Nifty may move back to 5450-5500: Fortune Financial

Globally, the start of May has been very good. The Dow closed at its highest level in more than four years in a broad rally on Tuesday.

The Nifty is in the process of bottoming out, says Abhijit Chakraborty of Fortune Financial. "The market has also shown a lot of resilience. It has not fallen below 5,200 despite avalanche of negative news globally and domestically. We can perhaps see a move back to 5,450 or 5,500 on the Nifty," he asserts. Also read: Expect emerging markets to struggle in May, says Richard Ross Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying videos. Q: What is the call going into May for you? How do you think the market may likely trend this month? A: My sense is that the Nifty is in the process of bottoming out. There are a couple of indications. One, GAAR provisions could be diluted or postponed as far as the FII taxation part is concerned. That could be a big relief for the overall market sentiment. Second, RBI has very decisively acted on signaling the reversal of the monetary policy by significant cuts, both in repo as well as CRR. But I think because of the overwhelming concern regarding fiscal deficit and GAAR, the market has not reacted to the RBI policy action as it should have. Third, the corporate earnings are also looking better. In Q4, we are seeing lesser number of companies missing the forecast and guidance as compared to the previous two quarters. So, we could be towards the end of the earnings downgrade cycle as well. With all these things put together, the market has also shown a lot of resilience. It has not fallen below 5,200 despite avalanche of negative news globally and domestically. So, my sense is that perhaps Nifty is bottoming out. We can perhaps see a move back to 5,450 or 5,500 on the Nifty. Q: How would you react to Hindustan Unilever (HUL) numbers? Do you think the valuations will now become a hurdle for the upmove on the stock or do you see it continue to move on the upside from hereon? A: Hindustan Unilever has surprised on the positive side. Most of the FMCG companies had revised the prices upwards of the products and that has helped in improving the margins. The underlying demand on the consumption side remains intact. So, results are good, but the valuations are such that we cannot go out and give an aggressive ‘buy’ call from here. Having said that, I think there is neither a reason to start booking and getting out of the stock. If there is a good run continuing in a good stock, which is performing well after a long period of underperformance at the business front, I don’t think that one needs to get out or book profits right now, whether it is ITC, HUL or some of the other FMCG companies like Colgate, P&G. On the valuation front, they might look costly, but so is the nature of the business and the valuation that these companies command. As long as the earnings are good and the business fundamentals are strong, I wouldn’t recommend, purely on the basis of valuation, one to exit. Q: The month of May is historically quite a weak month for the market. Do you think there is a possibility that the markets could move below this range that we have been trading with for a while or do you expect it to be another range-bound month with just stock specific activity taking center stage? A: I was quite bearish since Budget and after that. If market had to fall-off, I think in April itself we could have seen market touching 5,000 or going below that because April was a month where there was precipitation of negative news, both largely from domestic front and also concerns regarding slowdown in US as well as Europe concerns coming up once again. But despite all those things, the market has held on to 5,180 levels on the Nifty. Incrementally, since the devils are all known whether it is domestically or internationally and overhang on growth, economy, policy making all these things remain, but if we are going to see incrementally any better development on any of these counts, I think that market will start moving up. I think that market has shown enough resilience at around 5,200 levels, despite all negatives. Incrementally, I am expecting things to be better both on GAAR as well as the impact of RBI action is now beginning to be felt. We see a lot of banks are beginning to cut, not only the lending rates, but also the deposit rate. That will lead to cut in base rate as well which will benefit the corporate. Even the earning downgrade is coming to an end. All these things put together, I would be little more optimistic on market for the month of May. _PAGEBREAK_ Q: What do you do with the auto bunch now? This time’s monthly sales haven’t been very strong whether it’s a function of excise duties or demand finally lowering in this segment as well. Would you still buy thing from autos? A: In volume terms, we are going to see some kind of a deceleration basically from passenger car segment because of several overhang increase in taxation as well as the fact that fuel prices are also going to go up. March was typically a good month in terms of volume because of the preponement of the purchases by customers ahead of Budget. Having said that, I still find there is selective value in the auto space, typically I would like to mention Mahindra & Mahindra. We are quite bullish on M&M because of the fact that their acquisition in Ssangyong is beginning to turnaround. Last year, Ssangyong had loss of over USD 100 million at the EBITDA level. We are expecting it to breakeven this year. So that brings about a swing of 10-15% for M&M consolidated numbers at the EBITDA level. So, I think the turnaround in Ssangyong is going to more than offset the possible slowdown in sales from tractors and other utility vehicles (UVs). So, we are very positive on M&M. Second, we will continue to be bullish on Tata Motors. We think that Evoque and the new launches in new markets as well as the fact that they are going to form a joint venture in China will continue to boost the Jaguar-Land Rover (JLR) sales. Even in domestic market, the commercial vehicle (CV) cycle is looking up. It’s going to maintain about 13-14% kind of a volume growth this year. So, within the auto space, M&M and Tata Motors would be our top pick. We are little circumspect about Maruti because of the fact that raw material prices pressure still continues. The market share loss that’s happening for Maruti because of competition, it doesn’t augur too well. Also, it is very costly, it’s trading at about 14 times on FY14 numbers. So, we are not very sure about Maruti, even though there has been a quarter-on-quarter increase in the production volume. Even in case of two wheelers, I think the entry of Honda has changed the game completely. We prefer Bajaj Auto within the space because it has got an option of exports and three wheelers, which gives it more robustness. But overall there is a competitive intensity in the two wheeler segment because of which, it could be a spoiler for most people. Q: Pantaloon and Future Capital were up and away in anticipation of that demerger news that came through. How do you see those stocks or react to that news? How much more of an upside do you see on Pantaloon particularly? A: From sentiment perspective, definitely it’s a big positive on Pantaloon as debt gets pared down and with the new management there could be new focus coming into the stock. But on the valuation or on stock call, I would not be able to comment because these are not the stocks which we have under our coverage. Q: What is the top banking pick right now? Even amongst the PSU bank space, we saw completely diverse numbers on Monday. A: I am slightly more bullish on banking space right now because I think RBI’s action has been very decisive. It has signaled that the rates have peaked. It’s a matter of time when the actual rates in the economy for the corporate are coming down. Recently, we have seen banks starting to cut both deposit as well as the lending rates which augur well. Second, the PSU banks, which were suffering from asset quality deterioration for the last couple of quarters, have seen a reversal in Q4 so far. Even in case of SBI it is expected that the asset quality deterioration will get arrested this quarter and maybe a better outlook from Q1 of next fiscal. So, this is the main concern. Despite the fact that we have all been concerned about impact on the NIMs for PSU banks because the deposit rates were continuously going up, we have seen in this quarter so far that the NIMs have been stable or have improved. The credit growth underlying has been pretty steady. So, overall, the Bank Nifty has corrected from close to 11,000 near about Budget day to about 10,000 levels or so. It has found a base over there. Incrementally, I would be positive on the banking stocks. Not withstanding the fact that Moody’s has take three-four bands for possible downgrade and credit outlook, but it’s to be noted that these banks have continue to enjoy a rating which is higher than the sovereign rating. I suspect it will continue to do so because there is no severe pressure on asset quality or balance sheet which will likely result into a downgrade.