See Nifty at 9500 in Mar if it breaches 8900 soon: Jai Bala

Sonia: It is been a great week for the markets, I mean 4 percent higher for the Nifty in the week gone by. For some one who wants to take a fresh long position despite the run up would you advise that on Tuesday?

Bala: The market is prime for 12-15 percent correction. However this is predicated on the market falling to 8,365 from the current levels so that being the case some one who is trying to enter the market at this point of time they got to be a bit patient and see what the markets does whether it takes on 8,900 first or it falls to 8,365 first.

If the market drops to 8,365 then it is not ideal point to enter the market because the cuts can get much deeper. However, if the market value takes over the 8,900 they are looking at much higher levels like something 9,300-9,500 on the Nifty.

Anuj: In that case this 9,300-9,500 do you have any kind of time horizon for this particular mark? In terms of the Nifty would you say it is coming in the ultra short-term or it is coming in at some point during this year or may be even later than that?

Bala: If you try and takeout 8,900, the move to 9,300-9,500 should be fairly quicker. We should expect that to happen by as early as March, mid March or end of the March so it will be a fairly quick move.

However, Friday’s high of 8,860 odds is of a very significant resistance and if the markets try to turn from here the correction is going to be much deeper than what people are anticipating. So wait-and-watch.

Sonia: It has been a fabulous run for the equity markets. Will you continue to be bullish and if yes what does the shopping basket look like now?

Maheshwari: We continue to remain positive on the markets and the rate sensitive is the main stocks basically we are looking at. Now, we are looking after some of the second and private sector banks, housing finance companies, some auto companies, industrials, cement pack basically looks very interesting from these prices so that is where we are looking for in these three-four sectors. The consumer’s goods also continues to remain okay.

Anuj: Are you implying that the run in the top tier banking and financial names like HDFC and Axis Bank is that coming to a bit of an end for the near term?

Maheshwari: Somewhere around these levels some breather should be taken and that is where we are seeing that some of these stocks basically are going over the top for the moment.

Sonia: Can you just belabor that point a little bit about the second round private sector banks? We have seen stocks like Yes Bank hit new highs everyday. What would that list look like?

Maheshwari: Some thing like a Yes Bank, Federal Bank, a Development Credit Bank (DCB), South Indian Bank these are three-four of the names. Again on the housing finance side something like a Dewan Housing Finance we have been liking that stock for a while. Especially the Cement pack; cement pack as a whole is looking very interesting UltraTech Cement, J K Cement, ACC these are some of the names which we have been telling our clients to buy.

Anuj: Apart from that this week was also about narrow market, largecaps outperformed and midcap did not perform at all or were under performers. Do you think that trend is going to stay for sometime or do you expect a big midcap outperformance now heading into the Budget?

Maheshwari: What I see is after the rate reversal is happened and yesterdays ECB buying so you are seeing some amount of good exchange traded funds (ETF) buying and they largely come in the largecaps. Again the foreign institutional investors (FIIs) also are looking to once again increase their positions and they are also largely focused on to the largecaps.

At these levels I see that the domestic have been either consolidating their positions or are taking profits so you are not seeing a strong rally in the midcaps as yet. However, will it shift it is only after the Budget I see once again the shift happening.

Sonia: There was a mix bag performance in the auto stocks last week while Tata Motors have been hitting highs; names like Hero Motocorp have come under some profit booking. How do you decide which stocks to put incremental money into and what are your favourites in that pack?

Maheshwari: Four-wheelers continue to do pretty well and that is where we are focused also. I do not see two-wheelers doing very large numbers out there and the growth among the four-wheelers is going to be much stronger. So, our top pick there is Maruti Suzuki, Tata Motors followed by Mahindra & Mahindra.

Anuj: What happens to the Bank Nifty now because that crossed 20,000 and has been a big outperformer over the last three months or so?

Maheshwari: The important resistance for Bank Nifty comes around 20,150 and it is almost there and if you recall from a couple of interactions ago I had said that Yes Bank and Axis Bank are likely to be the best performers and State Bank of India (SBI) from the public sector space. That is typically what has happened and this is not much of a surprise but the speed at which this has come is a bit quicker than anticipated.

