Nifty seen ranged; avoid midcaps with huge debts: Experts

Moneycontrol Bureau

Relief rally seen today in the market should not be misunderstood as an uptrend, as markets will remain rangebound till expiry on Thursday and the pessimism may continue to push indices downward over the next few months, experts cautioned.

Market recovered on the back of short covering and recovery in China. The Sensex rose 88.26 points to close at 18629.15, and the Nifty gained 18.85 points to finish at 5609.10, broader market however remained under pressure.

"At this point the markets are cheerful – somewhere around 5700 or a little below before that we should be facing resistance," observed technical analyst Sudarshan Sukhani of s2analytics.com

SP Tulsian of sptulsian.com said that market would remain rangebound for next two days. "You can call it dull and boring which will make the Nifty to expire at a level of around 5600," he added.

Over a period of next two-three months market would continue to fall due to disappointing macro situation. Amit Dalal of Tata Investment pointed that the first and the second quarter corporate earnings might prove to be disappointing despite a very good rainfall.

"The whole premise of the rally which took place in April and May was that the trough of our slowdown was behind us in the quarter of January-March and here on we will see perhaps a better earnings growth. Almost all analysts had forecasted for 2013-14, an earnings growth of 12-13 percent. The lowest I had read in March-April was 11 percent for the year which now has been brought down to single digits by most analysts," Dalal added.

He fears that although market may see some respite in a very short term economic and industrial data would bring perhaps even more pessimism in time to come.

Hits and misses of the day

ONGC and Oil India today announced its decision to buy Videocon's 10% stake in Mozambique's oil field. Experts said that the transaction was good for both Oil India and ONGC in the long term and it will help Videocon to pare some debt. Tulsian said that for both Oil India and ONGC it will not be difficult for both companies to mobilize funds for this acquisition due to their huge cash reserves.

However Dalal cautioned that the valuation of the deal was vulnerable to any change in oil price. "You are making a fully valued investment with prospects of oil coming down and therefore the valuation is obviously vulnerable to any change in oil price adverse to the present valuation," he said.

On the other hand the deal is seen neutral to slightly positive for Videocon. Market was expecting Videocon to get a better valuation of up to USD 3 billion as against USD 2.5 billion announced. The company's current debt could be more than Rs 16,000-Rs 17,000 crore, Tulsian noted. "If the majority of the amount of about Rs 14,500-15,000 crore gets used by Videocon industries to retire the debt then that can change the fortune," he added.
 
Shares of Gitanjali Gems hit the 20 percent lower circuit for the second consecutive day due to recent drop in gold prices, Reserve Bank of India’s and government’s gold import curb initiatives. Tulsian however believes that such sharp fall in the stock could have been only because of margin call pressure as many other jewellery companies like Tribhovandas Bhimji Zaveri (Tbz), PC Jewellers, Shree Ganesh Jewellery have similar business risk.

"This seems to be a classic case of margin pressure and I think that this pain is likely to continue. We may see the 10 percent lower circuit and I will not be surprised to see the value getting eroded to the level of maybe about Rs 200-220," he added.

Tulsian further noted many other mid-caps companies might be going through carnage due to the same reason. Dalal of Tata Investment advises investors to be cautious of mid-cap counters.

"Where investing in any midcap stock is concerned, I think it is clear, you have to invest in clean balance sheets, in clean corporate governance at this point of time. So if there is excess debt or if there is more than even 0.4 debt-equity ratio, one should avoid the stocks. Ideally, look for MNC midcap stocks to invest," he advised.

Among telecom stocks, Idea Cellular continued gains and ended up nearly 4 percent today at Rs 142. Tulsian said that although the stock has a strong grip, he is uncomfortable beyond Rs 140. "If you want to take a call on the telecom sector I don't think that at current valuations Idea ideally looks a good buy."
 
Dalal on the other hand advises to remain invested in the stock. "Idea Cellular is definitely better positioned in terms of business. However, I am not very happy with the sector on the whole in terms of the capex that it has to do over the next three or four years. There is more and more investment required from this industry," he added.