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Pre-Budget rally likely; upbeat on financials, IT: Experts

Although it was a poor start to the February series with the Sensex shedding 499 points to close at 2,9183 and the Nifty losing 143 point to close at 8,809 on Friday,  both R Venkatraman, MD,  IIFL Group and Siddharth Bhamre of Angel Broking are not at all pessimistic on the market going forward.

Venkatraman believes that weak earnings were already factored in by the market and expects 2015 also to be a good year as 2014 but says one should not expect 30-40 percent returns. Earnings growth in 2015 is likely to be in the tune of 16-18 percent.

According to him the market in 2015, will broadly reflect earnings growth. “FY16 will be the first year when we will see the earnings coming back to the markets because FY15 nobody is talking about earnings growth,” he adds.

Niether does he believe the pre-Budget rally has run its course and thinks market will see some build-up till Budget.

Bhamre too does not expect this downward momentum in the market to continue because of strong liquidity inflows. The disappointing numbers posted by some PSU banks and one private sector bank is unlikely to stop the rally or take it significantly down, feels Bhamre. Maybe the Nifty could correct another 70-80 points but not significantly.

However, it is always difficult to call the short-term trend of the market says Venkatraman. For the near-term, market is sure to focus on two events whose results are unknown- one the Delhi assembly elections and two, RBI credit policy. These events could drive market in the short-term and they could enter into a corrective zone unlike the one-way rally that it witnessed in the past few days, he adds.

Bhamre says his opinion on the upward trend for the market would only change in case foreign institutional investors (FIIs) are seen unwinding their longs in a big way.

For the Nifty per se, Bhamre sees 8600-8650 as strong support levels but is quite sure that Nifty is unlikely to touch those support levels.

Stock specific,  Bank of India (BoI) and  Punjab National Bank (PNB) are a buy on dips for Bhamre. According to him  DLF has been consolidating for a long time and has now broken out, so one can go long from a positional trade perspective.

However, he is not so bullish on  HDIL and Indiabulls Real Estate . Grasim for him is a shorting candidate.

Venkatraman is upbeat on most financials and all interest rate linked sectors like autos. IT space too could surprise on back of revival in US economy and return of earnings growth. He expects most top rung IT stocks to do well.

Cement too could perform, he adds.

Below is the transcript of Siddharth Bhamre and R Venkatraman’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: The markets got a reality check this week what is your sense of how the markets would be panning out in the coming week? Are you still bullish in the first place?

A: We are not expecting this movement downward journey of this market which we saw on Friday to continue for long time because the liquidity is strong.

If I look at the rollover then we have seen both from the foreign institutional investors (FIIs) desk and retail high networth individuals (HNI) people have rolled over positions, their respective positions in February series. The open interest (OI)  with which have started is at an two and a half years high, three years high in fact. However, this open interest is mix where we are seeing FIIs who are rolled over long positions and weaker hands of the markets have rolled over the short positions.

So, I am not expecting because of PSU banks and one of the large private sector bank announcing disappointing numbers would stop this rally or take a significantly down. So, we still feel that this dip which has come, probably you might see 70-80 points or 1-1.5 percentage points cut from current levels.

However I expect momentum to continue and we would change our view only if we see that FIIs are unwinding their long positions in big way and as of now we are not seeing that happening any time soon

Sonia: Since you are not bearish on the PSU banking space at what point do you think PSU banks will become a buy and what would your buy list look like?

A: We did not say that we are not bearish on banks but what we are trying to say is that because of disappointing numbers market may not significantly correct only because some of the PSU banks have come out with the bad set of numbers because market is beyond PSU banks.

In PSU banks some of the names which we would be buyers on dips in Bank of India (BOI) if we see further 5-6 percent correction around Rs 250 odd. Punjab National Bank (PNB) has corrected sharply, further correction from here can be a good buy.

In private sector space we are seeing that  ICICI Bank is looking weak but  Axis Bank is not looking so weak. So that is the space where we would do some positive trading rather than thinking that this market is going to change the trend and go down.

Latha: The best mover in January was DLF that is a 24 percent gain. Even last week it was a good week for the DLF it is risen. Would you take an intro week position on DLF for next week?

A: We won’t touch the names which are flying like HDIL. However, DLF, the stock has been consolidating since long time between this range of Rs 125-130 and Rs 155-160 on the higher side. Now it has given a breakout and in this long phase of consolidation lot of people who are holding DLF since longtime have given up and stride off their stocks. So the ownership is reduced, the weaker hand ownership is reduced.

I feel this momentum in DLF is going to continue for sometime and there we are suggesting to go long from a positional trade perspective. However the way HDIL and Indiabulls Real Estate have gone up forming fresh long positions in coming week it would be challenging to make money out of it then. Although earlier were bullish on Indiabulls Real Estate.

Latha: Any strategies of shorting any stocks?

A: Shorting yes, we have seen cements space doing really well. One of the stocks not often spoken about is Grasim. Here we are seeing that there is good long positions which got created. Stock outperformed in last series and now we are seeing that there might be some pressure on stock because of long unwinding. Friday anyways we saw some pressure on the stock that would continue. We are suggesting to short Grasim at current market price. We have target of Rs 3,755 and stop loss is around Rs 3,925.

Other stocks from a largecap space from Index space which we like is metal space and there Hindalco we have already been recommending that Rs 135-140 is accumulation zone. It is quoting some where around Rs 139-140. It is a good buy trading by at current levels. We are not expecting huge run up in Hindalco but it can bounce back to Rs 156 odd level. So, you fix a stop loss of Rs 135 and go long.

