Mkt fall not yet over, monsoon can provide relief: Dalton

In the last few days, global investors have flocked into Japan and the US, leaving out India due to which domestic market witnessed severe fall. This has exposed the vulnerable side of the domestic market which cracks up even if foreign flows become marginally negative, believes UR Bhat, MD, Dalton Capital 

Dalton Capital was among the early birds to call the lows in the market which was plagued by high inflation, low GDP etc. But Bhat feels since the economy continues to surprise on the negative side, market trough is yet to come. He told CNBC-TV18 that probably the monsoon can give some short-term fillip, "otherwise the market does not seem to be poised for great recovery in the short run." Also read: Mkt close to near-term bottom; Bharti a good buy: PN Vijay Below is the verbatim transcript of his interview to CNBC-TV18 Q: It seems like Japan and US are attracting most of the capital these days. Markets like India are not quite the favourites with global investors.

A: It looks like that. Just a few days of marginal negative flows from Foreign Institutional Investors (FII) have caused quite some damage to the market. That shows the vulnerability of our Indian market to FII flows. After the Cyprus episode, things do not seem to be very good especially in Europe and with the German elections around the corner. The ability of Germany to support peripheral countries in Europe is very, very limited. The pump priming continues in Japan, US and also in Europe. However, the US market is on a mend, therefore most people seemed to be thinking that one can get better returns from the US rather than other markets. If one really sees the underperformance of the Indian market vis-à-vis the US year-to-date it is probably about 16-17 percent, which is very huge. So, India is not exactly the hot market. Lot of FII money as of now and the results are there for all of us to see. Indian market does not seem to be doing very well in the wake of marginal outflow of money over the last few days. Q: Are you feeling at all confident then that the market has made a floor for itself over here? Have you changed your targets for the market now?

A: Over the last couple of quarters we have been calling the lows in the market uneven in terms of the economic situation, whether it is GDP growth, inflation or twin deficits. However, the economy has been surprising us on the negative side for the last couple of quarters at least. So, we have been too early to call the trough in the market. There might be further pain to come, if the FII outflows continue for some more time. The 5500 is short-term support, but if there is no hope on the stalled projects, which is exactly the biggest problem as far as the Indian market is concerned. Also, with politics taking center stage, with the state elections and preparation to the federal election going ahead it looks like as if the economy is not exactly going to be center stage of the decision making as far as the government is concerned. So, that being the case with the March results not expected to be very good, not expected to cheer up the market it is just the monsoon that can probably give some short-term fillip to the market. Otherwise the market does not seem to be poised for great recovery in the short run. Q: What do you think worries FIIs more? This market is not showing signs of visible recovery economically speaking or are they apprehensive that given our Current Account Deficit (CAD) the rupee might actually go down to close to Rs 60 by the end of the year and that may takeaway whatever little gains they can make from the equity market per se?

A: There could be both. Whatever gains could be made out of the announcements of reform post September 2012 has already happened. Now it is time for some action and that action has not really been forthcoming to any significant degree. Plus the 6.7 percent CAD was a big negative surprise. Given the fact that exports are going nowhere it looks like as if the rupee is likely to be under some pressure. That is something actually putting off FIIs in a big way. In addition of course the slight risk-off trade on account of developments in Cyprus where for the first time bank depositors have lost money is something that is possibly a precursor of further pain in Europe. That is something that has put off risk as far as FIIs are concerned. India being a beneficiary of risk-on trade always has had some sort of flow that has come down a bit. That is one of the reasons why it is expected that India might not do very well as long as the Europe position continues to be as lacklustre as it is now. Q: Historically domestic insurance companies see their leanest patch between April and June. Do you fear we could be headed for some kind of technical crisis in terms of liquidity for the market where there is not that much buying, there is more selling from the FIIs incrementally and domestic hands are unable to even absorb that, let alone putting in more money into the market?

A: The ability of the domestic institutions to counteract any selling by FIIs is quite limited. In the past one had Unit Trust of India (UTI) and Life Insurance Corporation (LIC) doing this, but LIC has virtually been confined to be a depository of PSU stocks. They are selling most of the other stocks, so that they can buy more for the divestments by the government. Therefore LIC as a force which can absorb FII selling is not really of any great significance now. The ability of domestic institutions to sustain the market if there is concentrated FII selling is very limited. That is why the market has become extremely vulnerable to FII flows. Even small USD 300-400 million of outflow can cause a huge dent to the market and that is going to be the order of the day going forward. Q: If we do hold 5500 for a bit as you were suggesting what kind of an upside do you see for the market in the near-term in the event of some degree of stabilisation or even a pullback?

