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Low oil positive trigger for market; like banks: Edelweiss

Vinay Khattar of Edelweiss Financial Services believes that market rallies, at the current point, are looking weak and are likely to fizzle out considering the volatile global scenario. Whether the market rally sustains or not, one positive market trigger could be the crude prices, if it remains at around same level, he adds. 

However, Jai Bala of Cashthechaos.com believes that the bounce back from the 7225 level is a very bullish move on Nifty. He expects the Nifty to hold onto 7350 level.

“If it does that and takes out the high of Friday on Monday after the pullback, that is going to be very bullish for the market in the short-term to medium-term,” he says.

Bala is bullish on the overall market for the medium-term, but says one will have to wait for correction to be over.

Bala says that Bank Nifty continues to remain a problematic area. “Within the Bank Nifty we still aren’t seeing a big recovery come for State Bank of India (SBI) or ICICI Bank ,” he says.

He adds that banks like ICICI will take lead ion short-term, but Karur Vyasa Bank is likely to be the outperformer in the space.

Khattar says that once the public sector banks report all their non-performing assets (NPAs), combined with cheap valuations, they will benefit over a long period of time.

The capital infusion into the banks by government over the next few years is making the space an interesting bet, he says.

Bala expects pharmaceutical sector tobe join the bandwagon of the bullish move. He prefers Cipla and Dr Reddy ’s in the space. He also recommends names like Philip Carbon Black and Reliance Industries.

Khattar expects revival in cement companies with increase in government’s infrastructure spending, especially in south India. He recommends names like Jamna Auto and Dalmia Bharat .

Below is the verbatim transcript of Jai Bala and Vinay Khattar’s interview with Reema Tendulkar & Ekta Batra on CNBC-TV18.

Reema: A pretty good pullback you will have to say, the Nifty ending above 7,550, is there more to go and is there a trade that you would recommend on the index at least for next week?

Bala: Since November, we have been saying that 7,225 is a very important support and the market is very unlikely to break that. The market has so far done that. It has held above 7,225 and if you look at the short-term charts – that is hourly charts – the bounce from 7,225 is looking like a very bullish move.

What we want to see at this point of time is a short-term pullback, an extreme short-term pullback that holds above 7,350. If it does that and takes out the high of Friday on Monday after the pullback, that is going to be very bullish for the market in the short-term to medium-term.

We also want to see crude. Crude hold up very well and that also do the same thing, short-term pullback and higher recovery. We have been saying since 2006, crude falling is deflationary and it is not good for the stock markets and that has been panned out quite apparently.

We also want to see crude hold up very well and if it does that, it is going to be overall bullish for the whole market. We said this in the last interaction with Latha Venkatesh that we are going to see the end of the negative moves by the time January ends. We want to see a short-term pullback and a bounce back post the pullback.

Ekta: What about the Bank Nifty because that one has recovered very smartly at above 15,500 from the levels of around 14,700 that it had hit in the January series? Your sense in terms of what could be the sustainable level that we could watch out for?

Bala: Bank Nifty still remains a minor problem area. We want to see the level of 15,700, taken out on a closing basis for Bank Nifty.
If it does that, it will be a short-term positive but within the Bank Nifty we still aren’t seeing a big recovery come for State Bank of India (SBI) or ICICI Bank.

Within the banking space, our top pick remains Karur Vysya Bank and that is going to be an outperformer within the sector and we want to see the frontline stocks like SBI and ICICI Bank take the lead in the short-term.
Once it does that and takes out key resistances, the recovery for the whole market will be much more sustainable.

Reema: No thoughts on Yes Bank — that was clearly the star in Friday’s trade?

Bala: Yes Bank is looking quite positive. It has still got another Rs 200 move in the medium-term. What we saw on Friday is probably starting of a good move. I think it is probably doing quite well but if you look at something like Karur Vysya Bank, it is going to outperform the entire sector on a percentage basis, but Yes Bank being a frontline stock and it may do well on a rupee term.
However, on a percentage basis, the returns are going to be higher in a smaller bank like Karur Vysya Bank.

Ekta: Hindustan Unilever Ltd (HUL) didn’t have too bad a week. That stock was up around 6 percent on a week-to-date basis. Your sense in terms of where it could go from this Rs 817 level?

