Be patient, let market stabilise; avoid aviation, like IT: Pros

Market on Friday saw a late rally backed by some strong earnings, mainly from the pharma pack and some bargain hunting. Market expert Ratnesh Kumar is of the view that market is hoping for earnings to stablise this quarter at least after the disappointment of last few quarters. “If the third quarter earnings stabilise then market can start putting behind the downgrades and move forward," says Kumar.According to him participation of banks is a must for market to move forward. Jai Bala, Cashthechaos.com says one is still unsure whether to be bearish or bullish because the bearish case is still not out of picture and for that to happen the market will have to go above the December highs to completely eliminate the bearish scenarios. Although the market seems to be doing quite well at present, it is important for it to take out significant resistances around 7605 and 7970 for the bottom to be in place, says Bala.Bala is bullish on the market over the long-term and does not rule out 35,000 on the Sensex, but advices being patient for the short term and allow the market to stabilise, take out key resistances for it to go to record highs.The Nifty on Fiday tested 7500 in intra-day trade but ended the day just shy of those levels. The 50-share index was up 85.10 points or 1.1 percent at 7489.10. The Sensex rallied nearly 300 points to surge past the 24500 mark and was at 24616.97 up 278.54 points or 1.1 percent.From sector/stock perspective, Bala thinks the IT space is looking interesting; especially the likes of HCL Tech and Oracle Financial but FMCG space and RIL will be the leaders. Once Reliance takes out Rs 1100 then it will lead the market from the front and has the potential of going to Rs 1700-2200 in 9-12 months.  However, ICICI Bank and SBI are holding back the market and they need to pick up for the overall health of the market.Bala also likes Britannia and HUL. From other asset classes, Bala expects dollar-index to go to record highs and crude to bottom out once it takes out USD 36-38 on a closing basis.However, Kumar believes that IT space is likely to remain in the positive only because the overall earnings have been moderate and the space has the ability of delivering double-digit growth.Aviation space is an avoid for Kumar because on a generic basis it is tough to take a fundamental call on the sector.From the pharma space, Bala believes both Dishman Pharma and Cadila have the  potential of scaling new 52-week high.Below is the transcript of Ratnesh Kumar and Jai Bala's interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal.Sonia: We had some really good numbers come in from the pharma sector this week, names like Lupin, Cadila, Dishman, how did you read into them and what should investors do now?Kumar: If you are looking at the earnings picture for the quarter as a whole obviously pharmaceutical was expected to be one of the sectors which would have better than earnings from cyclicals and obviously numbers have come in better. However, the way I look at the market from the earnings perspective is that this quarter the market is hoping and looking for earnings to at least stabilise.What you have seen over the last 2-4 quarters is that the expectation of earnings stabilising and eventually turning around hasn’t come through and that has always continued to put pressure on the market.So, the hope is that this week carries forward and the earnings stabilise for the third quarter results and then we can start putting behind the downgrades and look forward from the markets perspective.Anuj: In that case what would lead this market; do you think it would be back to banks - the largest sector? We saw some signs of life in banks this week.Kumar: The market doesn't go anywhere without the banks. It is the biggest sector in the market but at the same time if you look at the short term, what you are seeing over the last one week is that the most sold off, most beaten down sectors had the better bounce. So, there was an element of value picking or bottom fishing or bottom hunting as you may call it. Banks and commodities are still the two spaces which in the context of last few months are the most beaten down. So, in the initial trading bounce in the market they will lead. The question is beyond the trading bounce; over the long term if you are looking at 6-12 months even then banks have to play a leading role, without that the market cannot move forward.So, to that extent what is happening viz-a-viz the bad loans and whatever the kind of legislative action and other actions in terms of recovery come through, probably some of it in the Budget, those will be crucial.Anuj: Did Friday change things or was it just one of those random moves? We have seen such moves in the past. How are you looking at the charts?Bala: We wanted the market to form a base around 7200, that has been our view since November. The market has turned from there. In fact when I was interacting in the same show last week I had said I wanted the market to pullback to 7350 in the short term. The market did exactly that. However despite doing all that the market hasn’t taken out key resistances. So, it is still open for book to argue on both sides - to be bullish or bearish, although we have taken a bullish stand I am not ready to say the bearish case is out of the picture.We want the market to take out significant resistances. If you were to look at it from a longer term perspective the market has to go above the December highs to completely eliminate the bearish