See downside on Nifty capped at 5000-5200: Sampriti Cap

Since 4,700 on the Nifty, Sandeep Shah, CEO, Sampriti Capital had an upside target of 5,400-5,600. “We didn’t really touch 5,400, but we almost went there and we have corrected from there,” he says.

He tells CNBC-TV18 that what has happened is that global headwinds have started building up with a lot of domestic events also slowly shaping up. “Right now of course we are in a state of pregnant expectations and we haven’t really seen delivery yet. I continue to expect that we will see a diesel price hike somewhere between the presidential elections and the next session of Parliament, urea could also happen but that’s trickier,” he adds.
In this environment, he feels the downside is probably 5,000-5,200 while the upside remains 5,400-5,600. He says it’s important to remember that in this rally from 4,700 onwards, India has actually started outperforming whereas India was actually underperforming and one of the reasons that has led to that is the fact that foreigners who were seriously underweight India are getting closer to a neutral position but we are far away from an overweight position as far as foreigners are concerned.
Shah finds that every USD 10 reduction in crude leads to a 0.3% cut in our fiscal deficit and 0.2% cut in our current account deficit provided the rupee remains stable. On commodities, Shah feels, it will continue to correct and is quite likely that globally markets will continue to underperform and India may outperform as long as we see the government taking measures to ensure that coal availability is there, that environment clearances are happening, that they try and facilitate land acquisition, clear FDI proposals. “As long as that happens, there is a case for India continuing to outperform and that we don’t a sell-off below 5,000.” Below is an edited transcript of his interview. Q: A word on Tata Consultancy Services (TCS)? How are you approaching the IT bunch now?
A: Last time after Infosys’ results, I had said that Infosys is off my investment radar screen even though it is a great company and our top picks would be TCS and HCL Technologies which is the current consensus as well. I think TCS has reported a good set of numbers but it is also important to remember that they have seen a 1% price decline. I think pricing is going to be a key challenge for most companies even though for TCS it has only been a 1% decline.
I think the volume growth has been 5% which is a fairly good number because 1% they have lost because of cross currency. The fact that they are able to scale up the business, they are growing in most geographies, they are growing across verticals, that is a fairly good sign. TCS had some trouble a few years back; they got over it, cut their prices but now their margins are in-line with Infosys as well and I think there is a case that Infosys’ margins may fall off as they need to continue cutting prices. So TCS will continue to remain the top pick but it is not a stock that you can jump and buy because headwinds continue whether it is in Europe or the US. Globally, growth is a very serious issue and you are going to see regulatory action there. So TCS would remain the top pick but it is a stock you want to buy on weakness.
I think you would want to wait for HCL Technologies’ results but at the same point of time, the only thing that I would like to add on as far as Infosys is concerned is that the price is back to where it was in 2008 and the earnings are higher. The point is that Infosys has finally started taking price cuts and focusing on volume, they are talking about 8-10% volume growth for this year, which is a reasonable growth. It is still lower than what NASSCOM is forecasting. Infosys is in the middle of a transformation. I think Infosys is now finally getting to a price where it is back on my investment radar screen but I am in no rush to buy it there. As far as the mid-sized companies are concerned, it is very difficult to jump in and buy some of the mid-sized companies when the largecaps are facing some amount of headwinds. So TCS’ results are good but they are not great.
_PAGEBREAK_ Q: How do you approach some of the rate sensitives now especially the banks both in terms of what you have seen on numbers and what kind of performance you think banks can give for the second half?
A: We have perhaps among the major results just seen IndusInd Bank and HDFC and they have largely been in the long predictable lines. There were some headwinds in terms of lower CASA and margins coming off and that is a possibility that we might see in some of the other banks as well but what was very encouraging was IndusInd giving an outlook saying that margins have perhaps bottomed out and are likely to pick up from here.
To that extent, you would expect that perhaps even ROEs might follow suit and if CASA is also going to be picked up then that is fairly positive news. So nothing has changed, the view on the banking sector has been the same for the last one year or so. We continue to remain positive on the private sector space, be willing to buy a few old generation private sector banks and not just the new generation private sector banks.
As for the PSU banks, we continue to look at them essentially as trading plays when they get deeply oversold, you buy them because fears of NPAs get over exaggerated but at the same point of time, the risk of NPAs still lurks out there in the environment and it is not as though margins have bottomed out either. So nothing has changed.
So you don’t buy PSU banks at all if after a market rally, if you want to buy them, you wait for some bad news, you wait for some poor results or you wait for some poor inflation numbers before you do that or you wait for a disappointment from the credit policy. But it is important to keep in mind that PSU banks will remain at least a trading play because we are looking at 50-75 bps into rate cuts this year.
The biggest beta that you get from an interest rate cut is the PSU banking space, not just because it impacts their government securities portfolio but also because lower interest rates means that in some sense they get more competitive because they are more focused on working capital and so on. Q: What is your expectation from the market from the next quarter or so? Do you think the probability of it grinding to a 5,000 to 5,400-5,500 kind of range is high?
A: It really depends on the speed and the velocity with which the market moves which also is contingent upon the kind of newsflow we have. If we have the government doing one thing and going back on another, but still seeming to move forward then this kind of a grind is possible, but if you get into a situation where you find that in spite of all expectations, all expectations are belied, there is no diesel price hike, there is a legislative logjam all over again then you could even perhaps go below 5,000, but that’s not my base case scenario.
I think it’s quite likely that as Europe is muddling through its problems, India also continues to muddle through its problems. I still believe that the worst is behind us in terms of the policy paralysis, something I have kept repeating often. But if we get to 5,000 and if we have a QE3 and we find that the ECB again starts loosening policy then you might even open up far bigger upsides than that.
But we will really have to wait for the newsflow and how fast it happens really depends on the velocity of newsflow or the velocity of whether we see a 50 bps interest rate cut for example. If you see a 50 bps interest rate cut from the RBI then that might open up the upsides even above 5,600. The time prior to the last credit policy, the RBI shocked the market positively by having a 50 bps interest rate cut and remember that there are two main credit policy events.
That’s when the RBI always consults the government and after the last credit policy announcement when we had no change, the Finance Minister said that the government was not consulted and this time around the government will be consulted. I agree that the economic data doesn’t really seem to be nudging the RBI towards further interest rate cuts, but it’s quite likely that the government will be able to do their bit of nudging. So I am hoping for at least a 25 bps interest rate cut. But once again the recent economic data doesn’t seem to favour that. But at this stage perhaps it’s a bit of a hope now.