However, again the momentum for the Bank Nifty along with these new highs is not supporting the new highs. So, we could see some sort of a correction come through in the banking sector. So it is better to be a bit more cautious here take some chips of the table rather than create fresh longs in the banking sector.

Anuj: What is the key risk to this market now because really, it has been a nonstop rally, we haven’t seen any correction at all. Seven to eight percent was the biggest correction that we got. From this point on what is the biggest risk?

Maheshwari: International risk, one of them has been out of the way, the second risk remains to be on the 25th, what is going to be the outcome on Greece. That is going to be a significant one basically though markets are becoming more calmer expecting that the Greece episode is also going to blow over but that is one risk basically which one can look at as far as the international outlook is concerned.

Domestically I believe worse than expected quarterly results. That is the one which is there on the horizon. Beyond that you only have the Budget basically where the expectations are very high and when you have such high expectations there is a very high chance of it falling short of it and that would be another disappointment which we will have.

Anuj: If the market has to go to 9,300 to 9,500 what would be your top three or four index names, blue chip names that you think would lead the market there?

Bala: Pharma names are coming to life or they have already come back to life. There is a good chance that pharma will be an outperformer in this league of the market and I have been bullish on the engineering stocks and power sector stocks, particularly BHEL, that will be doing pretty well. We are looking at something like 330 for BHEL and although it has underperformed on Friday BHEL is looking very good even at this levels and of course you can’t exclude banks from it and at this point SBI still has some headroom for the rally. So these are the names I am looking at.

Reliance, which has actually started showing some signs it could continue to give some more higher returns but it is not a trend changer in the longer term, it is still moving within the longer term range of 1,060 to 850. So, from the current levels it could offer another 10-12 percent higher.

Sonia: What is the feedback from the retail and the domestic community? Has the participation and the confidence picked up and do you see more domestic flows coming in?

Maheshwari: Definitely, specially on the domestic institution side we have seen flows being good. The only place where I see a bit of disappointment is the insurance side basically. This quarter used to be very big for insurance but it doesn’t seem to be happening. So, most of the people are still looking to come to the market through the mutual fund route and where we are seeing good amount of flows coming in.

Anuj: In the midcap space you have given us some names but in terms of stocks that you believe could rerate from here on in terms of either top down stories or bottom up stories, do you have any particular names in mind?

Maheshwari: Are you saying in midcaps?

Anuj: Yes, midcap stocks.

Maheshwari: A few of them which come to the mind basically Diwan Housing is one of them which is available pretty cheap, 1.2-1.3 times. There is JK Cements which I spoke to you earlier. That is another rerating story. Then you have in the large caps Mahindra & Mahindra is one basically where there is huge amount of underperformance and I believe once the new vehicles are out there is going to be huge outperformance happening on Mahindra & Mahindra. So these are some of the stock basically which we like.

Again in ITC also there has been a huge underperformance there. Last quarter results have been a bit disappointing but I believe once the Budget is out of the way ITC should perform pretty well from here.

Sonia: That was a list of midcaps, but what about the large caps because in the week gone by we saw so much heavyweight participation from the likes of HDFC, L&T, Axis Bank. All these stocks are up about eight to ten percent. If you have to pick two or three large caps to put fresh money into which ones would they be?

Maheshwari: I would still go out and buy Axis Bank, I would still go out and buy Ultratech Cement, I would still look at Mahindra & Mahindra, an ITC. So, these three - four stocks is where I am going to put my money in the large caps.

Sonia: So, at what point in this market would you start to get worried about valuations. Many of these stocks like HDFC are extremely expensive at this point. Is that a cause of concern or do you think this market is getting rerated in such a way that valuations don’t matter anymore?

Maheshwari: No, it cannot happen that way. So, valuations are very important actually and it cannot be rerated to an extent basically where earnings do not support it. So, we are very close to that actually where another 100-200 points rally basically is going to make the market jittery but we have seen on both sides of the market basically when it is falling and when it is going up both sides markets over do and I believe it is another 300-400 points rally in this euphoria, can it happen? Yes, definitely, why not.