See Nifty rangebound; won't buy Infosys: Sampriti Capital

In an interview to CNBC-TV18, Sandeep J Shah, chief executive officer, Sampriti Capital gives his expectations on the market's performance. Shah expects the Nifty to be rangebound. 

"I think the momentum has been lacking in the market now and the breadth is also disappointing. However, we are still in the early stages of the earning season and there is always a chance of some positive surprises here which might hold the market," he says. Shah expects the market to be between 5800- 6000.

After Infosys' unexpected results on Friday, Shah says that the rally was largely driven by short covering. However, Shah says he will not buy Infosys at the current levels.

Below is the edited transcript of Shah's interview to CNBC-TV18. Q: Is the market looking a bit sluggish to you over the last few days? With the way the  mid-caps are moving, do you think the market could even be tiring out?
A: Yes. I think the momentum has been lacking in the market now and the breadth is also disappointing. However, we are still in the early stages of the earning season and there is always a chance of some positive surprises here which might hold the market. I have mentioned the diminishing incremental impact of reform and even though the government has continued to make positive news, there have not been full-fledged reform measures that the market would be happy with. For example, the cabinet committee on investment. That is a watered-down version of what was originally planned, given that they do not have the powers to actually turn back the decision of the ministries also. Though we do have positive news in the market, like gross fixed capital formation seems to be on the uptick, some public sector undertaking (PSU) spending is driving that and the PSU sector spending, is ofcourse driven by the government. There are anecdotal evidences of brownfield expansion, but broadly speaking, for the sector as whole there still doesn’t seem to be any revival in the investment climate.
Last year, one of the sectors that was showing growth, was the road sector. This year, we are having fewer road projects being awarded but we are also having companies going back on the projects that they have committed to because of lack of environmental clearances and other issues on land acquisition. So, given this kind of environment, it is perhaps not surprising that the market has failed to breakout of 6,000. It has actually been trading in my target range of 5,800 to 6,000 for almost all of December except for a temporary move to 6,050 where we had some peaking of optimism given the resolution of the fiscal cliff.
However, it is interesting to highlight that the resolution of the fiscal cliff happened in January, instead of 2012. The point is that the market hardly reacted and the market kept expecting that it would get resolved at some point of time and it got resolved on January 1. We have time window till February 15 for the market to rally and see if it can breakout above 6,000. However, given the fact that it is quite likely that as far as the US market is concerned, they are unlikely to get unusually perturbed over the debt ceiling and the market will most likely expect that this will get resolved even if it is at the 12+1 hour.
I would like to differentiate a bull run from a bull market even though it might seem like jargon. Bull runs are market wherein the run lasts for about 15 months or so and are not much longer. We have seen a couple of those in the last two years and also from ’92 to ’96 where the market rally was an institutional participation.
There are some positive noises in the economy or on the reform side but there isn’t retail participation. The vast majority of small-caps or even a significant amount of mid-caps do not participate and we are still in that kind of a market. So, that is how I would describe the market at this stage. Q: What would that translate into terms of downside risk for the market in the near term? Do you think we will get away with 5-7 percent cut? Or do you think it could be worse?
A: Look at the current environment, most tail-end risks atleast in Europe have been taken out by Mario Draghi's promise to buy as much bonds as required or do whatever is needed. China seems to be showing signs of bottoming out and some growth seems to be coming there. The US fiscal resolution will take out 0.75 percent of US gross domestic product (GDP) but given that it is a known number the market will factor that and we are still to see spending cuts in the US. All these reasons will again probably take off another 0.5 percent of US GDP. So, you might see some sort of minor correction around that time or post Budget which is a possibility because most market participants are already beginning to brace themselves up for a tough Budget.
Higher taxes will mean that consumption will get affected. Whether it is higher taxes for people with higher income or a rollback of some of the excise concessions that happened in 2007-08, eitherway you look at it, there will be a slowdown in consumption. Unless we see a revival in the investment climate, the current incipient recovery in the economic growth that we are seeing would get curtailed. I don’t mean that it will get reversed, but it will get curtailed. So, in this environment, the market is evenly poised at this stage.
If we see a good Budget with economic reform; some mild tax increases, but not too much, the government focusing on direct cash transfers rather than incremental additions to social welfare schemes combined by a resolution to the debt ceiling and the US fiscal cliff, then the upside could even be 6400-6600 but the downside could also be 5200-5400.
I think the market is fairly poised at this stage for this year. One very positive thing for India from a longer term perspective is that we have never had so many chief ministers who have actually been showing performance, showing governance and have been focusing on economic growth and are getting re-elected. At the margin, it is also positive that the Congress actually won the Himachal Pradesh election inspite of a diesel price hike. Ofcourse, state issues are different from General Elections and central issues but having said that, inspite of the diesel price hike, we didn’t see a huge momentum against the Congress. It could have still affected them at the state level.
What’s happening in Indian politics from that perspective is positive and the people are saying that good economics means that money does trickle down to the lower strata of society and that also helps in generating votes and it’s not just populism. So, I think from a longer term perspective that’s something that gives me a lot of comfort. Q: Are you going to buy Infosys at Rs 2,700 plus?
A: No, not at all. I am really happy that Infosys has finally delivered. It’s not like they have done 8-10% sequential growth of a very bad quarter that is. Even if Infosys’ quarterly results this time is in the top quartile, I think, the management commentary remains cautious. They remain cautiously optimistic and that’s the best way that I would describe my view that of Infosys.
What we have significantly seen is a lot of short covering given the undue and excessive pessimism that was there across investors in the media and everywhere else. From that perspective, I think it seems to be have been a significantly technical rebound. However, there are some positives in the sense that the part of Infosys’ business which has really grown is the non-commodity part of the business, which is essentially their consulting and systems aggression as well as their platforms and services and products.
That’s the part of the business which has really actually shown some growth. So that’s actually comforting. Last quarter they had some price cuts but this time around, they have managed to show a marginal price increase, but that’s largely because of change in product mix. However, that’s also a positive. You don’t necessarily have to see quarterly increase in billing rates per person but even if your mix of business improves positively, even if it’s partly because of loadstone, I think that’s still a positive.
At this stage, Infosys’ valuations currently are 17 times. Next year, unless they guide for close to 15% growth, I am not too sure I would actually look at Infosys unless the stock were to correct 10-15%. At that point of time, it could be interesting. That’s not to say it is going to get there. So, I think it’s a good quarter but as they say - forget one swallow, two swallows don't make a summer.
We need atleast two quarters of reasonable growth from Infosys to get a sense that things are back on the mend. It is also important to highlight that one would have expected some recovery in any case, given the fact that the fiscal cliff has been partly resolved. So, that would lead to a bounce back in IT spending of a lot of corporates who are actually going slow. There is cautious optimism but I wouldn’t want to chase this stock for sure.