Share Bazaar News India

Nilesh Shah, MD & CEO of Envision Capital has a view that inflation and Infosys are the key triggers for the markets. He adds that inflation is more important as Infosys results are likely to be in-line with expectations. "Inflation nos will decide if Sensex can go above 16,000 level" he adds.

Shah also says that market may remain in a trading range over the next 3-6 months though midcaps may display more strength in future after recent correction.

Excerpts from the exclusive inetrview with Nilesh Shah:

Q: Another disappointing close, but do you think the market’s ready for a breakout or a breakdown on the back of the two important triggers that lie ahead, inflation tomorrow and Infosys on Tuesday?

A: Surely. These two events are clearly the most critical events for our markets over the course of the next few sessions. My sense is that I think it is going to be inflation, which is going to be the trend decider, because clearly Infosys and the rest of the technology companies by and large are going to give a reasonably predictable guidance.

To some extent, this sector has been a lot more resilient compared to the rest of the stocks. So, it is unlikely that the earnings guidance especially from the bellwether technology stocks is going to really kind of help the market too much. It is clearly the inflation number that is going to be the trend decider. I think what clearly the market will want as a base case situation is that we really don’t cross the 7% mark, because if we do cross that, then it clearly indicates that we still have a long way to go uphill. But if to some extent the number gets capped at around 7%, then it is quite possible that the market would start hoping that we’d probably get into a plateau kind of a situation for inflation.

So, it is clearly going to be inflation that is going to be the most important trend decider over the next few sessions and that is going to decide whether this market is going to be able to cross the 16,000 mark and close above it and trade above it for several more sessions, or whether it is going to kind of give up all its gains of the recent days and trend even lower.

Q: What's your sense on how long does one or should one expect to stay within a rangebound kind of situation now, now that we have entered earnings season, do you think by the time we ended, we would have found direction either way or this grind will continue for a while longer you reckon?

A: It looks like that the situation will probably carry on much longer. While the earnings season is going to unfold over the next one or two months but it is essentially only the technology pack and may be some of the private sector banks which will come out with their earnings numbers in April. But rest of the pack which is basically the infrastructure segment, the engineering segment, the capital goods segment, a lot of the steel and the cement companies would all come out with their numbers in May and June because they clearly have the advantage of declaring full year results.

So they have the liberty to take all the while upto 30th June to come out with their numbers. In addition to that even if basically they paint a robust scenario, the market is really not in a mood to give the benefit of doubt and it is quite possible that the market will actually wait for the first quarter numbers, which would come out only during the month of July. In addition to that, it is quite possible that inflation might peak out now but it might take a while before the down journey starts even on the inflation front.

So we combine all these factors. It clearly looks that we would at least be in a rangebound situation for the next three to six-months. It is quite possible that the range could expand. We have been kind of moving in a range of about 1000 odd points on the Sensex for the last few weeks, so this 1000 point range could expand to may be even 2000 points or even 3000 points. That situation is definitely possible but it is unlikely that we will move out of rangebound market at least for the next 3-4 months.

Q: In the last couple of days we have seen the action turning a bit more stock specific - midcaps and smallcaps, striking out some outperformance. Do you this trend could continue or is that too optimistic?

A: In the near term, the trend could continue and may be the midcaps could display a lot more strength. It is also because they have got disproportionately hammered in the last quarter and more particularly in the last few days of March and that’s possibly because of a lot of the balance sheet clean up and all which a lot of individual participants and investors might have engaged in. In addition to that, probably a worst of the margin calls could have been through for most of the investors and the traders and therefore we saw maximum distress on the midcap segment during the month of March.

As we turnover into the month April, a lot of the investors and participants clearly have the luxury of owning these stocks for the next few months or for the rest of the full financial year without having to really worry about their books of accounts and things of that kind. In addition to that the midcaps are already trading at bear market valuations. We clearly believe that a lot of companies that we track on an FY09 basis are today trading at about 11-13 times PE multiples and these are companies, which still are expected to kind of grow at 20-25% CAGR.

So it is quite possible that very selective value buying could emerge into midcap segment. I think it is only the earnings season, which will provide us an answer to that because it is quite possible that the earnings of a lot of the midcap companies could be significantly vulnerable to higher input cost because of higher commodity prices. If these companies have not done the right risk management and have some of these foreign exchange related losses or trading loses or derivative losses, then these could really be negative surprises which could come in from the midcap segment and if that happens and if we find the midcap segment engaging in a lot of backyard cleaning, then these strength that we are seeing in the last few days may not sustain for the rest of the season.

Q: What do you make of this private banking space now, they have got hit quite badly, they seem to be recovering, but today again was a bad day for ICICI Bank and HDFC Bank? Do you think there is more pain left out here?

A: I think the standalone banking players that are engaged into core banking and transactional banking, I think the worst is over for them, especially the kind of price points that we see during the month of March and the lows that they made for March, I think could hold for a while now.

But I think some of the other banks like the first generation banks, the newer private sector banks, or banks that have phenomenal exposure to the capital markets, may report for FY 2008 with probably the best earnings that they have had in the last three-five years and it is quite possible that these could be peak earnings for them at least from a one-year perspective. If you were to kind of factor-in a no growth situation that there will not be any de-growth, still some of these stocks are trading at about 22-25 times, which are rich valuations. So, it is quite possible that there may not be too much of a downside from here. But I am not too sure whether they are going to give you any kind of significant returns from current levels.

Q: How would you like to position yourself on IT before Infosys speaks and how much of a pivotal event is it for the market you think?

A: Well historically and traditionally, it has been an important event and on several occasions that has clearly been a trendsetter and trend decider and at times it has also helped the markets to come out of the woods. But this time I really don’t think that that is really going to be the ability of these technology companies to pull this market out of the woods. That is because probably I think their guidance is going to be the softest that they have ever given in the last maybe three to four years.

Secondly, I think as a business, they continue to face a lot of challenges whether it is in terms of the demand environment emanating out of the US or the pricing related or cost related challenges. In addition to that, a few of them will have sunset clauses coming in because of the STPI benefits. So, I think a combination of all of that. I think clearly the expectations are not very high. But I don’t think that is going to be a good enough situation for some of these companies to be able to positively surprise. So, I think today there are many other weaknesses, or many other negative points that would probably have a larger impact on this market and which could significantly outweigh even a small, positive surprise that the technology companies would give.

Q: As an individual investor, what's the prudent way to approach the market right now? Do you think there is another leg down and one gets better prices to accumulate or do you start acclimating now or is it better to just wait and watch and not do anything just at this point?

A: As I was mentioning even earlier that I think the next three to four-months are going to be very critical for this market more from a very fundamental perspective and if one leaves aside all the global and the macro issues aside and gets down to really macro evaluation or evaluation of even micro opportunities, it is going to be very important for investors to really take a much harder look at basically the earnings which companies will give and what the final balance sheet which these companies will provide to investors.

The devil could really be in detail and it is going to be a very important therefore for investors to really have a hard look and the next 3-4 months are going to give important opportunities or meaningfully opportunities for investors to be able to identify companies, which they believe will have unaffected growth and they will get opportunities to really get into those stocks and keep accumulating them over the next three-four months and hits in those individual stocks may not be fundamental related.

Those hits could come from various global events, from back home macro events or political events or combination of all them happening in a very short span of time and we clearly believe that yes, the market is rangebound but there is definitely a situation where this market can go and test back its lows which it made in March and that possibility is there that in the next 2 or 3 months we may go back to those levels of 14,000 or so.

Source: Moneycontrol.com