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Be patient, let market stabilise; avoid aviation, like IT: Pros

Market on Friday saw a late rally backed by some strong earnings, mainly from the pharma pack and some bargain hunting. Market expert Ratnesh Kumar is of the view that market is hoping for earnings to stablise this quarter at least after the disappointment of last few quarters. “If the third quarter earnings stabilise then market can start putting behind the downgrades and move forward,” says Kumar.

According to him participation of banks is a must for market to move forward.

Jai Bala, Cashthechaos.com says one is still unsure whether to be bearish or bullish because the bearish case is still not out of picture and for that to happen the market will have to go above the December highs to completely eliminate the bearish scenarios.

Although the market seems to be doing quite well at present, it is important for it to take out significant resistances around 7605 and 7970 for the bottom to be in place, says Bala.

Bala is bullish on the market over the long-term and does not rule out 35,000 on the Sensex, but advices being patient for the short term and allow the market to stabilise, take out key resistances for it to go to record highs.

The Nifty on Fiday tested 7500 in intra-day trade but ended the day just shy of those levels. The 50-share index was up 85.10 points or 1.1 percent at 7489.10. The Sensex rallied nearly 300 points to surge past the 24500 mark and was at 24616.97 up 278.54 points or 1.1 percent.

From sector/stock perspective, Bala thinks the IT space is looking interesting; especially the likes of HCL Tech and Oracle Financial but FMCG space and RIL will be the leaders. Once Reliance takes out Rs 1100 then it will lead the market from the front and has the potential of going to Rs 1700-2200 in 9-12 months.  However, ICICI Bank and SBI are holding back the market and they need to pick up for the overall health of the market.

Bala also likes Britannia and HUL . From other asset classes, Bala expects dollar-index to go to record highs and crude to bottom out once it takes out USD 36-38 on a closing basis.

However, Kumar believes that IT space is likely to remain in the positive only because the overall earnings have been moderate and the space has the ability of delivering double-digit growth.

Aviation space is an avoid for Kumar because on a generic basis it is tough to take a fundamental call on the sector.

From the pharma space, Bala believes both Dishman Pharma and Cadila have the  potential of scaling new 52-week high.

Below is the transcript of Ratnesh Kumar and Jai Bala’s interview with CNBC-TV18’s Sonia Shenoy and Anuj Singhal.

Sonia: We had some really good numbers come in from the pharma sector this week, names like Lupin, Cadila, Dishman, how did you read into them and what should investors do now?

Kumar: If you are looking at the earnings picture for the quarter as a whole obviously pharmaceutical was expected to be one of the sectors which would have better than earnings from cyclicals and obviously numbers have come in better. However, the way I look at the market from the earnings perspective is that this quarter the market is hoping and looking for earnings to at least stabilise.

What you have seen over the last 2-4 quarters is that the expectation of earnings stabilising and eventually turning around hasn’t come through and that has always continued to put pressure on the market.

So, the hope is that this week carries forward and the earnings stabilise for the third quarter results and then we can start putting behind the downgrades and look forward from the markets perspective.

Anuj: In that case what would lead this market; do you think it would be back to banks – the largest sector? We saw some signs of life in banks this week.

Kumar: The market doesn’t go anywhere without the banks. It is the biggest sector in the market but at the same time if you look at the short term, what you are seeing over the last one week is that the most sold off, most beaten down sectors had the better bounce. So, there was an element of value picking or bottom fishing or bottom hunting as you may call it.

Banks and commodities are still the two spaces which in the context of last few months are the most beaten down. So, in the initial trading bounce in the market they will lead. The question is beyond the trading bounce; over the long term if you are looking at 6-12 months even then banks have to play a leading role, without that the market cannot move forward.

So, to that extent what is happening viz-a-viz the bad loans and whatever the kind of legislative action and other actions in terms of recovery come through, probably some of it in the Budget, those will be crucial.

Anuj: Did Friday change things or was it just one of those random moves? We have seen such moves in the past. How are you looking at the charts?

Bala: We wanted the market to form a base around 7200, that has been our view since November. The market has turned from there. In fact when I was interacting in the same show last week I had said I wanted the market to pullback to 7350 in the short term. The market did exactly that.

