Nifty strong support at 5630; surprise rally possible: Dutt

Sanjay Dutt, Director of Quantum Securities expects market to get into a consolidation mode post its recent rally but does not rule out a surprise rally. He sees Nifty finding support at 5,630 and 5,400 as a strong floor.

"We may go down below 5630 but I think that will be very briefly – for a day max or may be even not that. My view is probability of breaking 5630 is just about 20% odd in the next fortnight or so," he told CNBC-TV18 in an interview. The government's slew of big ticket reforms this month, including a hike in diesel prices, has sparked a rally in Indian stocks. He says the market is defying scepticism about the lack of execution, adding policy action and Reserve Bank easing will be key triggers for the market. Dutt expects the RBI to cut rates by up to 50 bps on October 31. "The RBI is likely to work closely with the government to ensure growth revives," he said. Dutt says stocks with corporate governance issues may underperform going forward. He sees improvement in newsflow on fuel and pricing of power. "We also see potential for upmove in media distribution companies," he said adding, "turning optimistic on the power sector".  Also read: See Nifty at 6200 by March; more upside in infra: CIMB Below is the edited transcript of Dutt's interview with CNBC-TV18 Q: We speak in better circumstances today than we have for the last one year. Are you still bullish or are you too cautious for just the near term? A: What we have seen is a classic consolidation phase where the gains are being absorbed, where we are seeing rotation into areas where there has been underperformance. It can be starkly noted in some of the midcap stocks, while the large cap stocks run up substantially. We touched 5750 odd levels and now we have retraced back to that 5650-5700 range. This consolidation level is a way of basically correction in a bull market. We may go down below 5630 but I think that will be very briefly. It could be for a day max or may be even not that. So, in my view the probability of breaking 5630 is just about 20% odd in the next fortnight or so. Q: In the last couple of months of this year, you see a 6000 or more as a distinct possibility? A: Yes definitely. Infact we would be seeing those levels sooner than most of us expect. Markets tend to move in directions where we all don’t expect. I think the market is going to surprise all the skeptics and the bearish people because everything around us in India is bearish whether it’s the political spectrum or  policy framework. In the last four weeks people are saying that everything has come to a standstill. There have been giant announcements but no execution, so skeptics are back again and I think the markets will defy the skeptics once again. _PAGEBREAK_ Q: Last couple of days global markets have seemed a bit edgy. Do you worry about that or do you think that is also a phase of temporary correction, nothing more alarming than that? A: What has happened in the markets, especially the US market, needs to be looked into with perspective. The kind of outperformance one has seen in the US equity markets over last one year is quite surprising. What we are seeing in the last few days is merely a correction because of earnings. Some select earnings haven’t come upto the expectations of the analyst but once the US Presidential elections are out of the way, even US would start behaving much better. I am not saying that US is going to start running up again, but I do not see the fiscal cliff forecast coming true.

