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Current bull mkt still young; like LT, pvt banks: Experts

The momentum of the rally seen in the last few days has been much sharper than expected, and so there are chances of it consolidating going forward, feels market expert Sandeep Shah of  Motilal Oswal . According to him the current bull market is still young.

The sudden rally in market could be because of all around positive newsflow, positive global economic data, good last week quarterly earnings, and a stronger political mandate for Narendra Modi, feels Shah.

According to Jai Bala of cashthechaos.com market volatility could continue into the first half of November and could taper-off from the fresh highs but could be better of in second half of November and then December. Although the market would convincingly exceed 8355 levels, it may also revisit levels of 7724 which could pose as good opportunity to go long, he added.

Stock specific, Jai Bala feels most stocks having the name Bharat would perform well. The house has no screaming buys from the frontliners, however thinks  Tata Steel and  Infosys could lead the market going forward.

Amongst other stocks Jai Bala likes UltraTech Cement , BEML ,  BHEL and Larsen and Toubro .

Shah says the current investment approach would remain focused on growth and quality, and from that angle some private banks and NBFCs, IT stocks look attractive. However,  IT stocks may not dramatically outperform the benchmark like bank, he addd.

IndusInd Bank ,  HDFC Bank from the private banks, and Dewan Housing Finance Corporation as an NBFC looks good, says Shah but even  Yes Bank and  Kotak Mahindra Bank could see credit growth coming back. From the IT pack, he is upbeat on Tech Mahindra .

With regards to capital goods and power sector, there is still need more action at the ground level believes Shah, and so sticking with quality and growth the house would prefer to stay invested in Larsen and Toubro than the risky BHEL.

From the infrastructure pack, Jai Bala is positive on  Reliance Industrial Infrastructure and Ramky Infrastructure .

On the rupee dollar front, Bala feels rupee would be under pressure and dollar index would be around 92-94.

From the commodity point of view, he is bearish on gold for the medium to long-term and sees USD 1155 per ounce as a significant support for the metal in the short-term.

Below is the transcript of Jai Bala and Sandeep Shah’s interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.

Sonia: Great week for traders, great series as well although the initial part was a bit choppy but what is the sense you are getting about how the November series will shape up?

Bala: I have been working on the thesis that this market is going to face some resistance in the range of 8,286 and 8,355. The market has got into that range and has closed into that range. So Monday is going to be crucial day for me – it’s that thesis I am working with. So the volatility that we experienced in October is going to continue into first half of November, so we could see the market taper off from these highs and continue the volatility that we saw in October in the first half and then we are going to probably see a much better second half of November and December –that’s the thesis I am working at this point in time.

Anuj: In that case at what point would you initiate a fresh long position on the Nifty and what would be your December-end target for the Nifty?

Bala: Market is the ultimate boss and there is no argument with that because market will exceed convincingly above 8,355. I will have to revisit this thesis and I will look at the market hitting 8,600 without any significant correction. You might have one or two blips around couple of sessions but the thesis that I am working with is that the market is going to revisit the 7,724 levels that we saw in October and that will be an interesting opportunity for us to get longs.

However, even then there is going to be stock specific action in the market and whatever be the direction of the market in the short-term, the stocks that have name ‘Bharat’ are going to do well whether or not it’s Swachh Bharat – the theme is going to be ‘Switch to Bharat’ stocks.

Sonia: Big heavyweights like Larsen and Toubro (L&T), State Bank of India (SBI), HDFC and all gained last week. What would your top picks be now?

Bala: In the frontline stocks I do not have any specific screaming buy at this point in time although I like UltraTech Cement at this point in time. I am expecting UltraTech to scale new 52 week high. As I spoke about the Bharat stocks; in the Bharat stocks I think Bharat Heavy Electricals (BHEL) at this point in time. It is set to clock fresh highs about Rs 290 and L&T although is also likely to scale Rs 1,850-1,900 in the short-term. So, I like these three stocks from the frontline names.

Among other stocks which are not in the frontline stocks, I think BEML has fantastic potential from current levels. I think BEML set to scale Rs 900 in the short to medium-term. So these are the stocks I am looking at now.

