Source: Moneycontrol.com
Market veteran N Jayakumar, president of Prime Securities feels the upside on the Nifty is capped at 5,100 levels.
The year has got off to a steady start with the market managing to stay in the green – although just about – for most of the time. According to Jayakumar, the market is in a bottom formation process at the moment.
“I think the adverse newsflow has been factored in and now the market is likely to focus on the positives,” he said adding, “excessive correction in rupee and equities in the last quarter of 2011 is reversing.”
He expects midcap to outperform in the near-term. “We need crude to cool off for a sustainable rally,” he said.
For now, his advice is to sell into rallies in commodity stocks. “I think export-oriented sectors will continue outperforming,” he said adding, “…sugar will continue to underperform in the near-term.”
Below is an edited transcript of Jayakumar’s interview on CNBC-TV18.
Q1: What have you made of this 7% rally in Nifty in last 9 days? Do you see more upside in the near term?
A: The excesses of the last year especially the last quarter of the calendar year 2011 are being reversed pretty aggressively. The currency movement including movement on the index was a complete capitulation in some sense. At least the portfolios did capitulate of most investors especially the foreign investors. The new money which was waiting to come in has started trickling in but 2012 has also brought a certain fresh perspective to it which it seems like there was no tunnel forget the light at the end of it in the last two weeks of December especially. In that context if you see the current year nobody knows really who the buyers are and yet a number of midcaps stocks have bounced off 20-30% in some cases even 40% from recent lows.
The beautiful thing about the whole movement has been that the index has done nothing much. A 6-7% rally is decent but really speaking Nifty is stuck in a range of 4600-5100 maximum and in that context a lot of stocks have done much more.
This kind of resilience that the index shows in the context of whatever headwinds it had to encounter, the rupee shows some strength despite recent dollar strength. The rupee has appreciated moderately in 2012. From the levels of 54 it is down to a tad below 52. In that context the first signs of bottom formation are now more and more getting established.
From a sector perspective there is clear rotation out of the IT, consumption and the leader spaces and move into private sector banks, infrastructure space and that rotation is clearly visible. The story is not really an index story, the story lies else where which is really the midcap beaten down space where without knowing who the buyers are and the stocks are up 25-35%. We are talking about a pretty sensible call that the bottom is around the corner and if you look at recent headwinds like the European down grade for instance what is it that the rating agencies have told us that we don’t already know.
Also to some extent there is a lot that’s getting factored in and my own contention is that bad news now will tend to get ignored faster and good news will tend to get lapped up. A few large policy announcements, some large orders and the infrastructure space will be up and running. A simple thing like the L&T Chairman who has been the biggest critic of the government doing nothing over the last 12-18 months suddenly came out and said things are not as bad as they seem. An optimistic statement from capital goods giant Chairman boosted up that space which makes me believe to some extent bad news has been over factored in and good news will push up stocks much more than people will anticipate.
Q2: Do you think the meat of this rally will unfold in the course of the next few weeks and months? Is there a potential of a pre-budget rally here?
A: Depending on what you consider a rally 95% plus of the market is focused on the Nifty. The benchmark index is trading in a plus/minus 5% range which will not excite most people. Just take a look at what’s happening to the midcap infrastructure space. GVK, Lanco and GMR Infra companies were giving a sort of bankruptcy pricing indications in the stock market and now they have started bouncing off. There is news about road orders and the Power Ministry taking steps to make sure that things are available for power generation. Even though some of these steps are relatively small but it is enough to kick up a reasonable amount of action in this space. Many of these companies are quoting at 1/10th to 1/12th of what they used to quote at peak times or peak multiples. So from that perspective the correction is completely overdone and maybe the story lies there.
Another story can be the heavy engineering space. Some of the recent safe havens like IT, FMCG are clearly meeting headwinds and had their run up and they are sort of tapering off. So it wouldn’t surprise me to see this story to continue where public still looks at the Nifty or the index for some kind of a relief to say that there is a bull market on and they are not getting any clear indications. Yet the meat of the market which is the midcap space displays strength and momentum which is belied by the lack of strength in the frontline stocks or the index.
Q3: What do you do with commodities now, global and local? Metals, sugar for example. Do you think they are also slowly getting out of the woods?
A: We need to see sugar slightly in a different way. Sugar is just too controlled right now. The industry is fragmented and the bane of the industry is whenever the industry has started making money, the government came out with all kinds of issues regarding how pricing cannot be passed on to consumers. It’s a political issue. We are heading into UP elections so any move in sugar maybe short lived unless decontrolling happens. It’s a long time the sugar industry is crying out for decontrol and consolidation amongst players. Right now virtually every UP player is either on the block or having problems with his debt. There is a real fundamental issue as far as sugar is concerned and these moves shouldn’t be taken into any positive sentiment as it is just a few statements made about export quotas, etc which may have led to these moves.
The big bull run in the Indian market will come in only when commodities especially oil come off. Oil to my mind is displaying the same kind of price moves that golddisplayed at the 1750-1800 levels and then just came off to the 1600 levels. So the pullback in oil is the real trigger from an Indian market perspective. Iran has spooked the shorter term trend to make it more on the upside. But if you were to look at any other yardstick, oil should be significantly lower. It hasn’t played out more from political reasons. But for me, commodities would be a sell on rallies. Some of these levels in commodities are unsustainable, demand isn’t keeping pace and there isn’t growth in most parts of the world.
The rest of the world is still grappling with fundamental issues. How long Europe takes to move out of denial and into problem solving mode is one thing but the real story in terms of the engine of growth is US getting its act together. The first signs of recovery are more than just green shoots. The Indian story or from an index perspective what could help is really export oriented industries and the re-rating or de-rating of the rupee from a 44-48 range to what I think now is 50-55 range. So export oriented industries will certainly sort of lead the way. These are the spaces and sectors and especially dominant players with dominant capacities in these industries will be back in terms of picking popularly known as sectoral winners or theme based winners. So from a commodity perspective one would need to look at the continuation of downdraft. A lot of the commodity stocks have rallied more on short covering. So the price impact on the short covering happens vigorously. New money, I think is selectively walking in which is a huge change but overall the liquidity continues to remain a challenge. If the rupee provides some pocket of strength in the short run then that will attract more money in the Indian markets.
Q4: The concerns in infrastructure space both in terms of news flow and corporate governance still prevails. For instance JP Associates might have lost the Ganga express way or Sintex not strictly from the same space but disappointed the street with poor results. How do you deal with such road bumps?
A: These road bumps tend to get magnified in the current scenario. Assume one regulatory issue or one legal issue comes up in a company. In the past or in a bull market, stocks may have reacted 3% today but now they have reacted 30% or more in the last 12-18 months. So such kind of reaction has been seen. One must understand that in bearish markets people will see any regulatory issue as great excuses to continue shorting these stocks.
The events have always been an integral part of any stock market. A loss of one project can’t change the basic character of a company but if there are regulatory issues that fundamentally threaten the company is a different issue. Sintex results were decent, the forex losses were not there this quarter, in fact there were forex gains but the stock has reacted substantially more than any consideration. The bigger issue in Sintex has been the presence of FCCBs and whether the company will have enough money to repay it. The FCCB concern has really undermined a lot of stocks. So if you go back to the genes of some of these issues, one has been FCCB, second has been regulatory and third has been projects getting stuck. But other than that events are part and parcel of any market and we should take it that way. The over reaction is where the opportunity lies in terms of entering the market.