Q: What will drive India performance incrementally from hereon?  Do you think it will be continued good news from New Delhi? Is it going to be RBI action or it just going to be pure flows from the West as we have seen for most part of this year? What do you think will be the dominant trigger? A: It will be a combination of the three. But the main theme would be a policy action and RBI. Ofcourse flows would be supportive. A combination of three is what would take up the markets. The markets would move up in a step-up fashion. They would come to a level, consolidate and absorb the gains. Absorbing the gains is good because supply needs to be absorbed at every higher level. The stock needs to move into stronger hands. A combination of a good amount of policy action that is there in the pipeline and in addition to that RBI would be very supportive now of growth. Inflation has been a worry, there is no doubt about that. But RBI will finally understand that now growth has to be looked into and we just cannot keep inflation as top priority. They have done that for 24 months and we haven’t seen much success because inflation has got to do with a lot of other factors other than just monetary policy and monetary and money supply in the system. Q: How do you approach IRB after all the controversial news flow over the last couple of days with Nitin Gadkari? A: I really don’t want to comment on the politics part of it. Any stock or any sector that gets into some kind of a lime light in terms of investigation, political controversy or corporate governance issues is avoided by the markets for quite some time. We have seen this happening in the real estate space. We have also seen this happening in the telecom space when we had the 2G scam going on. I can name many stocks which have come under the cloud and have been avoided by the market. Particularly, institutional investors get very wary of these kinds of companies. Whatever be the truth, I am not passing the judgment of any culpability or anything of that sort, but I think the stock will underperform for the time being. It will be under cloud and for investors, it will be best to wait and watch to see how it pans out irrespective of what the fundamentals might be. _PAGEBREAK_

Q: What do make of this new found excitement in real estate after so may quarters? Do you think this optimism is justified? A: Yes, after a long time, probably four years odd, I am getting a little optimistic on real estate selectively. Some of the B group companies, good quality companies who have less debt or no debt on their balance sheets have slowly acquired good pieces of land over the last 3-5 years. These companies have good managements, have good projects in hand, and they definitely deserve a look now. Real estate companies, particularly the B group real estate companies have all come down to sub USD 200-300 million kind of market cap and even their enterprise value (EVs) has been very low. I think they definitely merit attention. I haven’t had a look at Peninsula, so I wouldn’t comment but there are many like that, that definitely warrant attention. I think they have the potential of outperforming the markets and giving very good returns over the next 2-3 years. Q: Where is the floor set for Nifty? Do you think the floor has shifted up after the events of September to may be 5500 kind of a floor? A: I would say 5400-5450. In that range I think there will be a good amount of support coming in. If you break down look at individual stocks , if you look at 70% of the stocks that comprise the Nifty, you come down to worst case situation where those stocks can come down to. And these companies include some of the big ones like Infosys, Reliance etc which have reasonably large weightage. I think 5400 is the floor for the market in the near term barring some more events that may really change their outlook. Q: Hero MotoCorp market seems quite disappointed and worried about prospects. Would you buy it on this decline or stay away for the moment? A: I wouldn’t buy it on decline. I like the management, I like the company, I don’t have investments in it, but I think the overall model of the two-wheeler space is going to come under challenge, particularly for the domestic two wheeler manufacturers like Hero, Bajaj etc. Once we see the international global players getting aggressive as we have seen Honda now very seriously looking at India, the entire perspective of those companies when they look at markets is nowhere close to what we would look. This it because global corporations normally look at two, three, four decades when they come into markets like India or when they come into a market where they think there is a potential to sell millions of units. So, Honda can seriously think of India as a two-wheeler space where it may bleed for a few years, but it will definitely capture market share. I am not saying that is Honda’s strategy but if you are coming up against these kind of players, I think there is a challenge. Therefore, one needs to be a little careful on valuations when you are going to invest in companies like Hero, Bajaj etc. I would only buy them when I get distress kind of situations and one would get a good trading upside in them. But I would be a little wary about having them as part of my strategic portfolio, long term portfolio. _PAGEBREAK_ Q: What do you expect to see from the RBI next week? Do you think a substantial cut is coming or it might get staggered next year onwards? A: I am confident that October 30th would see a 25 bps atleast or may be even more or a 25 plus CRR combination. One thing is clear, given the coordination that is now going on between the policy makers in Delhi, that the Finance Ministry and the PMO as well as RBI want to make sure that growth starts to get back on track. More than anything else,  they want to send a signal. If you look at it realistically, interest rates have come down over the last two months. If you ask any borrower or anyone on the main street, you will realize that banks are offering better terms at this point of time. So, therefore they would like to signal that actually a low interest regime is headed ahead. Given this