Anuj: I am giving you four or five names and if you could tell me what would be the market leader or if it would be something else. You had  Reliance Industries which participated in the last couple of days, Infosys and  Tata Consultancy Services (TCS) started to participate last week, you spoke about L&T and Tata Steel also showed signs of move up. From the index stocks what pocket do you expect would take leadership?

Bala: Reliance has been a bit of a disappointment. I had expected the stock to stay stronger than what it has actually done in terms of price action. So, I would say it’s a bit of a disappointment and I don’t  think it is going to lead the market at this point in time but Tata Steel seems to be putting in some sort of a pace and it could very well go back to the 52 week highs around Rs 530 odd level that it saw few months ago, so that could be leading the market.

Infosys being market leader in the month of August, it was staying at about Rs 3,600-3,700 and we saw Rs 3,900 coming through in the month of August. I think Infosys still has got some steam left although I would say this is not a point where one should create fresh longs but I am a bit reluctant to talk about TCS. The structure for the stock isn’t that encouraging but Infosys and Tata Steel would be the leader from the frontline stocks.

Sonia: In the last week we also saw a lot of the infrastructure highly leveraged names gained quite a bit like  NCC was up 30 percent,  GVK Power ,  IVRCL were up 20 percent. Any picks in that lot that you would want to trade just for next week?

Bala: I have couple of picks in the infrastructure names; of course Reliance Industrial Infrastructure seems to be coming up with a very interesting setup in the short to medium-term. The stock is set to scale about Rs 700 in the short to medium-term. We saw one of the smallcap infrastructure stocks Ramky Infrastructure breakout on October 30 – that has got terrific structural, it is set to scale about Rs 80 to Rs 85 from current levels. So interestingly I have two picks in the infrastructure space.

Anuj: You track global assets also closely, so (1) your call on dollar and (2) your call on commodities.

Bala: The dollar index is going to be much-much stronger than what people are anticipating. We have spoken about the dollar index in 2010 where I had mentioned that dollar index is set to scale 98 in the very long-term. We look at it from one year to one-and-a-half year timeframe. We are seeing at least 92-94 for the dollar index. So that is going to put a lot of pressure on the Indian rupee too.

Coming to commodities, gold is very important asset at this point in time. It is set to clock a short-term low at this point in time. I think USD 1,155 per oz will be a short-term important significant support for gold and from thereon we are going to see a short-term rally although I am bearish on gold for the medium to long-term.

It is going to go down to three digits in something like six to one year down the line. I am talking about dollar denominated gold and not the Multi Commodity Exchange (MCX) gold.

Anuj: Did you expect the market to reclaim the highs after the kind of 5 percent correction we had in a matter of what 10 or 11 trading sessions?

Shah: I had a target of about 7,600-7,800 and interestingly the market rebounded from 7,720 on Friday and immediately after that the newsflow every where all around that seems to have turned positive we got news of the stronger political mandate for Narendra Modi.

Also we have started seeing a bits and piece of reforms coming in. We have had good quarterly numbers this week compared to the previous week where we had more disappointments and globally also the economic data has suddenly turned positive. A rally was expected, but the momentum of this rally has certainly been sharp over the last few days so to that extent yes the momentum has been a swift and sharp and chance are that it is still a relatively young bull market but given that the market has gone up for about eight-nine days on a trot some call for consolidation is possible going forward from here.

Sonia: What are your top stocks calls now post earnings season? What have you liked this time around?

Shah: We still have some time before close of earning season but yes there has been a fair amount of companies which have done well including private banks, non-bank financial companies (NBFCs), so if you were to look for top picks clearly the private banks, Indusind and HDFC bank continue to do exceptionally well. Yes Bank has pulled in now. A lot banks like Yes Bank and perhaps Kotak Mahindra could also fit in to that category had actually deliberately slowed down on credit growth because of the economic environment. However, as hopes build up of an economic recovery you would see credit growth also coming back there.

Besides that there has been host of other companies as well. The NBFCs have reported good numbers. A smaller company there a Dewan Housing Finance Corporation has also done pretty well that’s again a company which has got incredibly lower non-performing assets (NPAs) and is trading at less than book next year and has return on equity (ROE) of more than 18 percent. Builds a lot of other ideas as well across sectors but the theme for the market broadly remain focused on growth it remains focused on quality and there is little incentive to change that investment approach.