The other largecap stock which is done well in its space in January series and which we feel that probably continue this momentum for first half of February series is Reliance. Now this stock on Friday corrected a bit but it has now strong support around Rs 900-910 zone. Again here we are not expecting huge rally because there is good resistance around Rs 340-360. What we are expecting that this stock may cross that resistance zone go up say 10-15 points and than probably stall. We have a target of Rs 970-975 in mind in Reliance. Fix a small stop loss of Rs 895 and go long over there.

Sonia: Since you are still bullish on the markets despite the fall that we saw on Friday what are the key levels to watch on the Nifty next week?

A: The way market is gone up in last part of January series that is after the January 15 th when the rate cut came it is difficult to figure out the immediate support levels. However if you really ask where is the very strong support to this market it is around 8,600-8,650 odd levels and that is where you know lot of people are stuck in their short positions. So, to this market support is bit down which is around 8,650. I have my doubts that in coming week we are going to touch that support.

This fall which has come into our market is predominantly because of PSU banks and some of the other heavy weights. It may not continue for long. From a short-term perspective this market is buy on dips till the time FIIs are holding on to their long positions because the quantum of long positions they have formed is huge and that sort of positions are not formed for one week or two weeks they will continue to hold on it for quite sometime. Unless and until, we have unforeseen circumstances on the global scenario.

Sonia: One view is that earnings have not caught up as much as the markets have moved in the last many weeks and months and now reality is hitting us, we saw it in the case of the public sector undertaking (PSU) banks. What is your expectation of how the markets will go from here? Do you think the weak earnings could sort of drag down the overall index?

A: I think most people or analysts have factored in weak set of quarterly numbers. We have had a very good month of January so far and as you just said, in the opening remarks, that Sensex came to very close to touching all time highs at 30,000. What had happened was in a month of January, we got unexpected or a pleasant surprise in the form of 25 bps rate cut. If you look at the results, which have come about, they have come broadly in line with expectations. Non-performing assets (NPA) of PSBs was a known problem, I don’t think the banking sector NPA is a problem, we have seen the worst of it. In my opinion as we go ahead and as we see the general broad economy pick up, only then we will see the NPA problem of banks getting sorted out.

I will give you a perspective and will take you back 10-11 years ago. If you remember the early part of 2000 i.e. 2001, 2002 or 2003 all we could hear was the economy is going through very bad times and there was a slowdown. We had drought, all kind of things were there. If you remember, I just want to take the name of ICICI Bank – it could have been true of any other bank also and there were lot of NPA stories and media reports saying that all banks have undercapitalised, they will have A problem, B problem. If you remember 2003, what happened was the general economy picked up and interest rates came down and banking was the best performing sector from 2003 to 2008.

So just putting things in perspective, something similar we will see this time around and I take your point that the economy has become bigger, the problems have become bigger so big has been the opportunities.

So our take on the broad market is that, last year was the great year for the market and market got rerated on the price to earnings multiple front but going ahead, I think the market will broadly reflect earnings growth and I think FY16 will be the first year when we will see the earnings coming back to the markets because FY15 nobody is talking about earnings growth.

Latha: My question is way more short-term. Should we assume that now the big pre-Budget rally is over and that the markets will now just consolidate below 30,000 mark or below 9,000 mark or do we think that the markets will take this bad news of Friday in its stride and we are yet to see even near-term gains before the Budget?

A: To put things in perspective, I think you would agree with me since you have an unenviable job of commenting daily on the markets that it is very difficult to call short-term in the markets. So having given this disclaimer, I think from here to the Budget there are two big events if I can say. I think next week we will see credit policy, we don’t know whether RBI governor will give another pleasant surprise that he gave on January 15 – if yes then markets will look at everything differently. Second is Delhi elections soon. So, barring these two events, I think we are entering into correction zone because last 10 days we have had a one-way rally in the markets and it was as if there are no problems, there is no earnings surprise, there is nothing. So there was absolutely a sense of complacency, so now people have just gotten a bit of a shock.

I think the two events which will drive future course of the market will be the outcome of Delhi elections and the credit policy which is there in next week. I think there will be some build-up on the markets till the Budget. The pre-Budget rally has not run its course.

Latha: So at IIFL, what are you all advising to buy on dips? Will you buy right away, are you asking investors to buy right away and if yes, what are you stocking on for the good times that you see in 2015 and 2016?

A: First and foremost, I think we believe that earnings will bounce back. So that is the basic hypothesis or theme on which we are recommending to clients. So 2014 calendar was a good year for markets, we believe 2015 will also be a good year for markets although a word of caution that we don’t go back expecting 30-40 percent return. So, now returns will be broadly in line with earnings growth and we expect earnings growth to come broadly in the range of 16-18 percent and they will be primarily driven by financials.

I gave a long thesis on why we are bullish on financials and apart from financials we should look at all interest rate linked sectors which is maybe autos, IT is a pack which will continue to surprise because of revival in US economy and earnings coming back and I think general Indian economy micro stories like cement, so these are the broad things that we are recommending and we think we are advising clients to buy into dips.

Sonia: IT space was a big mover last week on the upside, do you still increase your weightage into the top tier IT names or do you start to look outside the index as well?

A: If I can use the word our top pick has been HCL Technologies and they came up with good set of numbers, they announced the bonus also, I did not have time to analyse the numbers in great detail but at least whatever I could see was on expected lines and good. So I would recommend that we should stay with the big boys only at least for this year.

Sonia: Tech Mahindra was also a good set of numbers; you have any quick thoughts on that?

A: Yes, I think it is a good stock.  Tata Consultancy Services (TCS), HCL Technologies , Tech Mahindra , Wipro , Infosys. Meanwhile, Wipro’s earnings momentum just seem to be coming back on track but all these things should do well.

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