SENSEX NIFTY
Jul 23, 2013, 12.30 PM IST | Source: CNBC-TV18

Mkt correction likely as Q1 nos start to disappoint: IL&FS

There is a very significant chance that the market will go into another correction as more and more results come out, says Vaibhav Kapoor.

Vibhav Kapoor of IL&FS  says the market is likely to correct as he expects more disappointing news coming from Q1 earnings ahead. Although rupee depreciation has benefited the Nifty and some of the heavy weight stocks and sectors, it has not really helped the broader market or the economy as a whole, he says.

He sees Nifty trading in a range of 5,500-5,600 on lower side and 6,100-6,200 on the upper side. The best way to play the market is be selective and just trade, he advises.

He is not confident of slew of measures announced by RBI and government helping curent account deficit (CAD) situation. The governent intent is positive but more needs to be done on the CAD front, says Kapoor.

Also read: Defending currencies? More like digging a hole

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Do you expect the market to continue its upward trajectory given the kind of newsflow that you are hearing or do you think 6,100 thereabouts should be the cap?

A: Two-three points need to be made here. One is that in the current rally, the market has become even more narrow or the rise in the market has become even more narrow than it was earlier and there is very clearly a shift happening from the broader market to a very few select stocks in the Nifty. Therefore, the broader market has probably gone down in the last few weeks but the Nifty has gone up because of this 5-6 stocks. Stocks like ITC, Hindustan Unilever Ltd ( HUL ), Infosys , Tata Consultancy Services ( TCS ) and maybe Reliance Industries Ltd ( RIL ) have contributed about 300 points to the Nifty in the last three-four weeks.

Second, is that obviously rupee depreciation is beneficial for the Nifty not for the market as a whole or for the economy because there are a large number of high weightage stocks, which benefit from the depreciation of the rupee. Therefore, some of these stocks are definitely becoming pretty expensive now. There is also flight to fast moving consumer goods (FMCG), which is further continuing to happen and making these stocks now look pretty expensive.

All in all, L&T’s result for example yesterday showed that the domestic based companies are still in a lot of trouble and we have to go through a lot of these results over the next 15-20 days. The banking sector also is under stress.

Overall the Nifty would continue in the range we have been talking about, 5,500-5,600 on the lower side and 6,100-6,200 on the upper side.

Q: Where does this leave any investment approach or approach to the market even where this deep skew exists within sectors and within the index; one pocket of it keeps moving to higher valuations while the others in the doldrums, what do you do with the market like that?

A: Very tough because you cannot keep on buying those 5-6 stocks. They are becoming expensive and if they don’t perform according to market expectations, which obviously are very high now, you could see a sudden fall happening at some point of time in them. So it is not a very safe strategy.

One cannot buy other stocks because those companies are not doing well or those sectors are not doing well. You have to be selective and you have to just trade. That is about it.

Q: How is the equity market reading the slew of measures that have been announced both from the finance ministry and recently from the Reserve Bank of India (RBI), are they reading it as positive in terms of attempting to band-aid issues like the current account deficit (CAD) etc or is it being seen as a retrograde kind of an approach?

A: The intentions are definitely positive but how much these measures will help, will have to be seen. Curbing gold imports can only succeed to a certain extent because of the very deep-rooted social sort of attraction for gold in this country. So, they are positive but I don’t know how far they can help in controlling the CAD. We will need to see.

Q: Do you see the possibility of the market entering another correction by the time this earning season is over because after yesterday it looks like there probably will be significant downgrades or some downgrades at least at the end of this earning season as well?

A: I would think so. All that has happened is that the export oriented companies have performed well because of the rupee depreciation. So, we have seen the IT sector doing well. We have seen companies like Bajaj Auto on back of exports doing well. Even RIL tends to gain a lot because of the depreciation of the rupee. The results for the rest of the domestic based companies - some of whom stand to lose because of rupee depreciation and others,  which are completely domestic economy related are still to come out. We saw first of them come out which was L&T which disappointed the market as a whole.

So there is a very significant chance that the market will go into another correction as more and more results come out.

Q: How much longer do you see this range being in place and how much longer do you see this broader market languishing because barring these ten stocks, equities are not making money for people, do you see this being in place till the next elections?

A: Equities are not making any money for people even for the foreign institutional investors (FIIs) for that matter because they have suffered a lot because the rupee has depreciated. How much can you own of those five-ten stocks? This is going to continue for sometime.

In fact, if you see in this last 20-days rally from 5,500, this is one of the few times that we have had such a sharp rally without any FII participation. If you take out the HUL issue, there has been about Rs 2,000 crore of negative flows in the last 20-25 days from FIIs and yet the market has rallied so much. So this is just showing that there is no new money coming in but there is just a massive shift happening from the broader market, from capital goods, infrastructure, a lot of other sectors banking as a main example into just either IT or these 5-10 FMCG names and that doesn’t bode too well for the market.

Also, there are other issues that still continue to remain; there is always have this stimulus issue, which can come up at any point of time. The market also seems to have suddenly forgotten that there is an Immigration Bill pending, which can again impact the IT sector. There are still a lot of issues. The general economy is still not doing well. The macros are still in a lot of problems. Therefore, this range is going to continue for quite some time.

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