Anuj: In terms of the two large sectors this month was all about the banks. You had the Bank Nifty out performing 10.50 percent but from the bottom IT also made a very strong come back at one point IT index was down six percent but it ended flat for the month. Going forward what would be a better pick frontline IT or frontline bank?

Shah: Absolutely frontline banks no question about that. This is not say that I don’t like IT. However in spite of the fact that private sector banks especially the larger ones have done well. They have done well in an economic environment which has not been good and a better economic environment can add that much more to the growth. Even if we see some of the good banks reporting numbers we have seen some sequential increase in gross NPAs. In some cases in absolute terms, in some case in percentage terms the increase hasn’t been dramatic but at the same point of time we are still seeing that. There is a lot of that which could reverse and you could actually also see gains as you find that not just the rate of addition to gross NPAs actually comes off and starts falling but you actually start seeing recoveries as well.

IT companies will also do well. Valuations first among them are quite reasonable. Some of them like Tech Mahindra continue to do exceptionally well and continue to be some the stocks we like. One of the reasons why Tech stocks corrected was because the market was disappointed by Tata Consultancy Services (TCS) numbers but then its partly because expectations has also run-up significantly. So IT stocks will do well but I don’t expect them to dramatically outperform the benchmark, unlike the banks which could significantly outperform from here as well.

Sonia: The stock that has been the biggest gainer in the month of October was interestingly Bharat Heavy Electricals Limited (BHEL) with almost 30 percent gain and that’s peculiar because it was not corroborated by either good earnings or any fundamentally positive news. Would you buy BHEL now?

Shah: The first thing is that where you find stocks which have corrected 80-90 percent from the peak you will continuously see rallies of 30-50 percent because that will only retrace a very small portion of the fall because the 30 percent is on a base which is 50 or 80 percent lower. So that is one part of the story.

Secondly, BHEL did win a few orders and that gave some sort of confidence to the market. Having said that Capital goods and power as a sector is something that still needs more action at the ground level the government is doing their bit and will continue to do so.

Obviously it is a sector where it takes time takes 9-12 months before the efforts to actually speedup projects, clearances etc starts reflecting in to financial closure, start reflecting in to order flows, start reflecting in terms of actual delivery and sales and profit numbers so there is a huge cycle up there.

Having said that I would prefer to stay invested with the proven quality names, not that BHEL is not good quality but in terms of growth there are still a fair amount of questions. I would rather happily stay invested in Larsen & Toubro (L&T) which has also corrected and where also numbers haven’t been as per market expectations. In a relative sense this is probably more of opportunity in L&T whereas the risk is probably still higher in BHEL.

Anuj: The last half of September and first half of October saw a quite a bit of under performance from high beta but now with the market back to all-time highs and easy liquidity again back in the system would you be tempted to bring some beta into portfolio, some slightly lower quality stocks which could be high risk high return bets. Would there be temptation to include some of these stocks in portfolios the likes of NCC Infrastructure, GVK, Hindustan Construction Company (HCC) which had good run on Friday as well would you consider looking at them?

Shah: Buying stocks like GVK, G M R Infrastructure and I mean no offence to the promoters and am actually referring to the space in which they operate and the leverage that they have on their balance sheet as well as the environment in which they are currently operating can at best be looked as an option value. That’s the best way that you can look at it and I am not recommending it I am simply saying that if somebody who would like to invest in those companies and that’s not a recommendation from me.

The only way that you can look at investment in highly leveraged companies, in sectors which are still in the doldrums is to actually buy them as an option value and to say that this is the percentage of my capital that I am willing to write-off and therefore that’s the kind of position that I can take.

As far as I am personally concerned I would actually prefer to stay in quality. If I have to look at beaten down sectors I would look to buy quality within those beaten down sectors as opposed to buying companies with high financial leverage in those sectors. I would stick to proven leaders because when you are buying a beaten down sector you are obviously taking high risk so how do you offset or mitigate that risk. How do you ensure that even if things don’t workout your capital is still preserved and you still get some returns you do that by buying best companies in this space.

You do that by buying companies which have got low leverage on their balance sheets, which have got good quality management and leadership in their respective sectors that’s the really that to my mind would be the smarter way to play it rather than take whole a lot of risk at this stage.

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