Budget 2013: Bet on oil; brace for EU, US correction, says expert

Amit Dalal of Tata Investment explains, in an analysis on CNBC-TV18, that the oil and gas sector over a 12-to-18-month view is a lucrative investment option on widespread consensus of the need to reduce then subsidy burden and the increased possibility of a rise after prices remaining at a constant for a considerable period of time. He advises investors to brace for a correction in the US and European markets which have posted a continued rise of 10 percent since 2011.

Rahul Mohindar of Viratechindia.com adds that the market in the February series is going to be more of a grind. Mohindar opines that the market is tired at 6,100 as evinced by the strong level of resistance. Even overseas, the analyst adds that at the Dow is facing  strong levels of resistance at 14,000. "For the immediate short-term or the February futures trade, the first target I would keep in mind is 5,930-5,940 on the downside. So, I think that’s where the Nifty futures are headed for. There might probably be some sporadic upsides within the technology segment, so I think that could be a sector of some interest."

Manoj Murlidhar of IIFL PReMIA offers his perspective on the initial indications regarding the February series and the stocks he is keen on purely for the trading week in the next week to come. "In the expiry on Thursday, the open interest in Nifty is almost close to an eight-month low. The reason for that is the buying of 17 points on the VWAP, and selling in the broader market. The most important part is these scrips which had open interest were left to be rolled into this month’s contract."

"And it is these stocks that are going up. So we are trying to look at the average pricing of the cash-based delivery stocks and the sectors that have been bought. So it is possible these sectors might have some positive inclination to what the Budget might bring in. Contrary to majority analysts’ view, we feel that infrastructure and power are the two sectors which will witness renewed buying not only in the cash market but on the derivative side. I feel it might have positive implications."

"The quantum or the strength of put writing is in 5700 because that is almost 13 lakh followed by 5,800. So I would still go with a 5,800-put option which is being written as a base and is somewhere close to 6,100. So I think 5,800 to 6100 should be the range for Nifty for February."

Below is the edited transcript of Amit Dalal’s analysis on CNBC-TV18

Q: What do you make of appetite for the Oil India offer-for-sale (OFS) and how do you play the entire oil and gas segment with the Oil and Natural Gas Corporation (ONGC) rallying about 25 percent in the last one month. Where would you put your money?

A: Given the fact that the government has announced a policy which is definitely in favour of the reliance of these companies on the subsidy element going down, one of course hopes that the particular policy of hike in fuel prices by 40 or 50 paise per month that has been announced will continue to be implemented. The re-rating of these stocks may even continue going forward.

Q: Do you think it is advisable to put in fresh investment into the oil and gas sector? In the January series there was quite a bit of price appreciation.

A: Oil and Natural Gas Corporation (ONGC) with this appreciation of perhaps 10-15 percent from the level of Rs 280 is not such a bad investment. Oil India even at this price is an investment that investors should definitely consider. Going forward, over a 12-to-18-month view, there are two reasons to invest. The consensus that the government subsidy cannot be sustained has begun to gain ground.

The success of this policy being implemented is the reason I would put my money on that occurrence to a considerable extent. Secondly, oil prices have remained constant for a long time and there is a good chance that perhaps the oil segment may act favourably in the future with the growth in GDP getting little better in the world.

There is lot of speculation that oil has perhaps moved up far greater than it should have and there could be a correction in the price of oil. For those two reasons, I would definitely invest into the oil sector.

Q: What about the market? Are you slightly cautious at these levels on the Index or do you think the run will continue to be smooth on the upside?

A: The upside is limited as much as the Budget may perhaps spell out something very constructive because the government especially, the finance ministry is very keen to maintain the momentum on growth and continued boost in levels of  confidence for equity investors and entrepreneurs. However on its own, the market have perhaps priced-in the trough being a thing of the past, but it also started pricing in a slightly higher improvement in the overall economy.