scenarios which are alternate scenarios in my opinion, although the bullish scenarios have a higher probability at this point of time.So, the market is doing quite well. It is coming up from important supports but it needs to take out significant resistances. Short term resistances are placed at about 7605 and 7970. If it were to take out these two resistances the bottom is fully in and I am sure by that time crude will also be up above USD 38 per barrel. That will also signal the market is doing quite well.Sonia: If this positive move that we saw on Friday, if it continues next week, what would your top 2 or 3 buy calls be or long calls be in the market now?Bala: IT space is starting to look interesting. In October we wanted HCL Tech to drop below Rs 800. I think it has exactly gone below that by Rs 2, although I would have preferred it to go little down and come up but it has done what it was meant to do. So, one or two stocks in IT space are starting to look good. HCL Tech is looking good for Rs 1100. It is very likely to pickup steam in the next week. Similarly if you look at something like Oracle Financial, it might still have a minute level of downside left but once it does that it is heading to somewhere about Rs 4200-4500. So, IT space is starting to look good.As far as leadership goes, it is going to be the FMCG space and Reliance which I have been saying for the last few weeks.We saw Britannia and HUL do some very good price action last week. We had even mentioned about these two stocks last week. I am sure these two will do very well and lead the market along with Reliance.Anuj: We have seen Infosys consistently making a move towards all time highs. TCS has been a different case and now Infosys valuation is actually higher than TCS. However as a sector are you willing to take a positive bet on IT?Kumar: I would have a positive view simply because right now you are in a phase of the market where earnings growth is not there or there in a very moderate sort of a way. This year's earnings growth will once again come down; eventually it may be around 8-10 percent by the time the year is done. Then it is back to hoping for what sort of growth comes next year. Again the start is at 17-18 percent.What you have historically seen in India is that in a period of moderate earnings growth, if the IT sector can deliver double digit earnings growth which is what is likely then as a sector it would continue to remain positively placed in the market.Anuj: You did say Reliance as a stock to watch out for or that is one stock which could provide leadership. What will be the interesting levels to watch out for on Reliance?Bala: Reliance has been coiling up into a very big range from a very long term perspective. If you look at it from a very long term perspective the final leg of the coil is completely done. Once the stock were to take out Rs 1100 which I think it will do in the next 2-3 weeks, it is a free run for the stock. I think it is going to lead the market from the front.Once you see a close above Rs 1100, somewhere between Rs 1700-2200 is the potential for the stock from a 9-12 months perspective or slightly longer than that. So, it is very interestingly poised. It is going to be key for the overall market strength and overall leadership of the market.Sonia: What is the sense you are getting fundamentally, despite having good earnings the stock just refuses to get out of that range. Do you expect that range to break anytime soon this year?Kumar: If you are looking at the overall market clearly any big component of the market outside of the banks, if they are supporting the market that is always going to be good overall for the sentiment. Ultimately in the commodity space, what you have seen is the oil and the oil related downstream players are doing well. Refining margins have been good, downstream oil profitability is also good. So, those things are fundamentally in favour and if you get a leg up from other parts of the market which is not banks or pharmaceutical then it is always going to be good.Anuj: The interesting pocket has been aviation. Three months back when IndiGo listed everyone was giving buy calls at Rs 1000, people were saying at Rs 1100 we have missed out. At Rs 1200 it looked like it was still a good buy. It is now almost back to issue price and we have seen fair bit of correction in Jet Airways and SpiceJet as well. As a sector is this run over for aviation or is this a good buying opportunity?Kumar: Aviation is so hyper competitive, it is so capital intensive; historically, I found it very tough to take fundamentally long term calls on the aviation sector. I am sure there are good airlines around the world which from time to time make money for investors. However on a generic basis it is a tough sector to make a fundamental call and there are more structural growth story kind of sectors both in terms of business growth and even in terms of profitability and margins.So, I would avoid that segment._PAGEBREAK_Sonia: In the non-index space there were a lot of companies that reported good numbers. So, I want to check with you whether the technicals look equally good. Some of these stocks like Berger Paints, Bajaj Finance have all hit fresh highs post their earnings. Eicher Motors and Dishman Pharma also had a really strong run last week - any of these stocks that are worth trading now?Bala: I was looking at Bajaj Finance; it has had a stellar run. We have probably missed the bus if you haven’t taken position already. However Dishman Pharma along with Cadila still looks very