Prabhudas Lilladher sees softer October on drying FII flows

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After the 10% rally that the markets have enjoyed in the last one month, most experts are divided on the road ahead. Apurva Shah vice president - head of research at Prabhudas Lilladher expects a softer October as the September rally was great. "FII flows might dry up in the coming months. Also the rupee is slightly overstretched. And otherwise too October is known to be a tricky month beacuse of the seasonal factor," he reasons.

Talking specifically about his reading of certain sectors and stocks to CNBC-TV18's managing editor Udayan Mukherjee, Shah says, for the next three-four months, we are going to see a lot of strength in the entire consumer-related space.

He is also bullish on the media sector and likes stocks including Sun TV  and Zee . And, he continues to be positive on Voltas , IVRCL , Tata Steel and India Infoline .

Below is a verbatim transcript. Also watch the accompanying video.

Q: What are your expectations for October after the tear away rally in September?

A: I think we have had one of the best expiries that we can possibly think of in September. October is generally a soft month in terms of flows and I expect that after this fantastic September, we should see a somewhat softer October coming up now.

Q: What would be the trigger for that softness? Do you think flows will dry up, flows will get absorbed by IPOs, what other reason can you think of aside of near-term outperformance for this correction?

A: I think it is basically linked to flows. This entire rally that we have seen is essentially because of very strong FII flows. Apart from this there is a seasonal factor in October. There is also the fact that the entire currency outlook is now looking slightly on the overstretched side. At Rs 44.5 we are definitely on the overstretched side.

Overall the odds of it being a soft month are higher than a continuation of the rally. Though I do think that as we go back into November-December season which is normally one of the best times as far as markets are concerned you could once again go into a new high territory.

Q: How much of a draw down or a pullback are you expecting in October?

A: It is hard to say whether you will see any correction or not. I think you will see some bit of softness and maybe around these levels or around 4 or 5% lower. My general sense is that we are not expecting very strong continuing upside after September in the coming month now.

Q: How are you oriented between largecaps and midcaps now given expectations of flows?

A: The bias still remains towards the largecap even though there is a relatively higher value now available in the midcaps. We are not looking at it in terms of largecaps or midcaps. It is a stock specific and sector specific call. For the next three-four months, my sense is we are going to see a lot of strength in the entire consumer related space.

The reports that we hear from the ground are this entire festival season spending is turning out to be strong. So sectors like media, auto or even the other durables and stables, this whole space is looking very interesting for the next three-four months.

Q: Any changes you have made to your model portfolio in positioning yourself to ride this move?

A: The change that we are making is related to one media stock. You have seen fantastic performance from Sun TV and it is still continuing partly because of the overall positive trend that is there and is expected in the media space. But mainly because of the movie that got release today.

Zee has underperformed relatively over the last six-12 months. We believe that this whole spending season is likely to be positive for Zee as it is likely to be for many other media companies. It is offering relative value at Rs 295-300 levels. It is looking poised for a 10-15% run from here.

Q: Are you staying with your winners in your portfolio like India Infoline and Voltas , both those stocks are delivering returns?

A: Yes. India Infoline there is a still a lot of room for upside. Voltas, perhaps lesser so now, because from a valuation perspective it is in the top quartile. But we will still stick to it. The underline story is still stronger. There is no saying what the estimates could change in the next couple of quarters. India Infoline even on current estimates there is adequate upside.

Q: Tata Steel has been a big performer in September. Do you see this run continuing. Is there still value left?

A: Our analyst is quite positive on the steel space in general and Tata Steel in particular. We will leave it in our model portfolio at this point of time. After this run up it is possible that you may not get similar returns now in the coming months.

Q: You have IVRCL in your model portfolio but that that is still not performing. Do you think it might continue to be a laggard?

A: Well it is possible. For one more quarter it is likely to be a laggard. The overall longer term story is good so we will leave it in our model portfolio. But in the near-term you are not going to see any material upside in IVRCL especially because the quarterly season, the earning season is not likely to be good for the construction space in general. Not only because of seasonal factors but again reports on the ground suggest that the execution has not been all that good. Do not expect much over the next few months from IVRCL.