Market technically overbought; paper supply to weigh: Dutt

Dutt is bullish on financial services and banking stocks, and is betting on capital goods and EPC (engineering procurement and construction) companies to play the domestic recovery.

Below is the transcript of Sanjay Dutt's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: Markets are in terribly cheerful mood, you want to play party pooper?

A: The viewers should mute the channel when I am speaking right now because I got it totally wrong. I wasn’t expecting this when I last spoke to you and I was expecting a reasonably good retracement to the 8,000 range. Markets always are smarter than us. Let me hazard a guess as to what lies ahead. I think markets are purely running on momentum, liquidity and expectations right now.

The real earnings, the fundamentals need to catch up a lot but at the same time as most analysts will tell you and everyone will tell you that markets are always factoring in the future therefore, it is probably a future what is built into the prices. If that be so, I think there isn’t much scope for the markets to go up in the immediate short-term.

If I continue to maintain if there is a possibility, there could be a reasonably good retracement and that would be a good time to add in to investment buys. I maintain that the medium-term to long-term outlook of the market is very positive. It is the short-term retracement that I think is long overdue, even technically we are a tad overbought, global factors aren’t helping in any manner. So a combination of these should pull the markets back before we take the next leg up and come into that 9,400-9,500 range after we breakout of 9,100-9,000 range.

Latha: Does this period remind you of 2003 when the markets steadily built up -- until 2003 we did not have great numbers in terms of earnings but thereafter earnings picked up and we had a nice secular rally all the way up to 2006-2007, does it remind you of that period or does it remind you of a frenzy that we saw only between 2007 and 2008 when markets ran on only money? Where is it more akin?

A: I think it is more akin to the only money and the India story because on ground, things haven’t changed as yet or aren’t changing that fast as we want them to.

It is only most of us on the Dalal Street or in front of a trading screen, they are feeling very optimistic but when you talk to on-ground, hardcore business people particularly the real engine of our economy, the real heart of our economy that is the medium and small enterprise, they are struggling with a lot of problems right now.

I think those need to be addressed at the grass root level and once that activity picks up, obviously the initiatives are being taken by the current dispensation that is Prime Minister and his team on Make-in-India and those kind of issues sorting out bottlenecks, those would lead to that. That is the reason why I maintained that medium-term looks good.

However, what we are seeing right now is more akin to the 2007-2008 frenzy in the immediate short-term. If numbers catch up faster than what we think today, probably this momentum would maintain and we wouldn’t get that pullback that I am looking at and lose some of my gains and be left behind.

But then I will catch up probably later on because there is no doubt that there is a structural change in the way government is looking at business, the way businesses are changing, the way the entire landscape is changing and will change. It is just that these three-six months is what we all are trying to comment and game on. At least I am trying to comment and game on.

Sonia: We have a slew of paper that will be hitting the market in the near-term. In your assessment generally when there is supply of paper, does it affect the market in a big way or is it just about a 2-3 percent downtick and then we resume our uptrend?

A: If the downtick does happen, it will not be 2-3 percent, it will probably be bigger than that. Yes, paper supply does impact the market. For instance in Coal India, approximately USD 3-4 billion will get sucked out. Therefore, paper supply does move out a lot of money that is meant for equity allocations particularly out of global emerging market portfolios as well as domestic portfolios but liquidity flows to India would continue as long as the reform momentum and all these measures that are being spoken about are implemented and on ground one sees action.

However, the real stuff we need to see is that the core economy starts to pick up, that is credit offtake, capital goods, employment numbers those take time but those need to pick up, we haven’t seen them picking up in the last nine-twelve months but those need to pick up substantially. Bank balance sheet is getting sorted out. We know government is working on them, we know their right intentions whether it is power sector or bank non-performing assets (NPAs) etc but stuff needs to radically change there for the entire economy to pick up and the numbers to change. So it is not just about these 100-200-300 big companies that drive our economy. It is that real heartland that needs to feel everything coming back to that robust level.

Sonia: Let us talk about how to approach this market sector wise now because the good part is that since the start of the year, the rally has been so secular, Hindustan Unilever Ltd (HUL), Axis Bank, HDFC, Larsen and Toubro (L&T), you cut across all sectors and you have seen gains of 20 percent but from hereon what would the sectoral approach be for investors?

A: Financial services and banking looks good because things like insurance, things like widespread reach of financial services and banking whether it is mutual fund (MF), non-banking financial services (NBFCs), those kind of businesses then of course if you are betting on the economy recovery then capital goods, EPC, infrastructure, contracting companies because that is the only way that you will see a revival in the investment demand, revival in the capex cycle, everything else and it is all flowing down to the grass root level. So these are the sectors out of big companies that I would look at which I think would give good returns.

Latha: Speaking of financials, the public sector undertaking (PSU) bank numbers that we got from Union Bank and Oriental Bank of Commerce (OBC) were quite disastrous especially the bad loan creation. Is this a good time to buy them?

A: I would take that risk. We have seen the worst of the PSU balancesheet hits. Most PSU banks have been ultraconservative now and trying to provide for everything. So I think negativity as far as non-performing assets, restructured assets etc are all kind of built in and whatever would happen, would happen for the positive as to what Reserve Bank of India (RBI) is working on in trying to help banks solve the problem relating to these slow recoveries and these bad accounts.