See 10% upside in Indian mkt; Sensex at 18000-19000: Ambit

He is also hopeful of seeing 10% upside in Indian markets from current levels. However, Gubbi feels bank NPA and infrastructure issues are likely to cap the upside. "We would highlight that while this diesel price hike and the global macros coming behind it is positive but it doesn't move the needle much in terms of reducing the fiscal deficit on a sustained basis, nor even kick starting sustained investment cycle," clarified Gubbi. According to him, FDI clearances and more action from the government could further the market upmove.

After the price hike, oil marketing companies, particularly HPCL will be the biggest beneficiary, added Gubbi. Besides, investors can cash in on the moment and take around 10% profits in OMCs from the current levels, he advised. But, he cautions traders against exuberance and asks to be prepared for any surprise from the market.

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

Q: Your call has come through but what are you telling your clients now? Having told them to buy much earlier are you asking them to take profits or are you telling them there is a whole lot of upside from here on?

A: No I think there is still some way to go, however not really significant upside from these levels. We have been maintaining the 18-19000 target for the Sensex for the year end. We are getting close to that. It leaves about 5-10% at best from these levels.

Remember, while technically or flow wise the rally could go much longer because India in particular and Asia in general have been out of view, for some of the larger funds there could be some increased allocation which could push this through. But, fundamentally we would highlight that while this diesel price hike and the global macros coming behind it is positive but it doesn't move the needle much in terms of reducing the fiscal deficit on a sustained basis, nor even kick starting sustained investment cycle.

We point towards two-three concerns which would cap the upside from these levels. One is the bank NPA cycle which is perhaps still early and we are nowhere near the peak which could bring back funding challenges for an investment cycle to pick up. Secondly, in terms of the infrastructure issues, power and coal issues, there seems to be no easy answers. That is a critical element addressing some of the supply side challenges in the economy.
 
For a sustained pick up in investment cycle leading to broader growth in the economy, you would need some of these challenges to be addressed and there are no clear answers. We are entering a period of a series of state elections followed by the general elections in 2014. So it is unlikely that we will see many more such bold measures, perhaps an FDI in aviation, in retail, but beyond that it is unlikely that you will see significant measures or parliamentary action over the next 18 months.

We would still maintain that 19,000 top end, perhaps a return of irrational exuberance and risk on could take it north of 19,000 for a while. We would be selective in playing stocks and exit some of the weaker names on the back of these rallies.

Q: What would you do with the oil stocks now because they have gone up quite a bit, would you use this to exit or do you think something fundamental or structural has changed with the oil stocks?

A: Yes the OMCs and the upstream companies would be played definitely. OMCs definitely tend to gain on multiple levels. One is the reduction of the losses from the regulated fuel classes like diesel and LPG and also the elimination of losses on petrol. That is also a significant positive. There have been funding challenges also and they have been paying a lot of interest on the working capital requirements.

At multiple levels they stand to benefit. So I would think among the OMCs, particularly HPCL stands to gain disproportionately and that should rally for a while.

On the upstream companies however, while we do think that they stand to gain from this but, the upside could be limited.

Remember, the reduction in subsides on fuel is again not significant by this Rs 3.5-5 move by itself. Hence, some of the upstream OMCs, particularly ONGC , Oil India given that they are cash rich and also it is unlikely that a further diesel price hike will take place given the issues around the elections and the populist requirements, upstream oil companies would have to take a higher share of the subsidy burden through next year.

I would exit ONGC on the back of this rally, perhaps hold on to HPCL and IOCL for a while for another 5-10% upmove and then again take profits because the structural subsidy burden still remains unless and until we see a significant down move on crude.

Q: What about GAIL?

A: GAIL again would be in similar territory, GAIL benefits mostly from transmission volumes of gas within the domestic economy and there doesn’t seem to be any likely answers. We would be taking profits on GAIL as well.

Q: So you are saying that some interesting changes have happened but you would not get exuberant about the market from here on?

A: Not really, I won't but, cannot rule out the markets reacting the same way. Clearly, there is a strong tailwind coming from global macro with both the ECB and Fed acting and also there is still under allocation towards Asia and India which could mean flows could drive markets north of 19000. But fundamentally speaking some of these challenges remain. I would be cautious in some of the cyclical names.

Q: So your take would be that the best part of this rally has already played out?

A: I would assume so.