The ongoing correction in small and midcap shares could continue for a while, says Dhananjay Sinha of Emkay Global.In an interview to CNBC-TV18, he says retail investors--particularly high networth individuals--do not have the strength to put in fresh money. He says waning retail interest is also evident from the tapering of inflows into mutual funds."People are not willing to put in fresh money," says Sinha, adding that lack of buying support more than selling was adding to the weakness in share prices.He says the recovery will be led by large caps, as investors will wait for signs of the market stabilising before commiting money.In the short term, Sinha says he is bullish on companies that will benefit from a depreciating rupee. Also, he feels interest rates are likely to harden and says banks could benefit from better margins. Lastly, he is bullish on companies which are a play on urban consumption. Below is the verbatim transcript of Dhananjay Sinha's interview with Latha Venkatesh, Sonia Shenoy & Mangalam Maloo.
Mangalam: There have been talks of margin calls being triggered and stuff because of which we have seen a bit of selling in the market. How much of that has played out and how much of that is remaining as per you?
A: As far as margin call is concerned, it is difficult to say that and it's largely on the back of the fact that there has been a significant correction in the midcap and the smallcap stocks. I think that correction is translating into that. I guess that could sustain.
However, the feedback that we are picking from the market is that the retail investors especially the high net worth individuals (HNIs) has not got the strength or the confidence as of now to put fresh money. So as long as the correction in the midcap remains, the concern on margins can still sustain.
Mangalam: While the HNIs have not got much fresh trend to put in back into the market. Are you seeing a pullout from them, are you getting market orders rather than limit orders as far as sell is concerned from the HNIs?
A: The thing is that people are not willing to put in fresh money. I am not sure whether there has been a selloff because if you consider the data on domestic institutional investors (DIIs), more recently it has been picking up, over the first week or so there has been some selloff by the DIIs. So broadly we have to see whether midcap and the smallcap and especially microcap where a lot of these HNIs and smaller investors or retail investors, will they come back or not and with the kind of correction that has happened, there has been severe correction that we have seen since the beginning of this year. So I do not think they are going to come back yet. I think if the market has to stand or regain strength; it has to be lead by the largecaps because as far as the multiples are concerned on trailing basis, the correction has largely been lead by -- earlier was lead by the largecap and then followed by the midcap and smallcap. So effectively for a rebound to happen, it has to be largecap lead, if at all it has to happen and that depends on the flows from the FIIs and institution investors. So that is a data that we will have to look at.
Mangalam: You are alluding to the fact that the domestic investors have ramped up their gains in the last couple of sessions or so. So how much of a factor do you assign to that of it being LIC lead domestic and institutional investors buying?
A: If you look at the mutual funds, the incremental flows happening from there has come down, it is not still negative. Therefore, what is happening on incremental basis is that some of the insurance companies have been putting in some money because this is a quarter where insurance company will see flows and as far as LIC is concerned, LIC has been sitting on the sidelines and they must be waiting for disinvestment programme of the government and they should be keeping some gunpowder dry, so if there is pressure on disinvestment or more disinvestment happens later in this quarter, they have sufficient space to invest into that. So I do not see LIC being fairly active at this juncture.
Latha: After sterling numbers Asian Paints and from decent numbers Mindtree and HCL Technologies are all in the red. It's only Bank Nifty which is in the green. Can you explain this quandary to us?
A: If you look at the market, what seems to be happening today, after a routing that we have seen over the last couple of weeks, there is certain stability and from a macro standpoint as the market is gaining some stability given the context that larger correction has happened with respect to the high beta specially the banking names or the recovery is also happening over there. So in that context companies that have done well, HCL Technologies in our view has beaten street estimate and Asian Paints has done well with respect to volume growth and other operating matrix. So those companies have receded in terms of the attention that the market is giving today. So it's a matter of mild rebound that we are seeing after a huge correction that we have seen over the last couple of weeks and that's how I would characterise today's market.
Sonia: Once this market does stabilise, where do you see leadership emerge from?
A: Effectively the leadership will emerge from two things. One, it's the companies that will benefit from depreciation in the rupee. We think that there will be certain benefit to specific companies from there. Second, we think interest rates would be hardening, we see 10-year hardening, we see liquidity tightening so effectively banks that have positive Asset Liability Management (ALM) gaps, those will benefit with respect to margins and third segment where we see improvement is urban consumption and we see the spill over effect from high government spending which Economic Advisor has alluded to wherein he has recommended that government should go countercyclical as far as fiscal spending is concerned. So we see a lot of implication for consumer names in the urban area especially in the auto sector.
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