'See muted topline growth; 8225-8300 short-term resistance'

International money flow has been one of the key pain points. To give sense, sovereign wealth funds constitutes of very large part of international fund flows into equity and debt markets. Total sovereign wealth fund market is about USD 7.5 trillion out of which almost 50 percent plus is from countries which are hydrocarbon producing or exporting countries. However, with price of oil crashing so dramatically, this large pool of money is under lot of stress and that is causing pressure to buildup in most of the equity markets across the world and specifically getting reflected in emerging markets. So at some level it appears that 7,500 is a bottom given the overall domestic macro scenario but the international fund flows will continue to have an overhang in terms of market moving upwards.

Ekta: We are going to get into earning season next week. Your sense in terms of what we can expect from this quarter and which sector might standout on the upside as well as on the downside?

Khattar: We have seen that the demand recovery has not happened as what lot of people would have expected. Certain degree of downgrades would happen even in this quarter and if you were to look at results of the last quarter, we degrew in terms of bottomline; topline also some degree of muted growth. Most of these trends are likely to continue in the coming quarter - that means the topline for companies on an average could have muted kind of growth and the bottomline would be flat to slightly negative. This is a very generic one for the overall basket.

However, there will be areas which will shine; there will be sectors which will do well, which could include the urban consumption side which is on the fast moving consumer goods (FMCG) side. You could have autos especially the medium and heavy commercial vehicles (M&HCV) players like Ashok Leyland delivered good set of numbers and maybe in terms of rural demand especially on the housing side stocks like GRUH Finance and Repco Home Finance could be interesting bets.

The sectors which will do well are where you will see at least early signs of demand pick up; let's say in case of consumer durables, you are seeing data which is turning positive after many-many quarters and many months of negativity. The consumer durable demand has turned positive. The government is taking lot of action in terms of road construction space. Last year we bid out about 3,300 km of road. We have already done 2,400 km which is about 70-75 percent of last year, already in six months. So, road construction, engineering, procurement and construction (EPC) companies, build, operate and transfer (BOT) companies could provide lot of positive surprises in this quarter.

Sonia: What do you do with stock like HCL Technologies now? This stock has been one of the best performers this year but now there is a client specific issue because of which it got hit hard. Do you keep the faith and either accumulate or stay with the stock or now do you start to become a bit cautious?

Khattar: Our sense that the degree of overvaluation or stretched valuation which was there in HCL Tech, has gone away with a very steep correction which has happened. If you were to look at what company reported - USD 20 million hit in terms of specific client issue plus the big concern which market has been surprise with is that one of their components of the business which is IMS part of their business, infrastructure management services, which gives then 35 percent of their revenue, they are facing some challenging situation there.

However, what is happening at the global level is that lot of companies like HCL Tech which were handling infrastructure management services for the companies in US and Europe, they were still handling infrastructure which was at a relatively basic level. As these companies in US and Europe are moving towards cloud computing and so on, the competence required to manage infrastructure for these companies would go up. The complexity would go and that is our transition which market is worrying about as far as HCL Tech is concerned. So maybe for a quarter or two, the market will see what kinds of numbers the company report, how is company able to handle this IMS challenge going forward and then you could see upside on the stock. Our sense is for the near term the stock could remain range bound with slight upward push in case any positive news emerges. 

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Ekta: How would you approach Titan Company? There were two cautious notes which came out from your peer brokerages and there is an estimate that the jewellery business may decline in Q2. How are your thoughts placed on Titan?

Khattar: My broad sense as far as the jewellery business in Titan is concerned is if you were to look at what has happened for the last ten years in case of gold and jewellery demand, gold has always been India's one of the favourite places to put money in but with very high degree of inflation the physical assets in India grew dramatically and gold was a very big chunk of it and significant of demand that appetite for gold lead to jewellery demand. Now with inflation being very low and financials doing well, the household saving will shift from physical assets which is real estate and gold towards financial savings, which means that the demand for gold anyway should begin to taper off to certain extent; it may not be as aggressive as what we saw in last five-seven-ten years - that's one factor, but overall the slowdown in the urban consumption and rural consumption could be the second factor which could cause the demand for jewellery to taper down and that is my broad sense at this particular juncture.

