Nifty can touch 4,800-4,900 levels: Edelweiss Cap

The Nifty can touch 4,800-4,900 levels, said Naresh Kothari, President, Edelweiss Capital, in an exclusive interview to CNBC-TV18. “We don’t see it going much below that.” He sees support for the Sensex at 16,000 levels.

Kothari expects the markets to trade rangebound for the next three months. “Edelweiss house view is that the markets will trade like this for the next two quarters.”

It is time to play stocks and sectors going forward, he added. Here is a verbatim transcript of an exclusive interview with Naresh Kothari on CNBC-TV18.

Q: What is your sense? Will 5,000 Nifty ballpark hold out in this phase of global turbulence?

A: I am not really too sure about it. I believe 4,800-4,900 looks like a level that can easily be reached. I have been maintaining sometime 16,000 on the index. On the lower need is a number should be a level where you will find support, but you will also touch that level often in the next few weeks.

Q: What do you think will be the key reason for the market to breach that 4,800-4,900 mark if it does?

A: On the lower end further than that, I don’t think it is going to go much below that. According to me, you are in a period of reasonable uncertainty. So the market clearly boxed in by two factors, all kind of global uncertainty on one hand and by the strong India story on the other side. So below 16,000 fundamental factors start kicking in for India, we start seeing reasonably good interest and valuations become more attractive.

It has been the same story for the last four-five months and it continues to remain the story. Above 18,000 obviously valuations start becoming expensive and then the overhand of all kinds of global issues start coming on to India. So it is very range bound and it has been like that for some time and I expect it to be like that for at least next three months. Our house view is that next two quarters probably things will remain like this. Therefore, it is time to play sectors and stocks. So we clearly keep on looking at sector rotation and stock rotation that is the idea.

Q: How are you approaching this whole commodity complex because those are the ones which have got a real pasting because of the Chinese concern?

A: Yes but we are now reasonably comfortable. The view is that last time also when the US pumped in money and this time also Europe is pumping in lot of dollars into the system. Inflation, especially commodity prices, should remain firm, should keep on looking North. Our view is natural resources companies who are sitting on top of them like Sesa Goa, etc. will continue to do reasonably well. I think iron ore, oil, all these kinds of natural resources should be in reasonably good demand as you go along.

It has been a classical case, whenever there is ample amount of liquidity in the system there is a inflation threat. Therefore, real assets are the ones being chased by everyone. We have seen what has been happening to gold and we are very comfortable right now holding on to oil stocks holding on to any of the natural resources. The second corollary to this is to look at companies which are well integrated. People who have everything from natural resources end to the final end not people who are exposed to one side of it. The corollary to this is that if these companies are going to do well then companies who are going to use natural resources might continue to have some kind of problem. So they might have a dual problem.

If there is demand shortage kind of problem there might also be supply push kind of a problem. Our overall thought process though is India per se is not looking at any kind of a significant slowdown. So India related plays should continue to do well. From a sector rotation perspective the first sector that we would want to look at is probably natural resources in the near-term and then we will keep on looking at newer opportunities as they come along.

Q: What is the house call on Larsen & Toubro (L&T) now and have you guys upped your earnings target there?

A: The house call continues to remain a hold. We find that the company is doing well and the analysts are overall bullish, but valuations are also not cheap on that stock. So we are looking at another maybe 10-15% upside on the stock from current levels at the max which is why the call is technically a hold. Any time that the stock declines with market turmoil, you will probably look at entering into the stock. So it is also a more like buy on decline rather than just going in and buying at this point of time.

Q: There seems to be a delineation of the market sentiment though to odd stocks like L&T versus stocks like Punj Lloyd, IVRCL Infrastructure, why is that?

A: We are in a very classical market. You are looking at people becoming a lot more cautious at this point of time. I think we have two extreme ends in the market. If you are getting a Punj Lloyd and an IVRCL and you are not clear about where the numbers are going to be over the next one-two quarters, in the short-term people are saying maybe it is good to be in some of the largecaps.

On the other hand, I am seeing a lot of interest in a lot of midcap and smallcap ideas also. So wherever people can see visibility of numbers for the next two quarters, marketcap is not the relevant number for a lot of investors right now. Last time also we saw hedge funds and all other guys are becoming reasonably active.

So companies from USD 100-150-200 million marketcap onwards have a reasonable amount of interest that we are seeing. So at one end, obviously there is a flight to quality. On the other hand, there is a very strong interest in very good valuation plays, things which look undervalued that is where people are interested. The other phenomenon that I have been seeing which is very classical of this market, anytime you identify an undervalued story and people get to meet the company. We have seen stock prices move by 30-50% in a period of two-weeks. So there is also a lot of interest and very quick reaction by the street on things which show perceived undervalueness.

Q: What would you do with Aban now?

A: We have been grappling with the stock for the last two days. Obviously, we need a little bit more clarity in terms of how their earnings look like. From a balance sheet perspective, it looks pretty okay but the key challenge is because you have got your debt restructured already and it was supposed to hold through by the earnings growth through that was happening. A decline in earnings can lead to again another round of restructuring requirement on the balance sheet itself and that is the more complicated problem.

