The market has run up and is way above the psychological mark of 8000, yet Sanjay Dutt, Director, Quantum Securities believes the real robust recovery in the earnings is still a few months away. He isn't too surprised with the July-September quarter earnings and cites global liquidity, euphoria due to Japanese liquidity, ECB statements, euro zone statements as the main reason for parameters driving the rally more than the real fundamentals on the ground in India.
Dutt further elaborates that market is waiting for a bull run with substantial momentum with people looking for new ideas. "It is advisable to play small moves on short sides", he adds.
Speaking to CNBC-TV18, Dutt says capital goods and oil and gas looks attractive at this point in time on the back of declining oil prices and government efforts. He believes now is the right time for the government to sell its stakes in ITC , Axis Bank and L&T as the valutations are quite high and can fetch close to Rs 70,000 crore to the exchequer which may help in achieving the divestment target.
Below is verbatim transcript of the interview:
Q: Towards the end of this week, the market got some disappointing numbers from public sector banks like Bank of Baroda ( BoB ), the weak consumer trends played out as well, what has been your understanding of the earning season so far and how would you approach some of these pockets?
A: Earnings haven't been that good. Relating them to the price, it has run up ahead of the fundamentals. We are still about a few months away from a real robust recovery which will be reflected in the earnings. So, I am not too surprised about the earnings, I wasn't expecting much of fireworks there. I think it is the global liquidity, the momentum, the euphoria that is coming out of the Japanese liquidity, the ECB statements, the euro zone statements and that is driving up the rally more than the real fundamentals on the ground in India as yet.
Q: Would you play for a bit of a correction at this point or do you think it is better to stay with the momentum?
A: I would play for a correction at this point in time. In fact, more than that we will see a typical kind of a bull market play out here where we see rotation coming in. We may not see a substantial dip or rise, which have a way in the Nifty as such. But within the Nifty, within the market itself, within the broader market we will see a lot of churning.
The stocks that have run up ahead of their fundamentals would pull back, people are looking for new ideas.
A very important thing that we all need to note at this point of time is that domestic investors at large, both institutional as well as retail, have a left out feeling. They haven't been able to position themselves for the rally that we have seen. So they all are now wanting to creep in and look for ideas, I see a lot of private client group as well as the "active" operator category in the market who are now looking for ideas and they are the ones who will provide the floor. So if I would want to play it, I would play it for very small moves on the short side.
Q: Where would you be looking to buy because prices have run up in a few sectors quite significantly? If you think the correction will not be very meaningful which are the sectors that you still think will hold a lot of value for investors who have missed out?
A: Capital goods is one place where there is a lot of potential. Banks, I still see a lot of potential because we will see the clean up, recapitalisation all those moves starting to happen and pan out over the next 12-18 months.
Select good quality banks both in the private and in the public sector. Engineering, capital goods sector definitely looks very exciting at this point of time. I would want to buy them if I see a dip.
In addition to that, I think oil and gas continues to be a space that I like because this is the first time in decades that we are seeing a perfect situation where government is very clear that they want to set right the subsidy mechanism, oil prices have fallen down. Therefore, we have a perfect situation where a lot of things can happen right on the policy front for the sector.
The gas pricing issue that has been plaguing the sector for a few years would be resolved over the next few months. The first stage resolution has already started and so that is one place I would like to look in case I am looking for some good quality largecaps.
Q: What would you do with some of the auto stocks now? The festive season has indicated that the sales have not been so great, would that make you wary of putting fresh investments into this sector?
A: I think auto sector on the whole is price-to-perfection at this point in time and maybe much ahead of the fundamentals in some of the pockets. It would gain in case we see interest rates coming down, consumer spend and consumer EMIs coming down, but already most of the positives are priced in.
Foreign commodity prices would benefit them in terms of input cost, but all that is already in the price till I don't see a substantial sell off in them, I wouldn't want to position myself in any of the auto stocks as yet.
Q: Are there any specific midcap pockets or stocks that have caught in your fancy one maybe because of good earnings and two perhaps because they have fallen so much that a recovery is still underway?
A: There are many of them across sectors. I cannot pin them down to a specific sector. In fact, in a rising tide all will do well with some of the boats sailing faster. Therefore, companies with no debt or lesser debt, companies that have run tight ships, companies that are owner manager driven companies are well positioned whether they will be in consumer goods, whether they will be in capital goods or many other sectors.
In fact, quite a few niche sectors are coming up now which are linked to the e-commerce boom that we are seeing but very difficult to find stocks, very difficult to find pure plays there.
One needs to do a lot of work in trying to locate good quality midcaps and smallcaps but that is where big money is going to be made.
There are a lot of midcap stocks in the engineering construction sector because once we see government spending, government allocation starts going up, the capex cycle starts looking up, these companies will start looking good again.
The ones that totally got slammed because of liquidity issues and order flows, the likes of the Jyoti Structure , KEC , all these businesses will be back in vogue and will be making good money over the next three-five years.
Q: What about the sectors that have run into a bit of a rough weather recently? IT after the earnings this time around has started underperforming and the consumer numbers have not been great. How would you approach these two names?
A: I would be underweight because these sectors have been over-owned for the last few years particularly amongst institutional portfolios, they have been perfect safe havens, they are over-owned and that is one reason why I wouldn't want to be in them.
The stocks are over-owned and there are few companies, which had least amount of corporate governance issues. Also, the sector had the least amount of debt problems and so, it is priced to perfection. In fact some of them are actually expensive at this point of time.
Picking up from this, I have been reading reports in the last two days that government will not be able to meet its divestment target, may resort to expenditure cuts, I don't know how far those news reports are correct but if the government is going to resort to expenditure cards and such things, it is bad news because will be unable to meet its divestment target.
There are three companies that are lying with the government non-strategic, have nothing to do with the government, which are part of the erstwhile specified undertaking of UTI (SUUTI) that is ITC, Axis Bank and Larsen and Toubro (L&T).
The government should immediately sell stake of these companies because all of them are in the upper end of the valuations. This is the perfect time to get rid of them and easily garner about Rs 60,000-70,000 crore cash and most of the problems relating to deficit, the divestment target should be met.