Sonia: The other big issue that blew up in the last one week was the entire Volkswagen scam and we saw a lot of companies getting impacted by it and Motherson Sumi Systems was one of them, there was sentiment impact on Tata Motors as well. What do you do with these two stocks?

Khattar: The world has been riveted to the TV screen in terms of what's gone wrong with the Volkswagen 11 million cars being impacted with the glitch which will cause the nitrogen oxide level to be misreported. It's a clear case where company has made a mistake, it's a clear error and there could be penalties including the criminal liabilities which could emanate out of US.

However, globally you will find that a hit of such a large-scale is not very common and that is what is reflected in the stock price.

Our sense is that Volkswagen itself is sitting on huge amount of cash almost USD 30 billion plus it generates operating cash of about USD 10 billion every year which is a very large sum. So will the company be able to take the knock and move on. Our sense is yes, though the criminal liabilities or the class action suits could have seen significant impact in terms of this cash reserves, but how does a consumer in Western countries behave in terms of their actual demand for diesel cars and what could be the impact on market share of Volkswagen both in Europe as well as in US, is going to be the key question and that is one answer that we will have to wait for because I do not think even Volkswagen or Audi has a sense today what will play out.

Therefore, that leads us to the companies which are auto ancillary suppliers to these companies. Motherson Sumi has been one of the key auto ancillary suppliers. It has been our favourite for last two or three years. We have liked the stock very much at about Rs 100 or Rs 95 and it has been our top buy but our sense is that with what is playing out in Volkswagen; there are near term headwinds, some of which has already got factored into the price over last month or so and maybe in the near term the stock will stay at these levels and wait for more information that could emanate out of the data in Western markets in terms of demands for both Volkswagen as well as Audi cars. If the demand shows no disturbance and demand continues to remain robust and picks up, I think Motherson Sumi could be a very interesting bet going forward.

Ekta: HCL Tech had a very disappointing session because of the guidance warning that came in on Wednesday evening? What are your thoughts on the charts?

Bala: We were expecting the frontline stocks like Infosys and Tata Consultancy Services (TCS) to get into some action but HCL Tech has got into that resistance and faced some significant down move. I think we need to be careful with IT space and with specific to HCL Tech - that's probably showing early signs of weakness. Therefore, stay away from the stock at the moment. We need little more time for us to assess.

If we see the CNX IT index fall below 11,700 then this could be a bit of drag for the whole sector, could drop to something like 11,000 for the whole index but it could be just a short to medium-term correction and not a long-term trend change.

Sonia: What about the index. Last week after the RBI cut the rates, what the Nifty managed to do is at least defend that 7,500-7,600 level. Do you get a sense that the index is going to trend up from here?

Bala: There are couple of possibilities for the index. One is a bearish possibility and other is a bullish possibility which says the market has already seen final low and the uptrend has resumed. The first case is that if it still got further lows to come through, I do not think it's going to go much lower than 7,540 levels that we saw few weeks back. It will be just 50-60 points below that and then it will resume the uptrend, which is what we have been insisting for several weeks now, but if the market has fallen short of the final leg at 7,691 - this is a typical thing that happens in the final leg of a correction, market tend to fall short of the ideal targets. If it has done that, we want to see the Nifty close above 8,054 for a couple of days. If it does that then we will call this as a truncation of the final leg and we will get ready to be bullish on the market from overall sense.

We also highlighted couple of weeks ago that the Bank Nifty is performing slightly better than the Nifty. So if the Bank Nifty is actually driving an important message by not going below significant support. If the Bank Nifty again takes lead then it will give another indication that the final low of this correction is already in._PAGEBREAK_

Ekta: When you speak about an uptrend -beyond 8,000 what is the level on the Nifty, do you think we can recapture by the year end?