I think in next quarter there might be some disappointment because the ground reality of companies, even those in the FMCG segment, is not very positive. There is a marked slowdown and there is no real change in the policies for implementation of projects. So, entrepreneurs aren’t ready to go back to the drawing board for implementation of their capex plans. I think the next leg of a rally will be difficult to capture by the market. I remain cautious henceforth.

Q: What is your outlook on the government granting access to 39 offshore areas including KG-D6? We have seen the way Reliance Industries gained last week and now it is up about 1 percent. How much of an upside would you expect to see on the back of this news?

A: That is very difficult to say. There is really a lot more in terms of time and the kind of announcements Reliance would make if something like this happened. The two companies that threw up a positive surprise this month in results were Infosys and Reliance from the large group of companies. Regarding Reliance, I think the government is coming to a consensus view that gas prices need to be revised but by how remains the question.

Globally, the demand for liquefied natural gas (LNG) has become such that there is no recourse for India, but to reconsider the price at which we are manufacturing gas. All these factors taken together with the fact that Reliance has substantial earnings visibility, makes Reliance an investment which would continue to offer positive returns.

Q: What did you make of the results that Bharat Heavy Electricals Ltd (BHEL) posted and how many more quarters of loss do you expect a few of these capital-good stocks like BHEL and Crompton Greaves to suffer?

A: To differentiate the two, Crompton suffers more from its overseas acquisitions and overseas exposure that it has. Its standalone perhaps was not as good as it was last year but its consolidated was even worse. BHEL will continue to suffer for a while. Its order book expansion is in deep trouble with almost all the power plants unable to leave the.

Going forward, BHEL will not only have problems with margins but with the order-book too. Capital-goods, as a sector, will have a muted earnings potential and will not witness investor interest until the capex cycle really takes off. So, the whole hypothesis that the economy is at a bottom and the capex cycle will take off next year is not very strong right now at all.

Q: As the Budget nears what are your expectations? The finance minister has repeatedly stated his intention of presenting a fiscal prudent Budget. Even if there fiscal deficit is below 5 percent, do you think it will be viewed  positively or do you think a lot of it has already been priced-in by the market?

A: No, I do not think so. On the contrary, there has been considerable concern regarding the Budget in terms of the changes in direct taxation that may impact the common man. There is talk of perhaps a return of estate duty or direct income tax rates going up for individuals. There was a lot of talk that the securities transaction tax (STT) would be reduced substantially and the long-term capital gains tax may be reinstated.

I believe that to some extent already these concerns have been addressed by the government. I think that the focus on investment and pushing ahead infrastructure allocation is something that we should look forward to. Also, the quantum of reduction in the subsidies on oil will indicate exactly the strength of the implementation of the government’s policy.

Another factor is the rate that government assumes its interest outgo for next few years. These are factors which perhaps will make a difference in the way people look at the Budget.

Q: What is your view about the number of issues soaking up liquidity in the market right now? Do you think this may restrict the further upmove in the market? Will any of the inflows actually be lapped up by some of these issues?

A: No, I do not think so. In the last one year, FII inflows were to the tune of almost USD 30 billion. That means that on one side these flows did come in, but there was USD 30 billion of stock sold by Indian investors, and there have been no issuances of any major kind during the whole period.

So there is definitely a room for equity investing to take place from primary issues. I do not think that is a problem at all. If there are no FII flows for just two weeks the market will fall. But besides that I think there is enough room for equity-investing to take place.

Q: Do you foresee any kind of accident in the global market space because the all European markets were up today and there were a few bad days for the US market due to contraction in the gross domestic product? How important do you think monitoring the global situation would be at this juncture to map the Indian market’s trajectory?

A: In the very short term, I would say there are no major risks. But going forward over a six-month period, there is definitely going to be some negative news from Europe or even the United States where equity markets have gone up almost 10 percent from the bottom in 2011 or even more.

The markets have risen very high in that period of time. So, there is obviously going to be some kind of correction. The key aspect for India is that we have received all this money 30-40 percent of which is from exchange traded funds (ETFs). So, if there is any change in global sentiment towards equities, then that in itself may lead to some redemption and could perhaps lead to a correction at some point of time in the market.