Mkt may correct in short term; bet on HUL, ITC: F&C Asset

As the earnings season is about to start, Mahtani expects a bit of correction in the market. There is also a likelihood of good Q2 earnings from cement companies, he feels. At the moment, Mahtani is positive on HUL , ITC and HDFC Bank .  

Here is the edited transcript of the interview on CNBC-TV18.

Q: We have seen some sluggishness creeping back in the markets over the last 3-4 sessions. Yesterday it was all about Spain and the downgrades that we have seen, do you think we are getting into that bit of a corrective phase now?

A: Yes, we could be heading into a short term correction in the indirect market. Obviously, we have had a very strong run over the last few weeks helped by the announcements in US and the ECB in terms of injecting fresh liquidity into the equity markets generally.

On top of that, we have had very positive reform measures by the Indian government. There is a lot of euphoria out there at the moment. There's a lot of positive sentiment and we could definitely see a bit of a correction as we head through this result season.

Q: How do you see the earnings pan out in Q2 now? What are the key factors that you are keeping your eye out in this season?

A: There are several factors coming into play and it is very sector and company specific. So it's very difficult to give guidance on earnings. It is fair to say that there will be some pockets of strength in terms of earnings like the cement and consumer companies. Some of the other companies may not be doing as well, some of the midcap infrastructure companies for example.

It is kind of a bottom-up; we have to look at it on a company by company basis. There is a lot of optimism built into share prices at the moment. We could see certainly some corrections in some of those companies that don't live up to the expectations now into their share prices.

Q: The question was more intended to find out whether you would already start seeing some kind of a bottoming out of the sales decline or the margin cuts? When do you expect an upturn in perhaps earnings?

A: We would hope they are close to bottoming; we have had the economy slide down and high interest rates. Potentially, if the reform program continues things should reverse, the economy should recover a bit.

One would hope that in the next quarter we should see the bottom of the earnings cycle in India, but it depends on reforms taking place and the economy picking up more steam. At the moment, the headline economic numbers are still very weak.

Q: More immediately after this recent run up in prices do you see any sectors or stocks where you still have some valuation headroom?

A: We still like some of the sectors and some of the companies, where valuations are high. The reason of their high is the quality of the business models, quality of management, execution and delivery of management team. We are still sticking with those kind of longer term quality companies like Hindustan Unilever, ITC, HDFC Bank, L&T though those stocks are slightly higher priced stocks in terms of PE multiples.