backdrop, I think RBI would do 25 bps plus CRR or may be even do a 50 bps. And more of a reason why the mood needs to lift up at this point of time is, we are heading into the festival season, we are heading into the end of the year so there is a good probability that RBI might want to really get the sentiment back. More than fundamentals I think sentiment is what the policy makers are trying to play at this point of time. On ground, in India things aren’t that bad. It is just that negativity has eaten us over the last two years and that’s what needs to be corrected for the investment cycle to really begin again. Q: Lot of people are getting excited about infrastructure again after a long time. Would you stay with the safety of an L&T or want to take a little bit more risk in your portfolio? A: I will take a little more risk, because I am getting very optimistic on the power sector. In the next six months the fuel linkages that have been plaguing the power sector in terms of pricing, fuel, etc those would get sorted irrespective of the noise that’s been there behind Coalgate etc. If that happens over the next 3-6 months time, there is going to be a big boost to some of the power companies because lots of power projects for various clearances, fuel, etc have been stuck. Then, there is the issue about State Electricity Board paying the power companies. That is also in the process of being addressed. The combination of these, I think would really give a big fillip to the power sector and the valuations there are very compelling. Some of the companies have already executed good capacities or are in the last stages of executing capacities. That, is one place in the infrastructure I would like to be. I would also like to take some exposure to the contracting construction, road building kind of companies. And these too, primarily in the B Group good quality companies other than L&T, BHEL. Those I would like to avoid at this point of time. Q: There has been interest in another forgotten sector - media over the last couple of months. You track that space quite closely, would you own those in your portfolio now? A: Its getting a little complex, given the fact that we are getting into compulsory digitisation in the four metros and it will obviously be implemented across the country. Some of the broadcasters are going to really face a lot of problems. The issue of actual declaration of numbers and therefore ad revenues linked to that come in for some of the broadcasters, particularly the news broadcasters. So, I think there is going to be a tremendous challenge on the content players, the news broadcasters. They will obviously all go free to air because they cant afford to take the risk of their numbers kind of being disclosed. But in terms of the distribution people, I think there is potential there. I like some of the distribution players, that is the cable distribution and dish distribution players. I think they are going to have a good time for the short term, but in the longer term the sector continues to look good. Whether it is the content players or it is the pipe that is in the system, both will do well. It will do well because, any such modern regulation that’s happening in the sector, any such straightening out of issues, any industry that is going through this phase, over the next 3-5 years is going to give good money and finally the bigger players, the competitive players will start making good money. _PAGEBREAK_ Q: What do you do with the UB Group names? On one hand the news on Kingfisher doesn’t get better, even the expectation of the deal with Diageo seems to have got stalled for the moment. Are you optimistic or would you take your profits here, if you were owning the UB Group names? A: I would take my profits. But otherwise, I am optimistic on the UB Group as a whole. Unfortunately, what has happened is that the Kingfisher mess has really dragged them into all kind of complexities. Even as investors, from a corporate governance standpoint, transparency standpoint, one actually doesn’t know as to what kind of exposure which balance sheet has on the Kingfisher asset. One doesn’t know how it is going to unwind, what are the bankers going to do because that is what is dragging all the companies. That is what is dragging the entire group. It is so unfortunate that such a phenomenal franchise, such a phenomenal business that has been built over second or third generation has got dragged into such a mess because of the airline. The promoters are struggling to even kind of manage with the core business because of the airline. So, given this kind of haze that we are surrounded in, particularly with regards to transparency in regards to corporate governance issues, I would like to stay away at this point of time. But I like the business, I think there would be a better entry point down the line in buying the liquor business, but till the haze doest clear out I would like to stay away. I might want to buy it higher but atleast I want to know what I am getting into till all this mess is cleared up. Q: How do you see the next year panning out? Do you think the trend of 2012 will spill over and continue in 2013? A: I think so. I think the trend of 2012 will spill over as long as we have the policy framework, policy execution more than policy announcements falling in place and we don’t get some external shocks in terms of inflationary pressures. Most of the inflation that we are looking at, is from outside and it has got nothing to do with India. In fact whatever it has got to do in India has got to do with structural supply side issues which I think government is clearly aware of and is addressing it. Some of the land mark things that are happening, which really we are missing out in the negativity is- the direct cash transfers, the Adhaar system. All those things over the next two, three years will actually bring down the subsidy burden and sort out the fiscal deficit issue. I think this is going to be the big trend over the next 3-5 years. So, if this trend remains and the government continues this process of good execution of the policy announcements, I think in 2013 calendar we will have this trend continuing.