Go long on small and mid-caps, says Capital Mind

Markets are very richly valued and there are signs that they will keep going up, says Deepak Shenoy, Chief Executive Officer, Capital Mind. The liquidity in markets has risen.There is a clear sign of the number of traders increasing as the trading volumes rise, says Shenoy. He argues against shorting for now and recommends going long for midcaps and smallcaps.He showed his dissapointment towards Axis Bank, saying that its condition could get worse in the coming quarter. He recommends stocks like IndusInd Bank and HDFC Bank from the private bank space.Talking about Havells, Shenoy says the company posted very good numbers but is very cautious about giving it a buy as he feels the stock is expensive.Lastly, he points out that the market is mostly overvalued at the moment.Below is the verbatim transcript of Deepak Shenoy's interview to Latha Venkatesh and Ekta Batra on CNBC-TV18.Latha: What are you telling your traders if you do advise them, is this a time to smell a breakout?A: I think it is a very interesting point where I think fundamentally markets richly valued, but technically it showing signs that it just keep going up. Literally, anything that hasn’t gone up in the last few days is likely to go up in the next few. There is extreme amount of liquidity a lot of new people seem to be entering the market at least looking at the volumes. I believe this market is not going to go down in a hurry and the euphoria is starting to build up, so as a trader I would not be short this market and you would actually want to be long midcaps and some small caps as well.Ekta: How would you approach an Axis Bank in this market because the numbers you saw them on Friday evening it was a clear cut disappointment in terms of asset quality, the watch list didn’t move much beyond that Rs 22,000 odd crore mark. How would you approach it, even the cautious commentary didn’t have anything to move the stock, but it has recovered the Bank Nifty is at the high point of the day.A: I think the liquidity is moving it, but Axis Bank in particular has been a bit of disappointment. I would have thought that the watch list would have gone down considerably more than the NPAs or the provisions would have increased so I think they have seen Rs 3,500 crore increased in provisions or NPAs, but only a Rs 2,600 crore reduction in the watch list, so there are more skeletons in that closet I believe, this is just Q1 we will see more in coming days. Only their retail operations seen to show any enthusiasm, wholesale banking and treasury both of them have seen drops. Treasury in the face of a falling 10 year yield and tremendous increase in the price of bonds as well, I am not very happy with this Axis Bank results and some of the other private banks like IndusInd or even HDFC have done substantially better.Ekta: Coming back to a couple of stocks that we are looking at in terms of numbers, Havells completely blew it in terms of an outperformance this time, lot of people buying their fans, their geysers, their pumps, their consumer durables business was up 20 percent this quarter. How would you approach Havells and do you like the business, do you think it’s a buy at this level?A: I think the results have been fantastic. They have pushed away the Sylvania backdrop and now they are getting some really good numbers in and the stock remains a little expensive, but at these kind of results if they were able to maintain it then the stock can do real wonders. We are seeing lot of activity in that space. Finolex Cables for instance is one of their biggest cable competitors, that also has been doing an all time high for the last 7-8 days. I think the durable space for Havells is not working quite as well as perhaps some of their other business lines, but going forward if you are looking at a Pay Commission, you are looking at good monsoon Havells should be able to maintain at least in September quarter’s results at the 30 percent plus, 35 percent plus. I think this is a solid company and if it breaks out of this range and about Rs 380-400 if it reaches, I think this has a strong technical potential also to go much further from here.Latha: What stood out for you in the results season?A: I think it is not yet over, so I can’t just say that it is done. Some of the smaller financials we see Equitas do very, very well on results. I believe some of the other ones will also come out, among them we see companies like Equitas do substantially well. Much of the industrial space are still yet to come, but Reliance’s kid stands out in terms of results for me and on the large cap levels.Latha: But is there a still space from a valuation zone to buy stocks like say L&T Finance or even Equitas?A: That’s a good point, while results have come well the stocks have run ahead of themselves. We have seen this across the pack. Even in the small cap space or the midcap space, the PE of the midcap index is now 33 plus is the highest ever or I think it is higher than the 2007 levels. We have seen even the Nifty PE at elevated levels, but the Nifty Next 50 also is showing 28-30 PE, so I think expectations are quite high, some stocks are meeting this expectation. Overall, I believe we are doing less than the stock market expect us to be doing in the valuation level, so from a perspective of valuation I think more stocks are overvalued and you should only play them as a trading play right now.