Bala: We need to first look at the reparation work that the market needs to do. It had a significant amount of damage from 9,119 to 7,540, so the short-term resistance are placed around 8,225-8,300. If that is taken out in the short-term then by the year end we are looking at the record high, but that was a projection in June, but once the market went below 7,940 we said the correction is little bit undone and it need to complete that correction and once that is done then the long-term uptrend is intact. We still are of the same opinion but it may not come by the year end maybe sometime by January- February. It is slightly postponed by a couple of months. Therefore, we are looking at record highs once again but don't pre-empt the market, let the market say it has stabilised, it has done the reparation work; let it cross 8,200-8,300. Once it has done that then we can be clear that the all time record highs are back on the table.

Sonia: In the week gone by the sector of the week was pharmaceutical. Lupin has hit a fresh lifetime high, there was so much traction in names like Dishman Pharmaceuticals & Chemicals etc, any fresh trading ideas that you would recommend there?

Bala: Stick to frontline pharma names barring Sun Pharmaceutical Industries. Sun Pharma could have a relief rally close to Rs 1000 but if you stick to Cipla, Lupin and Dr Reddys Laboratories, it is quite bullish out there and I am looking at record high for Dr. Reddy's close to Rs 4,600 plus. On Cipla we are maintaining a target of over Rs 800 plus, so there is no change in that. So once the frontline pharma names starts moving, we can start looking at the second rung pharma names but until that stick to the frontline pharma names.

Ekta: Any levels on the Bank Nifty and the Bank Nifty Constituents?

Bala: 16,700 on the Bank Nifty is a very significant support. It has taken support there. However, last week we said that the Bank Nifty would clock higher lows even if the Nifty were to go below 7,540. It is showing a positive sign so far but once the Bank Nifty can take out 17,700 to 17,800 on the way up then its positive for the Bank Nifty and we can look at levels of 19,000 plus once it starts going above that level. So be patient. It's all looking positive but let's not pre-empt the market.

Sonia: If you had to be given a blank cheque and advice some trading ideas from the frontliners or for the midcaps next week, what would your two or three top ideas be?

Bala: I am positive on the pharma names and we discussed a few. I am also positive on FMCG. I think Hindustan Unilever has put in a significant low for the medium-term. If it were to stay above Rs 820 for a couple of sessions then we can look at record highs beyond Rs 1000 for HUL. So that will be a top pick.

If you look at midcap space, I am still bullish on midcap cement. JK Lakshmi Cement and Mangalam Cement are my top picks. They have 40-50 percent upside from current level but they are already stabilising. We can even go ahead and pull the trigger in the midcap names.

Ekta: What about telecom. We had Idea Cellular which shot up around 7 percent odd in this previous week, anything you like within telecom which provides confidence?

Bala: I have been mentioning couple of names. Idea was finding a significant support around Rs 135-140 levels and I had said that if it were to close above Rs 157 then Rs 210 will be back on the table for Idea.

However, on a long-term basis I have been bullish on Reliance Communications. I have been maintaining a target of about Rs 167 plus from 9-12 months timeframe but it is showing good sign so far. Therefore, wait for Reliance Communications to close above Rs 75, so all the alternate bearish scenarios can be eliminated once RComm closes above Rs 75 and the same for Idea; Idea has already stabilised. These two forntline names are quite positive in the telecom.

Sonia: You were telling that 8,054 is the level to watch on the upside, which if it gets conquered you will see more on the way up but what about on the way down, has the base for this market moved up and if yes, what is the durable floor for the market now?

Bala: I cannot take a clear stand at the moment because we want certain price action to complete, certain form for the market to complete and that's why I am looking at 8,054. So even if the alternate scenario says that the market going to go slightly below 7,540 lows it made few weeks ago; I think it is not going to go much below 7,480, 7,470 sort of zone.

I think we are in the last leg of down move or the down move is already done. So we can start deploying capital somewhere in the ratio of about 20-30 percent and then wait for the market to give further close and then we can pull the trigger further.