Mkts will react only to 'spectacular' results: Religare Sec

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Speaking to CNBC-TV18, Amitabh Chakraborty of Religare Securities said that everybody is talking about 25 to 27% net profit growth in third quarter. But he added, "That has been factored into the markets. So unless some company comes out spectacularly; results which are ahead of the estimates, markets will not be getting very positive on those results. But wherever there is a negative surprise, it would be punished quite heavily."

 Excerpts from CNBC-TV18's exclusive interview with Amitabh Chakraborty:

Q: What's your sense of what's going on in the market now?

A: Let's put it in perspective. Yesterday I read on Bloomberg, there's about 55% probability of 75 bps cut - that is as per the economists' polls. Now 75 bps cut in one shot on January 30 in the Fed meeting, is not possible, according to us.

Now to that extent, there would be disappointment in the market and that disappointment means that some selling off in the US markets; and hence the Asian markets. If one come backs to India, everybody is talking about 25 to 27% net profit growth in third quarter. According to us, that has been factored into the markets. So unless some company comes out spectacularly, results which are ahead of the estimates, markets will not be getting very positive on those results.

But wherever there is a negative surprise, it would be punished quite heavily; we are at a point where triggers are all factored in.

Now come back to the liquidity situation - FIIs are still not there in the market. We have seen some profit booking  - about 30% midcap and smallcap index falling from the top for the mega issue of Reliance Power. To that extent the liquidity will also be tight in the system. So under all this, if one puts these things in perspective there is a scope of about 1,000 points correction in the markets. We have seen about 200-250 points; probably some more to go according to us.     

Q: What are you hearing about Bharti and what's causing so much selling pressure on the stock?

A: If one sees most of the A-group stocks have fallen; so we cannot only separate Bharti. Yes it is 6% down, but so are so many A-group stocks. So at this point a definite selling has come. Please try to understand that everybody in the market was talking about market to be strong upto the Reliance Power issue.

When everybody starts thinking in the same line or direction, the market is always ahead of others in collective wisdom. So I would say that when everybody thinks market will be strong upto 18th of this month because of the mega issue is going on, lot of money is coming etc -but market is probably coming ahead of that because some smart people will be there, who will try to book profits ahead of that.

Q: What are you telling your clients to do on Reliance Power both for the issue as well as post listing?

A: This is a very important question - we have come with an IPO note, and we could not justify the valuations on a fundamental basis. However we also know that there would be gain on listing and those who have funded, their cost would be around Rs 350 to Rs 375. So to that extent one can invest to gain from listing. But on a longer period of time, we believe that entry point would be much lower than the listing price.

Q: How would you place yourself on the entire power sector? Some people suggest that it is time to book profits now that the issue is here. Others believe that post listing most power stocks will get dragged up along with Reliance Power. Which camp do you belong to?

 

A: I do not belong to any camp. Basically, everyone is talking about the power sector. We understand that there is huge opportunity in the distribution and transmission segment of the power sector. But also relative valuations should be looked at.

 

From that point of view, we like Tata Power at this point and we also like Torrent Power and Gujarat Industrial Power . In case of Gujarat Industrial Power, they normally used to get 1% more than the stipulated rate of return. But they will be doing all the new projects with the stipulated rate of return. That is a big upside. And in case of Tata Power, it is I think one of the cheapest within the power sector now.

 

Q: In your conversations with colleagues who handle the retail desk, are you sensing any big suck out of liquidity or money reallocation because of all these big IPOs open?

 

A: Yes. Last week we have seen some kind of selling so that the margin money can be given for the Reliance Power issue. But that was over by Friday, because we haven't seen those types of profit booking yesterday or today; because even if somebody has sold yesterday, they will not be getting the money before the issue is over. So, to that extent, last week we have seen some profit booking by the retail investors.

 

Q: What has your call been on the midcap space actually, because they have gone through a rough patch? Have you advised clients to hold on to positions or start selling a little bit?

 

A: Those midcaps where we have a fundamental story and a target price, we have advised our clients to hold on to them. But in any bull market, a lot of stocks like smallcap, midcap segments start moving without any fundamentals. Obviously one cannot justify those prices. Whether it is a penny stock or a Rs 100 stock, it doesn't matter, but they just move because of the momentum. So, if somebody has profit in those places, we have advised our clients to reduce their positions completely.

 

Q: How do you think things will be setup now for the next few weeks before we hit the big global event, which is the Fed and then a little bit longer down the run, the Budget for us?

 

A: As I said in the beginning, a very high level of cut by the Fed has already been factored-in by the US market. Any disappointment on that front will have some negative effect on the US and the Asian markets. In India also, our belief is that the market has factored-in good results. Also we haven't seen the FII allocations as yet and normally that happens by the second half of the month of January. All those things put together, it looks like January would be very choppy.

 

However, we are going to the Budget session. This would be the last Budget before the General Elections. So, there would be a lot of fiscal stimulating policy announcements in the Budget and we have to see how the market takes those aspects. But as of now, it looks like the Budget would be quite good and a fiscally boosting Budget. So, there will be a lot of spending in the hands of common people, which will increase the demand for goods. So, demand for consumer goods and durable goods will increase and then through that, the GDP growth would be good. So, it will be very exciting to see how the market behaves in February. But as of now, it looks like that January would be quite choppy. That is our view for the short-term.

Q: Would you be bottom fishing for any specific stocks or do you think that this market right now is a market to lighten and not to cherry pick?

 

A: If one sees for the short-term, F&O position should be lightened up because markets would be very volatile and we are not seeing the triggers and our understanding is that January would be quite choppy. If one sees 3-months perspective, at least then one can take some stocks like L&T or Hindustan Construction on the infrastructure space or the banking sector, any banking stock would be a very good bet because the Fed will continuously cut the rate and that is our current understanding. RBI has to follow because otherwise parity doesn't work. So if interest rate comes down, the banking sector should do well and we should pick up banking stocks.

Disclosure:

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