investor should look at.

Q: Which are the mid-caps that have impressed you? Some of them have come out with numbers. Selectively does anything stand out as something, which has been able to pick itself up form the debris?

A: I think the figures from Havells and companies of similar stature are proving that more or less the companies that have attained size and scale in operations and have been maintaining balance sheet discipline are not overleveraging themselves. I think they will exhibit good numbers and growth will not be an issue for them. These type of stocks will be on watch list or buy list of most of the discerning investors and we want to push this type of stocks, especially housing derivatives, second rung cement companies or consumer facing stocks. I think interest and growth will be in these type of stocks.

Q: What is the correlation that you see once you see these broader market fall, such deep corrections take place with the Nifty, is it a precursor or some amount of move that could be correlated to the front-line index showing some amount of correction?

A: I think it could be a precursor because the bad or weaker results of mid-caps have come out a bit ahead vis-à-vis the weak results form the large-cap because the shocks that one got on the index heavyweights may have been from Hero MotoCorp or to some extent Hindustan Unilever ( HUL ).

On the other side, some positive surprises outnumbered negative surprises on the large-cap front, case in point being Infosys or L&T. The better results may have already exhausted. So, the good news from large-caps maybe over and we could see weaker numbers coming from remaining large-caps.

So the indications, which are coming from the weak results of mid-cap could have a re-run in the weaker results of some of the remainder results of the large-caps. So, be a bit careful. One could see around 3-5 percent shave-off on the indices, but I think the uptrend is still present. So structural move will still be in the favour of bulls, but one could see short-term pressures on the markets.

Q: What is your view with regards to the steep falls that we saw in individual stocks like HDIL , IVRCL , IRB and Arshiya International ? Do you think that they would ever revert back to their old stock prices and maybe even valuation or do you think that these corporate governance issues will always remain an overhang?

A: Corporate governance issue is definitely a overhang, but if the business model is strong, you can bring discipline and cross that valley of death on operational front, then most of the companies tend to recover. Many blue-chip of today faced some or the other corporate governance issues few years back or couple of decades back, but they have managed to cross over and exhibit strength of business.

Few stocks which was thrashed yesterday, more than corporate governance issues, there were questions raised on their business survivability and structural issues on their business model front and that's a key point companies like IRB may recover and come back to their days of glory.

But it could take few more quarters, but they could return, but some companies what you mentioned their fundamentals must have been structurally impacted and the balance sheet will take a long time to come and unless that is repaired they will find a tough road ahead to seek acceptance in investors buy list.

Q: When be began this conversation you sounded like there is more to go for the rally even if there is correction in some stocks. What would you stick with now and how much more legs does this rally have?

A: In the shorter term, 5-8 percent could go off in the immediate-term, but on a longer-term basis we are headed for good times ahead. There could be volatility in the intermediate-term, but on a longer term we feel around 12-15 percent is left on the table on an annual basis. So come December, we could be at that level.

Where this next leg of rally could be coming? Our view is that the consumer facing or consumption stocks, which ruled the roost for the last three-three and half years may slowly come to the end of their rally and the entire balance could slowly shifting to investment-led stock. I think L&T was a case in point and it exhibited that most of the poison in the system maybe out for them.

Q: What is your view on Ashok Leyland?

A: Auto is a mixed bag. One has to be choosy and do some nitpicking in auto sector. Selectivity will be paramount in this sector.

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Havells India Hero Motocorp HUL
Infosys HDIL IVRCL
IRB Infra Arshiya

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