Move to frontliners, but be choosy, advices SP Tulsian

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The Nifty closed shy of the 4750 mark today, its lowest since February 2010. The main losers were the ADAG stocks, with the market capitalization of all the stocks falling to below Rs 60,000 crore levels. According to SP Tulsian of sptulsian.com, there is definitely some news or trigger that has pulled down these stocks. "Take Reliance Capital for example. The market cap of the company is less than Rs 10,000 crore and even at such a low valuation, it has corrected by 12%. So there is definitely a cause of concern" he said in an exclusive interview to CNBC-TV18.

Even in such turbulent times, Tulsian maintains his positive outlook on fertilizer stocks. However, he advices investors to be choosy while picking stocks. "I take a fundamental view on all stocks, and I see value in this sector and these stocks. A general call on the market definitely looks good for investors with a 6-12 months time horizon" he added.

On the whole, Tulsian says that the outlook for the market is bleak. "On the first day of expiry, that too of an elongated series, if we have this kind of a fall, I don't think that there is any respite in any direction for the traders" he said.

Below is an edited transcript of his interview with Mitali Mukherjee and Latha Venkatesh. Watch the accompanying videos for full details.

Q: What is causing so much damage for the ADAG group today?

A: We earlier thought that maybe Reliance Capital was correcting due to its bad results. Even Reliance Infra posted results that were not that great. If you take the case of Reliance Media and Reliance Broadcast , which are the two smaller ones, they have corrected by about 1-1.5% or 3%. However, Reliance Capital, Reliance Infra and RComm have corrected between 9-12% and Reliance Power has corrected by 6%. This means the larger the value of the stocks, the more corrections we see.

So one cannot simply take a fundamental call based on the face value. The marketcap of the whole group has eroded to below Rs 60,000 crore, which is definitely a cause of concern. Honestly, I am unable to take a call as to what could really be the trigger for such a big fall. There seems to be a serious problem in the way Reliance Capital has been correcting for a week or so. The market cap of the company is less than Rs 10,000 crore and even at such a low valuation, it has corrected by 12%. So there is definitely a cause of concern. I am worried for those who are invested in these stocks.

Q: Have you heard anything about margin calls getting triggered, particularly on some of the infrastructure names? Jaiprakash is down another 5%, IVRCL is down and even liquid stocks like TTML. Is there some technical problem in the market as well today?

A: We saw margin calls in the case of IVRCL, Lanco Infra , KS Oils , Karuturi Global , Reliance Infra and Reliance Media Works and some other stocks.

If you take the case of these infrastructure companies, the public float is 5% and the promoter stake is 73-74%. Institutions are holding a stake of 17-18%. So I don't think one can take a general call of a margin call getting triggered. That is happening in case of many stocks, but that rule cannot be applied generally.

I don't think that any special sector or special category of the stocks has been spared. So this again looks to be a general statement that this is pressure on account of margin call.

Q: So are you suggesting your clients to stay away or look at some picks? Fertilizers normally see a bit of a high during the monsoon and when policy initiatives are expected. Do you see any upsides to these set of stocks at all?

A: Firstly, I don't think that there is any point in for the traders to remain active in the market. Even with a stop loss of 1-2%, I don't think one can really take a call. On the first day of expiry, that too of an elongated series, if we have this kind of a fall, I don't think that there is any respite in any direction for the traders.

Coming specifically to the fertilizer stocks, I am still maintaining my positive view. But, one has to be selective. Just to give an example, if I need to choose between GSFC and Chambal fertilizers , I won't go for the Chambal fertilizer, even though the screen will suggest you to go for Chambal fertilizers and not for GSFC.

I take a fundamental view on all stocks, and I see value in this sector and these stocks. A general call on the market definitely looks good for investors with a 6-12 months time horizon. I again emphasize that one has to be selective, and should only pick quality stocks in this market. I don't think that there is any point on banking on groups which have even a shade of suspicion or bad history.

So one should be very choosy, because this is the time to reshuffle your portfolio and move to the frontliners, which are available at very good valuations. But I think one should only nibble in the front line quality stocks.

Q: Just to come to you on some of the heavyweights and the way they have got crunched down. Where does it stop for Reliance ?

A: I don't think that there is any respite or any positive news on the developments which have been happening because we have seen a technical short covering. There might be some buying interest because people were taking a call that Rs 750 looks to be its fair value. So buying got initiated there, and the share moved to Rs 760-765 levels. There is a carnage happening across the board and Reliance Industries is a soft stock. I won't say that it is as vulnerable as ADAG stocks, but there are definitely concerns.

One can put Reliance Industries in the same category as the banking stocks, where we have seen the confidence getting shaken. There is no renewed buying, no short covering or any positive news coming in from the company. So it will probably hold a level of Rs 700. However, institutional selling by hedge funds and ETFs could worsen things from here on.

Q: What are you advising clients at this point in time? Should they stay away from the market or come in and pick up front liners like Idea , SBI and Axis Bank at current prices?

A: One should definitely think of reshuffling the portfolio. Look at exiting the weak stocks, even if they have corrected by 50-60% in midcap and small cap. Frontliners are available at eroded value of 20-25%, so one can make the portfolio healthy.

Secondly, go with quality stocks. I definitely place Axis bank and SBI in that category. All along, I have been maintaining the view that Rs 1950 is a good level to enter SBI. It has now fallen to around Rs 1880-1875. It is the same case with Axis Bank. Anything below Rs 1000 looks quite interesting, and now its ruling closer to Rs 980.

So start nibbling in quality stocks with a 6 months time horizon. But, don't put all the money at one go; there has to be staggered buying.

Q: Apparently there is a ban now on Tumkur and Chitradurga as well and I think that they have asked for observations from the steel industry in terms of what kind of iron ore requirements are now present. How do you think companies like NMDC and Sesa Goa will read what the Supreme Court has had to say?

A: This is definitely negative news, but there is a disconnect between the industry. NMDC was allowed to produce one million tonne from its Bellary units. But if you see their average annual production in last 12 months, it has never exceeded more than 6 lakh tonne. So that is definitely seen positive.

With Tumkur and Chitradurga also getting banned, Sesa Goa will definitely be the worse affected; same with JSW Steel and Kalyani Steel . JSW Steel takes away 65-70% of the requirement of iron ore, so they are the biggest losers in this category.

But sometimes, I wonder that why NMDC has really taken a beating. In fact, this order seems to be in favour of the company as they will be able to ramp up their production by 40% for these particular mines and they will be able to get it sold easily and at a better rate. So the effect of all this is definitely negative for Sesa Goa and JSW Steel, but not for NMDC.

Q: Would you recommend that investors look something at all in the midcap and smallcap space?

A: Yes, in the capital goods, I will probably look at BHEL . If there is no FPO fear, I am finding the valuations quite attractive.

Cmall investors may like midcap stocks like Thermax , Cummins India and Swaraj Engines . Even in fertilizer space, GSFC looks interesting. Investors should look at those companies which are sitting on a cash balance of 10-15% of their market cap. They have no problem, they have the growth visibility and you can see their margins remaining intact. They may pause for a quarter or so, but it is not something I see happening in case of these companies.

If somebody can take a view of 6 months, then definitely selective buying can be made in these stocks.