Discount IIP; earnings sign India Inc's win over slump: AQS

Nitin Raheja of AQS Advisors explains to CNBC-TV18 that the current IIP statistic needs to be discounted of the Diwali effect before the actual growth in manufacturing can be considered. He adds that the earnings indicate corporate India's ability to tide over the downtrend and post positive results.

Below is the edited transcript of the analysis on CNBC-TV18 Q: Do you think the IIP data indicates sustainable growth? Are there going to be some earnings upgrades maybe in Q4 itself?
A: Clearly, the earnings have been surprising most people even if the Q2 results were considered. I think the downgrade cycle is clearly over. In terms of the upgrade, yes, there will be marginal upgrades, but I would not want to read too much into just one data which has come out at this point of time which needs to be taken into consideration after to discounting the impact of Diwali in 2011 and 2012.
The Q2 numbers have clearly highlighted that corporate India seems to be coping quite well with the slowdown and has been tightening its belt and managing to post positive earnings. That is the reason for this rally in the market. The market has really manifesting signs of the earnings from the grassroot-level rather than the macro-factors. Q: I want to focus on the levels for the market because the Nifty has been in this consolidation range in the past couple of trading sessions after conquering that 5,900-mark and in fact it closed sub-5,900 on Tuesday. Do you think that the markets are now waiting for another trigger and if so what do you think that would possibly be?
A: The market, even before it crossed 5,900, after a heady 27-percent rise in this year seems to be gradually inching up and looking for fresh stimulus in terms of news developments or earnings. So the two factors that will continue to drive the market are going to be corporate earnings and fund flows from foreign institutional investor (FIIs). Q: How do you pick stocks at this juncture like for instance in the midcap space?
A: In the last six months, the moment bad news stopped, the government showed positive intent and FII flows turned positive, a wide group of stocks across sectors and it’s been led by earnings of companies and on cheap valuations in the midcap space. So we are interested in a diverse set of stocks across sectors. Q: What are your picks in the midcap space?
A: One of the stocks that we like in the midcap space is a company called CEBBCO, a company engaged in commercial engineering and body-building. It is largely catering to the trend of offering fully-built vehicles which has become in the commercial-vehicle segment. This company has a huge market share and is running short on capacity. The growth in earnings is expected to increase by 30-40 percent in the next couple of years. Q: Any picks from the Nifty at all, possibly your view with regards to auto stocks in particular considering that the sector is not in line with the IIP data?
A: In auto stocks, the expectation clearly is more toward cut interest rates. I don’t know when that is going to happen given the way inflation is trending. But among the picks that we like, the stock that clearly stands out is Mahindra & Mahindra on continued diversification in portfolio and resilience in the downtrend. This is followed by Tata Motors purely for the fact that valuations are very cheap. Q: You like any of the initial public offerings (IPO)?
A: Among the IPOs, I’m interested to see how the CARE issue fares.