Portfolio manager PN Vijay says the market has formed a base of 5,700 levels in the first blush of the earnings season. He says the banking sector is likely to play the key role. “The banking sector is a significant contributor to the index apart from oil and energy. Particularly, HDFC Bank could be interesting because they have grown yet have maintained their net interest margins at very strong levels.”
He says private banks have reported stellar performance. “It was suppose to be a tough quarter because the cost of deposit was going up, however, they seem to have passed it on and NIMs are pretty strong,” he adds. He also says the banking sector would give an upward momentum to the market and sees strong results from ONGC.
Sharing his view on the TCS results, he says the earnings came in as a stellar show at the back of the HCL Tech results that pushed shares to 52-week high. “The pessimism around IT-sector post Infosys has been turned around by TCS,” he says.
On the Reliance results, he says that though the company delivered, it didn’t meet the market expectations. “The street expected that as the oil prices went up this high, the refining margins will go through roof, however that did not happen. Reliance is going to bring down the bullish undertone in the market,” he adds.
Below is a verbatim transcript of PN Vijay’s interview with CNBC-TV18’s Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: What are your initial thoughts on what TCS has delivered for itself and for the sector generally?
A: TCS came out with some stellar results, on the back of some excellent news from HCL Tech which took that share to 52 week high. The pessimism that surrounds the IT sector post poor guidance by Infosys is sort of melting away because people are saying the sector seems to be okay and probably, Infosys has its specific problem related to its own company. I think TCS has turned the sentiment in IT tremendously.
Q: What about Reliance? How would you approach that now?
A: Reliance did deliver but the street had too much expectation. The street expected that as the oil prices went up this high, the refining margins will go through roof, however that did not happen. As far as the market is concerned, Reliance was a disappointment. The company’s spokesman may not agree but there is the overhang of the gas — what is going to be the through put and what is investment required. They also announced a new gas find but as of now Reliance is going to slightly bring down the bullish undertone in the market.
Q: What kind of range do you think the market might hold through earning season?
A: The first flourish of earnings performance seems to indicate that the market has formed a base at least around 5700 or so levels. The banking sector is a significant contributor to the index apart from oil and energy. The private banks have reported stellar performance. It was suppose to be a tough quarter for them because the cost of deposit was going up but they seem to have passed it on and NIMs are pretty strong.
Banking sector would give an upward momentum. Reliance was a bit of a dampener in the oil and energy sector but ONGC, whose fortunes are linked to international crude prices, would show very strong result. So far what little we have seen of the Q4 not much of the manufacturing companies have reported would make one believe that there is an upward bias from this Q4 earnings.
Q: What would you accumulate from the banking space because some of these prices have also move up quite a bit over the last month or so?
A: HDFC Bank could be interesting because they have grown but still have maintained their net interest margins at very strong levels. It is very surprising and if you look at their balance sheet it is proving to be a giant. It will become almost to be type of a thing in all portfolios. While Yes Bank, IndusInd Bank and Axis Bank have been good, the smaller ones like Dhanlaxmi Bank and DCB have also been good. However HDFC Bank is almost becoming an Infosys and TCS in that sector.
Q: The capital goods index was down more than 2% last week and BHEL was down about 7%. How do you think capital goods will fair in earning season this time?
A: This could be a laggard because on the existing contracts these guys are being hit with high material cost and high interest cost. They have a long product delivery cycle; however the order inflow was pretty poor. The order inflows have picked up in the last month too especially in power sector but for the last quarter, the market is right in feeling rather anxious. The IIP data was there up 58% number in capital goods in December but after that it has been like minus 18, minus 15. We do not know what to make about it, however, the capital goods industry in the first quarter of calendar year 2011 has not done well and this will have a negative effect on the Nifty
Q: How do you position yourself in autos right now? We have Maruti suzuki results and we will see a string of them coming over the next few days. What is the right way to approach that space now?
A: Autos should be bought on declines because in terms of cost push, they have seen the worst. They seem to have maintained their volumes without too much of discounting. Therefore, going forward the sheer momentum of the buying should see that they maintain their volumes and their margins. Incrementally, with China slowing down, the material cost impact would become less and less. If the monsoon is right that will give big impetus to stocks like Mahindra. On the whole one need not be as pessimistic about auto as one was post all that we heard about Hero Hond and Maruti Suzuki.
Q: Some news flow is expected from Delhi on the second list of CBI charge sheets. Do you expect that to have any ramifications on the market per se?
A: Loop which is has indirect Essar influence would surely be charged, so we have to see what the impact is. For the market as a whole, the event has been totally discounted but for specific stocks there could be some volatility.
Q: Any fear of any political un-structuring or hiccups because of it though?
A: The Manmohan Singh government by agreeing to the Lokpal and the Joint Committee has wanted has managed to stay on the right side of public opinion on corruption. These are all related to corruption 2G, CWG. Therefore, big political hiccups would come when the Tamil Nadu, Assam and West Bengal results are announced. It looks as if for a change it could be Trinamool Congress that comes into West Bengal. It could be a fillip to the beleaguered Manmohan Government. Politically, the next one month I don’t expect negativism for the capital market.
Q: The monetary policy that lies ahead about 10 days from now and completion of this earning season, what is the high likelihood in your books Nifty getting past 6000 and adding some more weight or staying in a bit of a trading range?
A: Nifty may trade in a range because right now the market is ignoring some heavy headwinds in sums of macro economy. It is almost given that RBI would tackle rates and you are looking down the barrel at about USD 113 on the Nymex, which is upsetting all fiscal deficit calculations and the ability of the government to spend money. Therefore, this being so at some stage if inflation continues to be above 8% next few months, anything above 6000 will bring in selling because it is impossible for the market to be just driven by liquidity. The fundamentals will start weighing against the market.
http://www.moneycontrol.com