Market heavy, June to be tricky; ITC may go Infosys way: Udayan

Market is not weak at this point, but is rather ponderous, is the word coming from CNBC-TV18’s Consulting Editor Udayan Mukherjee. Nifty is likely to hold on to its 7700-7950 mark in the coming few weeks, but could go down to the 7500-7600 level if dollar strengthens. “7500 should be the floor for our market in near-term,” he says. One will also have to take into account the looming global events in June — the Federal Reserve and Brexit meetings. “June is loaded with possibilities,” he adds. Mild risk-off in emerging markets may be seen. The coming month will see a rally if the US Fed and Brexit both do not make any move. But there could be some shake-up as expectations of rate hike increases for July. Among individual stocks, Mukherhjee says ITC is likely to outperform in the near-term. Some upgrades are likely considering the rise in cigarette volumes. He is also bearish on the pharmaceutical sector and says serious capital erosion is expected in the space. A 15 percent correction in pharma stocks is not unlikely, he adds. Below is the verbatim transcript of Udayan Mukherjee's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: It has been a slow grind to the bottom for the market and now we are sub-7,800 a swell. How have you read into the cues, largely global in nature, which have put pressure on our market lately?A: The market is appearing a bit heavy and that much is quite clear from the price action because we have had a couple of swings down to 7,700-7,800 zone and the market attempted to get back to 7,900-7,950 - that got sold into and we have ground down to these levels of 7,700-7,800 once again. So it appears that the market will do better or do well to get a swing lower to get some more purchase, to get the momentum back. Often it happens that after a very long rally, market distributes a bit, appears a bit heavy and therefore a bit of a correction is necessary to get the buying back in full force before the momentum resumes once again. It is not a market which is looking terribly weak but it is looking a little heavy and ponderous at this point and maybe because of the technical because while the domestic investors have been supportive, the foreign institutional investors (FIIs) selling figures have been coming in over the last four days, not huge but enough to keep a lid on the index. The best case scenario for the next few days is that the Nifty continues to hold this range of 7,700-7,950 but it wouldn't be surprising particularly if the dollar strengthens some more that we probably seek lower levels of 7,600 or even 7,500 on the Nifty. Latha: In April we were made to fear the -sell in May and go away - phenomenon. We have got away with less in terms of a downside; sell in terms of a scare this May. Are you getting a sense that the downside is protected? What are the scenarios for June?A: It did not happen in May but June is a tricky month because there are so many events stacked up. When they say sell in May and go away, they don't say come back in June; they probably mean the summers and the summer is not out yet. I think June is loaded with possibilities. Right now all global markets are fretting over the possibility of this rate hike, which has suddenly come back on the table. The dollar has strengthen, most emerging market currencies have got hit a bit including the rupee and for the moment there is a mild risk off across global markets, emerging markets in particular. So that scenario is understood. Can this strengthen over the next couple of weeks as people start worrying more and more, market starts pricing in the possibility of a Fed rate hike. It could certainly happen. I do not think it will be an alarming situation but it could lead to the scenario one is talking about of the Nifty getting down to those 7600 kind of levels. Heaven will not fall if that happens. It is a small correction in the context of the rally that we have seen but there are two big events in June; one of course is the Fed meeting and other is the Brexit. You could have a possibility of scenarios - markets are soft into that Fed meeting because they fear that a Fed rate hike will happen and that does not happened, then markets will have a bit of a sigh of relief and then we get into Brexit and that Brexit situation is complicated. I do not think it will happen. It should not be the base case scenario for the market and therefore if the Brexit does not happen, you will almost certainly get a relief rally because it is getting priced into a small extent into most markets but that relief rally might be tempered by the fear that in July with Brexit out of the way the Fed will then go on to raise rates, having not done it in June. So you could have a soft patch now, you could have a rally in the third week of June because of Brexit not happening and then you could again have the markets come off in July. So the next six to eight weeks are loaded with possibilities of volatility. Therefore, the one thing one can safely bet on is that the Chicago Board Options Exchange Volatility Index (CBOE VIX) will rise over the next six to eight weeks and even the India VIX might probably go on to rise a bit. So expect volatility but maybe ups and downs through this summer. Sonia: Talking about the individual stocks, the ITC stock has not performed in the last two years but do you think the time for ITC to perform has come now, post good numbers?A: It's a surprise because the tobacco numbers have surprised the street and therefore, there will be some upgrades. However, for the longest time my view has been that ITC is Rs 300-350 stock but Rs 300 now remains a firm base for that company. We may get closer to Rs 350-360 right now but ITC might move the Infosys way, which is that for a while suddenly people will start flocking to that because it has underperformed for a long time and therefore has mild under ownership at this point and that will get corrected over the next few weeks, so expect outperformance in the near term. But, I expect that very soon the trade will become quite crowded and then it will not perform as well as you have seen in Infosys over the last few weeks - there was a bout of outperformance, everybody owned it and then the outperformance has got stymied a bit. So, in the near term Rs 30-40 upsides in ITC over a period of time can certainly happen.I think there are two issues with ITC. One, the fast moving consumer goods (FMCG) business will remain a challenge going forward as will be the paper business but the bigger problem could be that as we get into the monsoon session and beyond, goods and services tax (GST) might become a probability once again and that might cap a bit of the exuberance on ITC. I do not expect ITC to close the valuation gap with its FMCG peers because it is not FMCG company. It comes with a lot of other challenges build with the tobacco business which is not as clean as some of its FMCG counterparts. It trades at 25 times; it can inch its way up to 27-28 times but never 35-38 times like other FMCG companies.Latha: Can I make a bull case for this market. The rains, bankruptcy code has passed, a lot of people are arguing that numbers are now stacking to reduce the opposition to the GST in the Rajya Sabha, the required 1/3rd, 82 seats maybe lost in the current set of new people who will come into Rajya Sabha, so GST passes and even the broad swath of midcap numbers; the number of winners are clearly outnumbering the losers as of now. Is there a fairly decent bull case for this market for the next 12 months or for 2016?A: If you look at the domestic picture, probably yes, as I keep saying that you have to keep the global context in mind and that is the fly in the ointment, just the last time we spoke, we were talking about the rupee and the bull case for the rupee and why it should appreciate. Look at the evidence of the last one week; the smallest of wrinkle in the global markets, a little of pressure on the dollar on the way up and the rupee depreciated despite the strong internal fundamentals that it enjoys at this point in time that underscores the point that I am making that this market in India, regardless of its domestic fundamentals, is still very heavily dependent on what happens across the world. There are such a lot of possibilities this summer across the world, including that of the US getting into an inverted yield curve which has pernicious possibilities that it can hint to going forward. So keep your eye on that as well. Yes, there are domestic cases which are looking better than the last quarter or so, there is no doubt about that, which is why we are trading at where we are trading at 16.5-17 times. A part of it is captured in the valuation and the premium that we enjoy compared to other global markets. So a lot of the local news is in the price. The thing that we need to worry about over the next couple of months is not probably so much local but global and there things can go wrong. So, if everything is okay and we suffer from some mild global volatility then 7,500-7,600 is the floor for this market for the time being. If it turns out to be something more dramatic globally then we will have to reassess the situation. Local bullish factors are not withstanding.More to follow..