On a like-to-like basis, with the asset going down, the reaction of price was sufficient for us to say that things should be now stable on the stock but because of this second degree of complication which is there. We are waiting for a little bit more information and getting more clarity in terms of how they get through the situation and that will allow us to take a better call. So I would for this point of time, not want to jump in till we get more clarity.

Q: You spoke about commodities earlier. What about the other two major clusters banks and infrastructure? If you had to ride on either of these themes for the next two-three quarters, which one would be comfortable for out performance?

A: In the short-term, in the next two quarters again, we are reasonably comfortable on banks. Especially there are quite a few midsize private sector banks, old private sector banks and new private sector banks that we are very comfortable with. Valuations are attractive because the overall outlook on the sector and the economy is reasonably stable. We like ING Vysya Bank, it is around 1.7 times FY11 book, about 1.5 times FY12 book. We think that is a good pick.

There is a good change that the new management is bringing in and things look very good on that counter. We continue to like SBI and Axis Bank. They keep on flirting with valuation excesses on the upside whenever the market goes on an uptick. So you really wait and buy these things whenever the market is in a downturn. So there are really two approaches whenever the market is falling, you look at picking up some of the core stocks that you like and whenever the market is stable things like ING Vysya are good picks which you keep on continuously accumulating that is the idea.

Q: What are you hearing about money flows? We haven’t seen huge outflow yet, although yesterday was bad, are you hearing of money being taken off the table in the short-term?

A: It is very unlikely. As I mentioned I think there is again an excess liquidity situation that is going to get created once more. Every time that we are talking to global investors, I think the sense we keep getting is that people are very comfortable with India, there is hardly anybody who has not been comfortable over the next 12 months kind of a timeframe. So we are grappling between two timeframe. The most important problem is the next six months and beyond. There is some amount of uncertainty about the near-term again not driven by India, but global parameters. Therefore, the thought process is that every time valuations become reasonably money will keep on flowing into India.

We sort of believe that there is very little option in the world other than for people to come to countries like India, maybe Brazil and obviously on a correction into China because this is where the growth is. People will chase this growth. So you will go away from Europe to US dollar for a period of time whenever there is lot of uncertainty, but as soon as you want returns you have to start looking at one of these markets or all these markets together. Unfortunately, we are much smaller in size compared to the global economic size and therefore you done substantially large flows coming in. But our view is we are in midst of a steady period for India and capital flows will be reasonably consistent. In the very short-term, you will obviously see blips depending on global parameters, but India seems to be very comfortable.

Q: How high would you rate the chances of Nifty going back and testing the levels of 4,650, 4700, which is where the market took support when the last meaningful correction happened, do you think it is likely or a higher floor is likely to be set in this May correction?

A: I don’t think it is very likely, there is a possibility, and I would say there is probability of maybe 30-40%, so around one-third chance. But every time when the market is falling we see very strong interest coming in. I think the other thing is there is also capital sitting on the sidelines with a lot of private equity funds, I would also say with HNI and retail investors who are not moved into the markets in a big way in the last few months. People have been reasonably trying to find an opportunity to enter into the markets and have been reasonably valuation focused. So every time you go to 4,700- 4,800 levels, the market starts looking interesting, a lot of stocks correct obviously a lot more than the 5-7% that the market corrects and people start picking up ideas and opportunities that they like

So our view continues to remain maybe 4,800-4,900 is where the market should start seeing very strong interest, below that probabilities are much lower.

Q: What do you do with telecom now?

A: Stay out. If you really want to play telecom, the only play is go long on Bharti and go short on some of the others. So intra sector play a long short but ideally I don’t think we are still looking at bottom of telecom. Let the results for the 3G come out. Companies will have a substantial amount of money to pay. The sector as a whole will have to pay another Rs 50,000-60,000 crore which is not small by any stretch. The bottom of the sector is going to be the day when MNP really comes in. That is the time when almost all negative news on the sector would have come.

The turnaround in the sector only happens when the consolidation in the sector starts. You are in the midst of an extremely aggressive price war. There is no option for companies but to keep fighting on the price front and that is not going to lead to any kind of margin improvement for the incumbents and the new people are obviously going to loose money.  On top of that you are doing significant amount of capex. There is really no way in which this sector is something that you would like to play at this point of time. If you want to play, you want to hold on to something in the sector then obviously Bharti is the best candidate. It also has the Africa play now inbuilt into it which obviously plays out in the next two-three years. So long Bharti and short everything else.

Q: Any thoughts on sugar?

A: I am not in a hurry to get in again. The commodity cycle is not in your favour. There are again very short-term noises being made, but my view is still time for us to wait and watch. At least, you should look for another one-two quarters to see how the whole thing pans out. We are in the midst of a bumper crop and the next crop cycle is where things will start turning again.

So I am in no hurry to enter right now. Shree Renuka is trying to renegotiate the Brazilian deal. You will see a lot of these kinds of things happening. Everybody is trying to revalue the assets that you are looking to buy. Things will be cheap for a period of time before they become expensive again.

Source : Money Control

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