A: About 5750 or so is the top as far as the current situation is concerned. I do not think the market can really break that in a big way. I think it will be probably trading in range between 5500-5750 given the current circumstances. For example, the government shows some dramatic will to reform, if the government does solve the problem of the stalled projects once in for all and if Europe stabilises a bit it is possible that 5750 could be broken. However, given the current circumstances that is probably the range. _PAGEBREAK_ Q: Aside from IT the only other strong spot for the market has been private sector banking. Any fears that there maybe wrinkles or cracks on the earnings performance there this quarter?

A: Private sector banking has really given a very good account of itself. They continue to do so, but I think the problem with the most banking is about the stalled projects. The reflection of the stalled projects is going to be there in the banking system. It maybe quite largely in the public sector domain, but even the private sector banks has financed quite a lot of these stalled projects. If the stalled projects issue is not sorted out the Non-Performing Asset (NPA) position could worsen even there over probably the next quarter or two. So, there are certainly some problems, especially in the large private sector banks, but as of now it looks like as if for this quarter and next quarter things look very good as far as private sector banks continue. At some stage the problems with the electricity issues, with power, roads and things like that needed to be solved by the government before the federal elections. If that were to happen, private sector banks will continue to show very good performance. Q: How do you approach the IT space now? It has been such a big outperformer but, over the last few days Infosys has been seeing some strain, it has come down to about Rs 2,800 again. Is there a possibility of disappointment there or you are sanguine that they will hold out the optimism that stock prices have been reflecting for the last one month?

A: Infosys is always a trailblazer for the quarterly results. Therefore whatever is going to come on Friday is going to be very keenly watched. It does not look like as if they are going to have a huge positive surprise. The surprise that came last quarter that was the one that really turned around, the stock performance was largely on account of guiding very low and delivering slightly better than that. In terms of the large IT stocks probably the other stocks had done much better than Infosys, but Infosys did the guidance much better. Therefore they are not a great wicket to perform some miracle, but it will be probably around these levels. I do not expect a dramatically good performance by Infosys. However, they managed the market very well in terms of expectations and guidance and that is what would continue in Friday. Q: Next week will be a big one for earnings season. There is a bunch of the IT guys, but Reliance reports on the 16th this time, pretty early in earnings season. How are you feeling about what some of these heavyweights like Reliance can do for the market?

A: These are the ones which can really sense sentiment at least in the short-term, because typically the better results come earlier. So, therefore if Reliance is coming out with results so early, there must be some good reason for that. I am sure that can change sentiment in the short-term. However, it has got to be followed up by further action on the economy. If that happens, it can sustain for some more time. One result cannot really change the situation as far as the market is concerned dramatically, but short-term sustenance of the market at these levels is quite possible. Q: Once we start wading through this earnings season we get into the tricky month of May. In the past sometimes it has not been the best months for the markets. Do you think markets are at risk this May given just the position of factors or do you think most of the correction has already happened ahead of that cruel month?

A: Quite some correction has happened. The biggest catalyst for the market either way would be the FII flows. The FII flows would be influenced by events in Europe. If the Cyprus disease spreads around a bit more to the peripheral European countries, that is something that can cause quite a risk-off trade and can influence the Indian market quite dramatically. In addition, in May one have some of the state election results coming out so that might have some impact on the potential economic and public policymaking situation in India. So, that could be the other one, plus of course the first expectations from the Indian monsoon would also start making rounds in mid to late May. These things can really change the sentiment a bit, but I think the big one would be FII flows. As a result of the emerging situation in Europe that can probably change sentiment dramatically in May. Q: The only sector that has seen some policy impetus in the last couple of weeks is sugar. How would you approach some of those stocks?

A: These stocks have their ups and downs based on the government policy issues, but if the decontrol has happened hereafter the sugar companies will really be judged on fundamentals, not on potential policy changes. Therefore, it will be like any other industry. People will take a view on the total sugar production and the potential demand and the international prices. Based on that they would probably trade like any other sector. They are at sort of more or less equilibrium. Things do not seemed to be very good for them except that two policy changes have given a one-time fillip, but after that it is just business as usual.