Mkt can hold 5800, buy M&M, Tata Chem: Prabhudas Lilladher

Dilip Bhat, joint MD, Prabhudas Lilladher says the market in the June series would be leaning towards the southward side, and would hover around 5800.

Talking to CNBC-TV18, he says the downward spiral of the rupee means that the immediate fall of inflation is arrested. All-in-all, it is a matter of concern because whatever money that has been put in, especially by the Foreign Institutional Investors (FIIs), there is a de facto depreciation for them too. He said he would continue to put his money on M&M despite stretched valuations, but advises investors not to take a long-term call on Escorts. He is also bullish on Tata Chemicals and see it giving a return of over 20 percent. Below is the edited transcript of his interview with CNBC-TV18 Q: What is your sense of how the rest of the June series will pan out? So far it has been volatile, edgy and at some sort of a tipping point. Where do you see it heading? A: A very difficult call. All the same markets have held out very well in the last couple of days’ trade. My broader take would still be that it would be leaning towards southward side. I think markets would try to hover around 5800. Maybe on the upper side it would still look like that 6200 be the cap. Very clearly our markets have been mirroring as to what exactly has been the trending pattern even for the other markets too - all the front line markets. They have come off their highs by almost about 4-5 percent and we too have come off our highs by almost about 4-5 percent. Given the fact that in the last couple of days the Foreign Institutional Investor (FII) flows have been tapered off is creating some kind of a minor panic that if this were to sustain then probably a greater fall is not ruled out is what people are guessing. But my own sense is that 5800 should still hold out and given the fact that the economic fundamentals still are very much way behind the way the markets are at the moment. Q: How concerned are you now about currency and the impact it is having on a sentiment basis on the equity markets? A: We recently had done a road show with one of the leading foreign exchange consultants of India and even his broad take was that the rupee should head towards somewhere around 60. But maybe over next 8-12 months and I do remember there is a lot of people did think that he was being overtly bearish. But even leaving aside that for a moment, I think this currency factor still continues to play very heavily and of course we all know that the downward movement of rupee only means that the immediate fall of inflation is arrested and as what Reserve Bank of India (RBI) governor put it, it really ties his hands down in terms of making a very deeper correction in the interest rates. So, all-in-all of course it is a matter for concern because whatever money you have put especially the Foreign Institutional Investors (FIIs), there is a de facto depreciation for them too. So, I think of course it is a matter of concern for all of us. Q: I do not know if you have spotted some of these tractor makers like Escorts and even Mahindra & Mahindra (M&M) for that matter. The start of the year has been pretty strong for them in terms of tractor sales and it seems like the worst is over. Would you put your money in either of these stocks Escorts or M&M? A: M&M continues to be on our radar as one of the picks which you must have in your portfolio though at the moment valuation-wise it is slightly stretched. Escorts certainly looks very interesting, but overall Escorts will still have to be played like a momentum stock maybe for a couple of months, but taking a secular long-term call on Escorts is not what I would recommend at the moment. Q: Would you have a view with regards to what is happening on the telecom space? There is a bit of nervousness which is seeping in now. Bharti Airtel is down around 2.3 percent and we have some amount of nervousness seeping into Idea as well. Is there some amount of possible looming threats from other competitors now? A: There are couple of issues involved over here. The entire telecom space continues to be still mired in the controversy. So whether there is a threat of a huge penalty being imposed on Bharti or any of them continues to be a question mark. More important also is that the capital intensity of the business in terms of capex continues to be pretty high, though the Average Revenues Per User (ARPU) really are supposed to have bottomed out and probably started moving northwards even though it is very miniscule at the moment and of course the hush-hush talk about Reliance 4G making a dent into the competition over here, all in all I would still stay away a little away a little from telecom even from the current levels. Maybe I would look at it 3-6 months down the line when the things have settled down and there is a lot more clarity on some of these issues. Q: Would you have a call with regards to a couple of these banks for example UCO Bank has seen a strong rally in the past couple of trading sessions and if you put things into perspective their Q4 results were extremely weak where they saw profitability dip of around 80 odd percent. How would you justify the recent rally that we have seen in that bank in particular? A: After the results and some of the statements and the press releases that we have been following it appears that the current year seems to be very much firmly on a good track and overall I think there are a couple of things – one is of course the asset quality worries probably now is definitely behind the bank and that is not going to be a major source of worry. More important is the core performance. I believe somewhere or the other this particular year is going to be quite good for them in terms of the core performance, also it is ably supported by treasury income. So, I think more important is, the stock is available at reasonably very cheap, very compelling price to adjusted book value. So, I think based on all this even if one were to play for the momentum, I think there is good 10-15 percent to be made at least in this particular stock. Q: Would you have any midcap picks which you would be promoting at this point in time, maybe a strategy which would be more stock specific? A: If I were to see on an overall basis I would lean a little more towards Tata Chemicals largely because it is defensive. Market cap is close to around Rs 8,000 crore. The downside in Tata Chemicals is limited but on the upside it can give a return of almost about 20-22 percent. We are largely basing our recommendation based on the fact that the cash flows are going to be pretty healthy for the company and possibly we may see an improvement in the Return on Equity (ROE). So Tata Chemicals on a risk-return basis looks pretty interesting from the current levels. Another stock is MT Educare. I know education has not really given any great returns for any of the investors and worse still I think the balance sheets have been in all sorts of mess, but this particular company I think is turning out very well, managed also very well and I think is generating reasonable amount of free cash and it is available at very reasonable valuations. So that is another stock which we feel has a good potential in terms of appreciation. Q: What is the next trigger for the market? We do have the Reserve Bank policy, but I don’t think anyone is betting on that one to drive the market sentiment higher. In your mind what is the next trigger that could pull the markets out of this range of 5,700-6,100? A: I belong to the camp, which I feel that on the upside the market appears to be a little more capped, maybe 6,200-6,300, it can’t breach that level unless and until it is backed by a very sharp recovery on the ground in terms of the economic fundamentals or in terms of some proactive policy measures which are taken, which will be pursued as something which can drive the overall growth. So, I think that being the case I still feel that markets will continue to be range bound, maybe on the downside it appears to be capped largely because of the kind of liquidity we are seeing and maybe the bottoming out of the economic fundamentals in terms of the kind of downgrades that we have seen. But I think we can still see a good cut in the interest rates. I think the RBI policy probably will be a little more amiable to the markets. So, I think that will cap the downside, but upside also appears to be a lot more limited.