interesting at this point. They have much more upsides coming through and they are presenting a low risk entry opportunity.If you place a stop below the January lows both these stocks Cadila and Dishman are looking interesting and they are looking like they will cross at least Rs 450-500. In my opinion Cadila is a much better stock as far as risk reward is concerned but both have potential to scale new 52-week highs. Anuj: Two stocks - ICICI Bank and Maruti, both in different categories, ICICI Bank has been in a bear market, for Maruti it has been two bad weeks but before that it was strong going. How would you approach both these names now?Bala: ICICI Bank and State Bank of India together are a problem for the market, that is what is holding back the market. We want both these stocks to pickup and once the banking index was to cross above 15700 it would be because both these stocks have stabilised.Both of them are still in a problem zone. It is looking like it is trying to stabilise but it is not yet picking up but we want that to happen for the overall health of the market.Maruti has had a stellar run from 2012. So, it is a very welcome correction. I think the correction is still ongoing. There is still little bit of downside left for the stock. It will come somewhere close to Rs 3300-3400 and stabilise somewhere around there. Then post that it will go to record highs but you have got to be patient for this stock to correct a bit more, don't get impatient and try to pull the trigger here. It has corrected quite a bit but still there is a small bit of downside to be done for the stock in the short term. I think that will be stabilising around Rs 3300-3400.Sonia: What is your overall view on the market itself. Do you think the lows that we hit in January could be protected and the worst is over for the market or do you think there could be more downsides in stored?Kumar: I think January low probably will remain the low for the year. We were hit by unprecedented foreign selling in January which had not happened for a lot of years. Obviously you had the volatility and the issues in the commodities and China. So, gradually I do believe the market is trying to form a base. If I hear the technical's right then it could well be that the lows seen in January would be the low and we gradually have a recovery phase in the market for the rest of the year although year is a long time.Early in the programme you said you got to take the market every day and in a year you have lot of days. However at the same time, I would be optimistic that this quarter’s earnings form a base for bottoming out of downgrades and then gradually we begin growth phase for earnings.Anuj: Do you have conviction that this market over the next one or two years will scale back to all time highs?Kumar: One or two years, yes of course. We are a growth market, we are a growth economy and we have had probably one of worst phases of earnings downgrades in recent years in the last 12 months and I don't think we will have the scale of downgrades over the next one year. I am looking at earnings growth coming back into double digits over the next year as well as the year after. Gradually even the capex momentum, which has begun very slowly with the public spending, the hope is even that comes back and banks begin to move their balance sheet and all of those put together you could look at a 15 percent plus type of a compounding earnings which should reflect in the market returns. That will mean your previous highs would be taken out.Sonia: What is the sense you are getting because the fear is that once the price correction gets over perhaps there is a protracted time correction that this market could see and it would take a long time before the prices return to the 2014 or 2015 levels, what is your own sense? Bala: Sometime back in the middle of 2015 you and Latha Venkatesh asked if you will get an opportunity to wear the 30000 T-shirt one more time, I said yes and I am still of the view but you have to be a bit more patient. Not only that you might have to print a new t-shirt saying 35000 Sensex. So, we are bullish over the long term but we have got to be patient in the short term, let the market stabilise, take out key resistances and then we can come out and say the market is going to record highs.Anuj: The other interesting piece of this market would be what happens to dollar and what happens to crude because this has been a global correction; this is not an India specific correction. Looking at both these parameters dollar and the crude market, what are the next important levels to watch out for?Bala: The dollar index is set to scale record highs one more time and even US dollar (USD) against Indian rupee (INR). That was my view back in December 2014, I said by the end of 2015 or early 2016 you will see USD INR hit record lows. We are very close to that. That is actually a worry for me, when the markets hit this low around 7241 I expected the rupee to capitulate to record lows, if it had done that it would have been a much welcome sign for the market to bottom but that hasn’t happen. So, that is keeping me a bit on tenterhooks.Coming to dollar index, I think it is going to record highs.Coming to crude once again it is looking like it’s bottomed out. Once it takes out USD 36-38 on a closing basis I think it is going to go for a very big bull run. We are looking at something beyond double digits; we are looking at into hundreds over the long term not in the short term. However we want to see the level of USD 36-38 taken out on a closing basis.