Mkt headed higher; ground for profit taking ready: Citrus

The Indian market gained strength in late trade and the Nifty closed above 5600 while the Sensex ended day at 18505.38. Sudarshan Sukhani said after the Sandy storm subsides, US markets are likely to be positive. "In the long-term Indian markets should certainly outperform and the US markets would be subdued when we compare it to India," he added.

Though, the RBI policy has created some disappointment for the market, Sanjay Sinha, Founder of Citrus Advisor feels, it has certainly created the ground for profit taking. According to him, the market movement in the last two days suggests there is something other than policy expectation which is holding the market. Eventually, if the government implements the initiatives that it had announced, the markets could head higher from current levels, opined Sinha.

Here is the edited transcript of the interview on CNBC-TV18.

Q: What's your best guess of how the markets will move from here given that one of the biggest triggers or one of the bigger triggers, the RBI policy is now behind us?

A: I think the RBI policy and the disappointment that followed have created the ground for profit taking which is not very surprising. If you trace the movement of the market from the end of July till now, it has appreciated close to 13-14% and therefore, there was every reason why those who have participated in this rally would have taken profits.

What is more important is, if the RBI policy was such a big disappointment, the retracement that we have seen in the market yesterday and the way the market has behaved today is not of a very large magnitude. It suggests maybe there is something far more substantial which is there at the base of the market and is holding it up than just the expectation of our policy.

I think if I go by these market sentiments, there seems to be a fair amount of conviction building on the part of the government to kick start the policy initiatives to get the economy on the right track. If that sentiment does not change I think we should see the market going up even higher from the current levels.

The only setback that I see before the market would probably be the winter session of Parliament where some of the policy measures that have been announced would be put to test. If there is a fair amount of obstruction, there could be some amount of disappointment or some retracement. Otherwise, I think there is a clear ground now for the market to go up even more.

Q: Wanted to narrow in on your opinion with regards to the RBI policy and the commentary that you saw from them, is there a possibility that a rate cut could possibly come at the start of 2013?

A: That to me looks like a very likely possibility because even if the RBI had announced a repo rate cut yesterday, I don’t think it would have changed the actual activity on the ground substantially. There are two factors which go behind the off take of credit. One, there is incentive which comes from a very attractive interest rate but, I think a bigger incentive comes from the confidence that the investor has in borrowing and investing for capacity expansion or other reasons. I think the second factor today is lacking much more in India than the first factor.

Even if the RBI had chosen to cut repo rate by 25 or 50 basis points, at best it would have been a sentiment booster for the equity markets. It would not have changed things substantially on the borrowing front. I think the government is currently getting the public sector undertakings to unlock Rs 1,50,000 crore of cash that they are sitting on to get the investment cycle started.

I think that is more important and that is not so much a function of RBI’s announcement as much as these PSUs getting their act together. It is signaling to the private sector that they can also now follow it and can start participating in the investment cycle.

Q: You made a very valid point that the fall in the market that we saw yesterday was quite feeble indicating that this market was hungry for positives and is ready to perhaps even discard some of these macro overhangs. In terms of stock picking if you are constructive on the market now, where do you think is the most lucrative opportunity, will it be in the banks that are seeing a bit of a retracement post the policy or would you like to pick up other cyclicals?

A: I would expect the entire rate sensitive pack to lead the market rally and in that rate sensitive pack, it would be the banks as a whole which would lead from the front. They will be followed very closely by the infrastructure pack and the auto pack. If you go back to the last quarter, July to September, you can get to know the behaviour of the market.

In the first month of the quarter, when the market was falling, the defensives were to be outperforming and in the second half of the quarter and the last two months when the market rallied by about 13% the capital goods, banking and auto pack rallied by about 17-18%. If you have an outperformance of 4-5% in a span of just two months, imagine what sort of outperformance can you expect from this pack when you can have the market rallying by 20-25% over the next 12-18 months.

Q: In light of all this, how is the global set up at this point in time, especially what sort of risk does the US election pose for flows into the Indian market?

A: In the short-term, there might be some impact on the flows and on that account if you see what happened to the flows leading upto the resolution of the European crisis, I would not say the crisis has resolved completely. As of now, the expectation is, probably with the change of guard in US there could be some restrictions on the flows which will be coming to the emerging markets. In my opinion, that would only be something which would be of a very short-term nature and I don’t think that would affect the flows to the market.

While we are looking at what is happening to the US elections, we also need to keep in mind what is happening to the Japanese yen. Last time around, the yen had weakened and that is the time when yen carry trade had fuelled such a lot of liquidity to be infused in the emerging markets. We had also benefited from that. If that same scenario gets replayed now, with the yen weakening day by day, you could see liquidity flows getting substituted from the easy money that is coming from the Federal Reserve's action which will come from the carry trade factor.

Q: Wanted your opinion with regards to the earnings till now, how exactly have you read Q2 FY13 in terms of earnings because it seems like it’s a bit disparate?

A: It has at least measured upto expectations by and large. In fact if you have seen the performance of companies within the sector while there have been some entities which have disappointed, there are others which have actually excited very strongly. You had Infosys which disappointed you and then you have TCS which excited you so much.

Within the auto pack, there was a certain amount of skepticism with Hero Honda results but, you had Mahindra giving you a fantastic set of numbers. If you look at banking as a pack, by and large the private sector banks have done well. Contrastingly, the public sector banks have shown that they had weakness in the way they managed their risk assessment. Therefore, their results have not been so good.

But, I think on the whole this quarter would probably mark the end of the cycle in which the earnings are being downgraded across the board. We should not see any further earnings downgrade from here. Going forward, it has now set the ground for more earnings upgrade than accumulation of pessimistic sentiments. Therefore, I would say that for the market to now rally from here on you would also need certain amount of comfort from the valuation front.

That comfort would come not only from the price earning ratios getting rerated to higher numbers than where they stand today, they would also come from some earnings upgrades too.