Bala: Within the sector, HUL in my ranking is third. HUL is going to be doing quite well in the short-term to medium-term probably it is going to cross Rs 1,000 in the medium-term. We are quite bullish on it. We have been bullish on it for a couple of months now.

The top pick within the consumer sector is Britannia. Britannia is set to cross Rs 4,000 in the medium-term. If the stock were to come down close to Rs 2,500, it will be a fantastic opportunity. The fast moving consumer goods (FMCG) sector as such is looking quite promising and we think Britannia, Godrej Consumer Products and HUL are the stocks to watch out for within this space.

Reema: Reliance Industries was perhaps one of those few stocks which managed to hit a fresh 52-week high in the turmoil in 2016. It corrected a bit last week; it has bounced back above Rs 1,000 mark. How does it look now?

Bala: Last couple of interactions, we have been pointing out about Reliance Industries. The one thing that needs to be watched out for is Rs 1,100 mark. Once this stock closes above Rs 1,100, we are all set for a big bang for Reliance.

It is coming out of a large contraction pattern and once it takes out Rs 1,100, it can easily cross Rs 1,700 and further even Rs 2,200. So this is going to be a stock that is going to lead the entire market.

We are bullish on the overall market for the medium-term but let us wait for the market to tell us that the correction is complete and that will be a signal from Reliance when it closes over Rs 1,100. Once it does that, it is heading for something like Rs 1,700 to Rs 2,200 in the medium-term.

Ekta: Any stocks from the broader markets that you like in terms of technicals right now?

Bala: There is an interesting pick. We don’t usually talk about it. There is a stock called Phillips Carbon Black. It is looking quite interesting in a price action perspective. The stock is very likely to hold above Rs 90 and that is going to be important support for the stock and from its current level of about Rs 100, it is expected to scale to something like Rs 180.

This is an interesting stock. We can start nibbling in at the current levels. I am looking at something like Rs 180-200 on the stock.

Reema: Pharmaceutical names like Sun Pharma and Dr Reddy’s Laboratories (DRL) had a fairly good week with gains of about 10 and 7 percent respectively, any thoughts, any trading ideas?

Bala: Still Cipla remains a good bet for me within the pharmaceutical space. It has been oscillating between Rs 570 and Rs 740. If it were to continue a follow-through buying, if you had to see a follow-through buying for the stock, it is looking quite promising.

However, the sector as such is going to be join the bandwagon of the bullish move. Once the frontline stocks like Cipla and DRL takes lead but for me the top pick within the sector is Cipla.

Ekta: One of these standout result reactions have to be something like an ICICI Bank this week. What is your sense in terms of the technicals for ICICI Bank? That stock is currently at around Rs 230, it has already lost around 11 percent, can you compare it to the likes of Axis?

Bala: As I said earlier, ICICI and SBI is a little bit of concern for me. If markets were to have a little bit of downside, these are two stocks that could drag the market, but I think there are early indications that these stocks are also bottoming out.

Once this stock takes out Rs 263 on a closing basis, it will be a mark that the correction here is also complete but that is 10-12 percent work to be done for the stock. So we need to be a bit more patient here.

However, I don’t think given the fact that the overall market is looking quite positive, this is going to lag much behind. This is probably lagging behind in the short-term once this stock starts to pick up, the entire banking sector will also pick up.

Reema: What is your sense now about the markets? Do you think pullback can extend itself or do you think the medium-term picture looks murky and therefore these rallies should be sold into?

Khattar: Broadly speaking, the rallies don’t appear to have strength at this stage. If Nifty ends up spending some more time at the current levels and shows certain degree of strength then probably you may want to hold on to stocks but at this particular point in time it looks that rallies are pretty weak and given the overall global scenario, most of the time the rallies may likely peter out.

Ekta: What is your sense in terms of what is happening with the banking space? Asset quality review has become the new buzzword, which a lot of analysts are now concentrating on and which is affecting a lot of banks gross non-performing loans (NPLs) in terms of the reportage at least this quarter. What is your sense in terms of how you would read it that maybe the pain is out of the system for most of that?

Khattar: I don’t think the pain is out of the system for most of them. I think the pain is still there but the good thing is that at least Reserve Bank of India (RBI) is forcing banks to report non-performing assets (NPAs), which were otherwise getting sidelined or were not getting the kind of attention that they needed to.
What was happening was that once the NPAs were not getting reported and all the analyst community was having doubt in terms of are they looking at the right number in terms of both gross and net NPAs, valuations were suffering a lot.

