Oil & gas, capital goods to disappoint in Q1: Rada Advisors

Looking at the choppy markets at this point of time, Nitin Raheja, CIO of Rada Advisors believes the market is trading in a range. With the macros not looking too good, he does not expect the scenario to change dramatically overnight. However, he feels companies who are meeting the challenges head on, names like TCS, MindTree, CMC or HDFC Bank have clearly stood out as gainers.

Terming it a 'stock picker's market', Raheja said companies who do well despite the broader market conditions stand a good chance of being rewarded. From an investors' point of view, he is hopeful about midcap IT stocks like CMC and MindTree.
Talking about sectors that are likely to disappoint in their Q1 earnings, Raheja picks the capital goods and engineering companies, oil and gas majors along with the public sector banks. Below is the edited transcript of the interview on CNBC-TV18. Q: We are starting with macros today, we have politics on Thursday and then we have RIL on Friday. We have a couple of big banks such as Axis coming out with earnings, give us a sense in terms of how exactly do you expect the markets to take cue from and how do you expect them to move over this week?
A: My view is that markets are trading in a range at this point of time, with the undercurrent being a little firm because we are seeing individual stocks and individual numbers doing well. Given the fact that the macros are not looking good and I don't think there is going to be anything which is going to dramatically change overnight. This is going to be a market which will trade in a range.
But what we are clearly seeing is that there are companies who are meeting some of these challenges head on and doing better. A classic case in point was something that we saw last week with Infosys and TCS. Today we saw MindTree. We have also seen CMC and HDFC Bank on the banking side.
I think this is going to be a stock picker's market. This is going to be a market which is going to reward companies who are able to do well despite the broad market scenario. I think one should focus on bottom-up, as far as these markets go. Q: The broad trend has been important, we have got this crude advantage which now has flittered away at least partly after the 10-15% rise we have seen in the past two-three weeks. Now all eyes ofcourse are on whether any decent subsidy control will come after the presidential poll. If indeed it were not to come in the next two weeks, do you think we are going to see some seminal damage for the markets?
A: Given the way the markets have behaved even prior to all these expectations building up, I think we have bottomed out at 4,750-4,850. We are going into some sort of a range mechanism now where you see long-term consolidation starting to take place. Now it is almost the fifth year since the peak we hit in 2008.
I think this is that consolidation year, in a broader eight years cycle that Indian markets have seen for almost twenty years. If some of these expected changes do not happen, you could see the markets reacting and correcting. But I think that even at that point of time, you will continue to find those islands of prosperity which is where stock investors should focus on.
_PAGEBREAK_ Q: You were speaking about the bottom up approach, do you think there is more juice left in TCS mistaking the good numbers, HDFC Bank or TCS whichever the ones you pick, is there any juice left?
A: Probably they are pretty well priced given their earnings and numbers as far as some of these larger names are concerned. They would probably act as defensive bets in your portfolio. I think we see some juice in midcap IT names like CMC which declared the numbers or MindTree and so on. Q: In terms of earnings season as a whole, what would you be most positive on in terms of positive and negative earnings?
A: We believe that some of the midcap IT space is going to declare good numbers. We think some of the private banking space is going to declare good numbers. These are the two sectors that we are much more positive on.
As far as negative is concerned, all the companies which are sensitive to interest rate, basically the capital goods and the engineering companies, those companies will continue to disappoint by and large. I think oil and gas majors would probably disappoint. Those would be the sectors which will be weak. Public sector banks I think will probably be a little bit of a disappointment. Q: You spoke about oil and gas and we have Reliance numbers coming on July 20. What is your sense, when does this long stupor that the stock has got into get shaken off, this quarter, next quarter or till gas output goes to zero, what really will shake it up?
A: I think people have got so used to Reliance over the years being a growth stock, investors are clearly looking for that next growth trigger. Unfortunately, in the shorter term, we do not see any such large trigger coming in Reliance. It's very unusual for a company like Reliance which has been an aggressive growth player to build up cash in the balance sheet.
It doesn't really have a big business trigger happening possibly on the oil and gas front. Unfortunately, the news is not good. People might start looking at Reliance as a value play at some point of time and probably park their money and play short term upsides. But I really don't see a big breakout growth trigger as far as Reliance is concerned. Q: We have the inflation figures, just give us a sense in terms of how important on market moving would it be because we saw the IIP figures come and go, there wasn't a much of a reaction. Do you think that the inflation figures would stir up something as well as what happens on July 31? Would a rate cut make a big difference?
A: I don't think people are expecting a lot from inflation. I don't think you are really going to see some dramatic positive news on the inflation front happening immediately. With the monsoons clearly having failed, at least till this point of time and food inflation going ahead is going to be a concern. I think for the RBI, it's going to be a very tough job to take a call as far as the rate hike is concerned.
If you go by what the Governor has been saying in terms of what he now expects the government to do, clearly he is saying that it's very difficult for him. However, who knows, under political pressure and the kind of pressure that the RBI Governor is today facing from all sections of the economy and politics is not funny. I really wouldn't want to be in his place.