However despite doing all that the market hasn’t taken out key resistances. So, it is still open for book to argue on both sides – to be bullish or bearish, although we have taken a bullish stand I am not ready to say the bearish case is out of the picture.

We want the market to take out significant resistances. If you were to look at it from a longer term perspective the market has to go above the December highs to completely eliminate the bearish scenarios which are alternate scenarios in my opinion, although the bullish scenarios have a higher probability at this point of time.

So, the market is doing quite well. It is coming up from important supports but it needs to take out significant resistances. Short term resistances are placed at about 7605 and 7970. If it were to take out these two resistances the bottom is fully in and I am sure by that time crude will also be up above USD 38 per barrel. That will also signal the market is doing quite well.

Sonia: If this positive move that we saw on Friday, if it continues next week, what would your top 2 or 3 buy calls be or long calls be in the market now?

Bala: IT space is starting to look interesting. In October we wanted HCL Tech to drop below Rs 800. I think it has exactly gone below that by Rs 2, although I would have preferred it to go little down and come up but it has done what it was meant to do. So, one or two stocks in IT space are starting to look good.

HCL Tech is looking good for Rs 1100. It is very likely to pickup steam in the next week.

Similarly if you look at something like Oracle Financial, it might still have a minute level of downside left but once it does that it is heading to somewhere about Rs 4200-4500. So, IT space is starting to look good.

As far as leadership goes, it is going to be the FMCG space and Reliance which I have been saying for the last few weeks.

We saw Britannia and HUL do some very good price action last week. We had even mentioned about these two stocks last week. I am sure these two will do very well and lead the market along with Reliance.

Anuj: We have seen Infosys consistently making a move towards all time highs. TCS has been a different case and now Infosys valuation is actually higher than TCS. However as a sector are you willing to take a positive bet on IT?

Kumar: I would have a positive view simply because right now you are in a phase of the market where earnings growth is not there or there in a very moderate sort of a way. This year’s earnings growth will once again come down; eventually it may be around 8-10 percent by the time the year is done. Then it is back to hoping for what sort of growth comes next year. Again the start is at 17-18 percent.

What you have historically seen in India is that in a period of moderate earnings growth, if the IT sector can deliver double digit earnings growth which is what is likely then as a sector it would continue to remain positively placed in the market.

Anuj: You did say Reliance as a stock to watch out for or that is one stock which could provide leadership. What will be the interesting levels to watch out for on Reliance?

Bala: Reliance has been coiling up into a very big range from a very long term perspective. If you look at it from a very long term perspective the final leg of the coil is completely done. Once the stock were to take out Rs 1100 which I think it will do in the next 2-3 weeks, it is a free run for the stock. I think it is going to lead the market from the front.

Once you see a close above Rs 1100, somewhere between Rs 1700-2200 is the potential for the stock from a 9-12 months perspective or slightly longer than that. So, it is very interestingly poised. It is going to be key for the overall market strength and overall leadership of the market.

Sonia: What is the sense you are getting fundamentally, despite having good earnings the stock just refuses to get out of that range. Do you expect that range to break anytime soon this year?

Kumar: If you are looking at the overall market clearly any big component of the market outside of the banks, if they are supporting the market that is always going to be good overall for the sentiment.

Ultimately in the commodity space, what you have seen is the oil and the oil related downstream players are doing well. Refining margins have been good, downstream oil profitability is also good. So, those things are fundamentally in favour and if you get a leg up from other parts of the market which is not banks or pharmaceutical then it is always going to be good.

Anuj: The interesting pocket has been aviation. Three months back when IndiGo listed everyone was giving buy calls at Rs 1000, people were saying at Rs 1100 we have missed out. At Rs 1200 it looked like it was still a good buy. It is now almost back to issue price and we have seen fair bit of correction in Jet Airways and SpiceJet as well. As a sector is this run over for aviation or is this a good buying opportunity?

Kumar: Aviation is so hyper competitive, it is so capital intensive; historically, I found it very tough to take fundamentally long term calls on the aviation sector. I am sure there are good airlines around the world which from time to time make money for investors. However on a generic basis it is a tough sector to make a fundamental call and there are more structural growth story kind of sectors both in terms of business growth and even in terms of profitability and margins.

So, I would avoid that segment.

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