So you found a lot of public sector banks where number of these NPAs are sitting on their balance sheet, they were trading below book value and it doesn’t make sense till the time you don’t start doubting that the book value itself is genuine or you are going to be taking significant more hits there.

With the very strict audit committee and audit review process that RBI is running, at least all the numbers are beginning to get reported. You saw ICICI Bank report very elevated gross NPAs and also the statement that next quarter is also going to reflect similarly high NPAs. So, this brings the cat out of the bag.

My sense is that public sector banks once they have reported their NPAs and given that their valuations are so cheap would benefit over a longer period of time that their balance sheets begin to clean up. That is one.

Second big thing, which will play out is that the government is now infusing serious amount of capital so they had plans of infusing Rs 70,000 crore, last week incremental Rs 26,000 crore announcements have come in, so that takes it almost a lakh crore of infusion over next few years into the public sector banks as part of government security.

That is a reasonably large number and once that begins to happen and overall macroeconomic pick up begins to play out, I think public sector banks over the longer period of time could become interesting bets.

Reema: One of your experts told us that there was a 90 percent correlation between crude prices and equities. Last week, we saw crude prices bounce back, there is some hope of supply cut but do you expect a rally in crude prices to sustain even next week and can that act as a positive trigger for the markets?

Khattar: Whether the rally will sustain or not is anybody’s guess, but my sense is that if the prices in crude sustain then it is definitely going to be the positive trigger for the market.

Let us look at what is happening on the crude scenario. You had a clear war within the Organization of Petroleum Exporting Countries (OPEC) itself with Iran coming back with large supplies and then you had differences between OPEC and non-OPEC countries mainly Russians and Middle East guys in terms of the production levels that each one is going to maintain and since Russia is not part of OPEC, they kept on producing for last many years having no restrictions and enjoying higher prices while OPEC was forced to take production cuts to maintain prices.

Third big factor, which is playing out in this industry is a kind of a battle between the sovereigns — the countries and the private sector companies mainly led by US shale producers and private capital.

Now, sovereigns at this point of time, have taken a very tough stance that they would want the prices to come down because their marginal cost of production for most of the Middle East guys is very low at USD 10-20 kind of a scenario while the shale producers are all upwards of USD 50.

So these three scenarios playing out, oil has taken a big beating. Our sense is that at some point in time this will begin to reverse. So if you look at the rig counts, which are deployed on the shale, they are beginning to fall very significantly and month-on-month, the number is deteriorating.

As far some estimates, almost half a million barrel of shale production will not happen in 2017 and balanced part of 2016 because the prices have crashed so low. So overall if the shale production begins to come down and there is some kind of an understanding between Russia and OPEC and a degree of public statements have emerged from both the countries in last seven days, you could see some degree of bottom formation happening in oil. If that happens, of course it is going to be positive for the markets specifically for countries like India.

Ekta: You have a couple of stocks that you are looking at, for example Jamna Auto as well as Dalmia Bharat?

Khattar: Yes, these are the stocks that we have been advising our clients to buy into. Let us look at Dalmia Bharat. It is a cement company with significant production capacities in south and east of the country and southern part of the country has had excess capacity.

The capacity in southern part of the countries are almost around 20 million tonne and with what was happening on Andhra, you had utilisation level, which were very low at just about 55 percent or so. So, most of the southern cement producers were suffering.

Now, with a split of Andhra and Telangana, our research shows that whenever the states split, the capacity or the cement demand settles at much higher levels than what it was for the unified state.

It could be as high as 23-40 percent more and Andhra was one of the largest consumers of cement in the country so with Andhra and Telangana both becoming independent state, that number is likely to move up significantly.

Second in north-eastern again with focus of Prime Minister Modi and the current government, infrastructure projects are likely to come in and cement demand could again pick up there but the big factor, which we find that makes Dalmia very attractive is the way the company is run.

It has almost become the third largest or fourth largest producer in the country at about 22-23 million tonne kind of an effective cement capacity and the cost of production is the second cheapest after Shree Cement.

So, Shree Cement has total variable cost at about 2,100 per tonne, Dalmia is closer to 2,300-2,400 per tonne. This gives us a disproportionate profit benefits because I can price my cement well, my costs are very low and I am in geographies, which are very good to do. So it is an interesting bet.

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