Even as the stock market continues to surge buoyant on foreign inflows and the improving earnings picture for most Indian companies — as is evident from second-quarter results season currently underway — how should you position yourself in terms of stocks and sectors? Or is this the time to liquidate your holdings given the fact that prices of most stocks have seen a phenomenal rally in the past few months? Analysts answer.
View on markets
The market has been trading at 16 times forward earnings estimate, which was fair value, said Rajat Rajgarhia of brokerage firm Motilal Oswal Securities. “If you look at the global markets, every market is making a new high on a 12-month basis. So, we are just following global trends right now.”
Amit Dalal of Amit Nalin Securities said that, going forward, the market will take its cues from US markets and also earnings of industry leaders like State Bank of India (SBI) and Reliance Industries (RIL).
Rajgarhia said that in case a market correction was to set in, investors should be wary of stocks that have run up the most in the recent rally. “Metals definitely rank on top of the list,” he said. “There most of the cases are factoring in the prices which the under lying commodities are trading at, so you can see some correction there. Engineering is another space where despite a long-term [positive] view, valuations look stretched in most of the cases even on FY11 basis.”
Information technology: “We saw some good numbers from some midcap IT companies like KPIT Cummins,” Dalal said. The technology sector, he said, holds the most promise in terms of what those stocks will do by FY10-11.
“TCS is a stock that investors can bet in the technology space,” said Rajgarhia. “The numbers for this quarter have been good and the guidance especially that TCS has been giving more in qualitative terms seems to be indicative of good times going forward.”
Sugar: Dalal said there was room for an earnings upgrade for sugar stocks given the shortage of sugarcane in the country. “Balrampur Chini may make something like Rs 250-300 crore next year and that comes to an earnings per share (EPS) of about Rs 12-15, so that could go up to Rs 160-170.”
Metals: “China’s demand for metals that started in April-May has peaked off now,” Dalal said. “I would not expect further rise in metals stocks from hereon. I remain underweight on all metals.”
Earnings of metal companies may look bad on a year-on-year basis, said Rajgarhia, though non-ferrous companies should report better on a quarter-on-quarter basis. “Metal stocks are more a function of how the day-to-day business environment and underlying commodity prices are behaving because earnings are generally following with a lag of one-two quarters. As the outlook in the global economy and commodity prices have improved, we have seen a meaningful upgrade at least in the forward estimate in most of the metal stocks,” Rajgarhia said, adding that he liked Sesa Goa and Sterlite Industries in the sector.
Banks: Among banks, Dalal said he was positive on South Indian Bank and Karnataka Bank.
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