Time to find the right stocks

Vivek Mahajan
Head - Research, Aditya Birla Money

After reaching a high in November 2010 the Indian market has witnessed a correction and in the current year, on a YTD basis, it is down by 12 per cent as against a gain of 17 per cent in CY10. This phenomenon is happening at a time when the global markets are witnessing an increasingly better performance. For instance, the markets in the US and the EU are up by 4 per cent and 3 per cent respectively on a YTD basis. We have seen that the Indian markets have witnessed an inflow of USD 29 billion and climbed up by 17 per cent last year, while in the current year we have witnessed an outflow of USD 1.3 billion and the markets are down by 12 per cent, thereby revealing the shallow nature of the Indian markets.

But I believe that this correction is healthy and the valuations of the markets have become attractive as we are quoting at 14 – 15 times the next year’s earnings and therefore it must be seen as an opportunity to accumulate frontline stocks on a regular basis. At present we are going through the earnings’ season for the third quarter of the present fiscal and I believe that the results are in line with the expectations. Going forward the rise in interest cost will start showing its impact and it is very hard to comment at this point of time where the market will find its bottom.

We believe that the market may correct by 3 to 5 per cent in the worst case scenario from the present levels and feel that this will bring in an opportune time to make an entry. Another issue that has been the talk of the town is the high level of inflation. We do not see a major dip in the inflation levels going forward as the high food prices are playing spoilsport and these are not likely to see a major correction. Factors such as crude nearing the three figure mark and copper hitting an all-time high will certainly leave its mark on the inflation figures.

The RBI has taken measures to tame inflation and has raised the interest rates in the recent past and we believe that they will take the same measure in the near future too. The next event in the list of triggers is the Union Budget but in the last couple of years we have seen that the bud-get as an event has lost its relevance. However, this year the budget may be watched closely by the market as there may be some withdrawals of the stimuli provided by the central government a couple of years ago to tackle the global slowdown. Last year’s budget had such withdrawals too. Further, five states are going in for elections in the current year post the budget session and we can therefore expect the budget to be a populist one.

In a time span of one year we believe that the first half of the calendar year would be challenging. The scenario is likely to improve from the second half. Going forward the UID project will be a positive move which will channelise the subsidies in a proper manner, as a result of which the leak-ages will decrease significantly. Then the roll-out of the GST, which will lead to a moderation of input prices, will be viewed as a positive move for India Inc.

As mentioned earlier, we feel that the markets may remain under pres-sure for the next three to six months and we are not sticking to any sector as a whole. In long-term perspective, sectors such as IT, textiles and pharmaceuticals look to be better bets. Our advice to retail investors is to avoid over-trading and avoid F&O or mar-gin funding positions.