Best case scenario? 5000 on the Nifty, says Dilip Bhat

Over the past few days, the market seems to be shrugging off any bad news and moving higher, some what defying gravity. The Nifty posted strong gains on Tuesday to surge past the 5,350 barrier, and today’s consolidation did little to hurt its position.

However, questions have started to rise on the street as to the sustainability of the market at current levels. According to Dilip Bhat of Prabhudas Lilladher, it is best for the market to move back towards the 5000 mark, because valuations and fundamentals have not yet caught up to the market. In an interview to CNBC-TV18, Bhat said that domestic macro factors are still negative, and therefore will not support fundamentals. “While they stocks may have hit bottom in quite a few cases, I still think that it maybe a little too premature to really call it a bottom to this market and possibly start buying,” he said. However, for the short-term, Bhat believes strong foreign inflow can take the Nifty to 5,400 levels. Below is an edited transcript of his interview with Sonia Shenoy and Ekta Batra. Q: It’s flat for the index, but one thing that stands out is the way Reliance has performed. What kind of target would you have on the stock and would you have a recommendation there? A: I think Reliance has been in such a groove for such a long time, so it has just made an effort to break out of that. But important I think is the exchange traded money which is really coming into the market which is probably driving some of the index stocks which is what is very obvious. So I would rather see from that point of view. But otherwise I think on the performance front there is nothing much which is really happening on the Reliance. So I would still be a little circumspect about Reliance Industries even from the current level and would not really be in a hurry to buy that stock. Q: We have approached a congestion zone at 5350-5400 mark. From hereon, do you think the market has the strength to climb higher and breakout of the range or will it be unable to cross this hump? A: I think the market is very comfortable at the moment because of the kind of the FII money coming in. Riding on that, the market is making an effort to breakout. So if more money comes in, I think it will definitely seek to go up to 5400-5500. But the economic situation, GDP growth and IIP numbers don’t do anything much to support corporate earnings. Unless and until they don’t do that, I don’t think valuations look attractive or very compelling. While they stocks may have hit bottom in quite a few cases, I still think that it maybe a little too premature to really call it a bottom to this market and possibly start buying. Maybe if you are a three year or four year investor it’s a different ball game altogether. But I would still not be comfortable because I think levels beyond 5400-5500 aren’t really sustainable. My own feeling is that it may settle down around 5000 levels, and that would really be the best case scenario for the market. Going below 5000 is also not something which is impossible given the overall inclement domestic as well as international scenario. Q: After looking at the earnings seasons, which has been the best pick out of the lot in terms of either sectors or stocks, something that can see a sustainable earnings momentum in the next couple of quarters? A: As far as the overall picture is concerned, it has been a very mixed bag. Pharma has seen a very secular trend, in the sense that all of them have done pretty well. But other sectors have been a mixed bag. I would say that on an overall basis it would still be a pick and chose market. In the pharma sector I would still root for something like Ranbaxy, Cadila or Lupin and slightly lower down may be Dishman Pharma probably would look good. Apart from that, it would still be little bit of defensives like Coal India, HDFC or Power Grid. May be these are some of the names that really come to my mind at the moment from the results that have come out. _PAGEBREAK_ Q: Would you buy ITC on this dip? A: I think ITC prima facie is a stock which everyone will be having and should be having in their core portfolio. Maybe on the short-term there is some room for correction, so maybe I will still wait for a small correction to happen before I really decide to buy on a long-term basis. But yes, ITC should be bought on the dips, and there is no doubt on this because the core business continues to show a very solid revenue growth. Also, the cash flow that the company is generating is really very good at the moment with a very decent return on equity of around 35-37%. So I think you should wait for a little dip to happen and possibly once again recommend this stock to buy. Q: Do you like Maruti at this price, would you buy it? A: No, not really at the moment. Of course there will be positive reaction to the reopening of the plant, but I think the labor trouble at Maruti has happened too frequently. I think there will be some amount of derating that possibly could still happen in this particular stock. Though Maruti is really very well placed amongst all the car companies, particularly in the diesel segment, unfortunately everything has gone for a toss because of the labour troubles. What I would do is wait for the stock to correct to around Rs 1,000 levels, which is where I would be a little more comfortable. Otherwise, I think some of these factors will continue to haunt Maruti and has already taken the sheen off the company. Q: What would you do with something like SKS Microfinance now? They have trimmed their losses this time and the stock has been moving quite well. A: In stocks like this, at best you can just have a short term kind of play. The atmosphere in which we are at the moment, the kind of beating the economy is taking and the conditions of the people, it will be very difficult to imagine that the stock will be free of any political interference. So that will continue to haunt the stock for sometime to come. Unless and until we have good economic growth, I think these kinds of stocks can be played only on a short term basis. Q: Do you see more upside in IDFC? A: Based on what I have heard today from the management, it is very apparent that may be the worst is over for the stock. So possibly we can look for some kind of better times. The only problem which I see in this particular stock is it doesn’t have any great RoEs to support for any sustainable rise beyond a 10-15% run up. So one should play for 10-15% that is what it appears at the moment.