Rahul Shah, Head-PCG, MF Global, said the markets have risen too fast and too soon. He feels RBI may go in for a rate cut in October.
MF Global is advising clients to take long positions in largecap stocks. He is bullish on cement companies like Century Textiles, ACC, Grasim, and Ambuja.
He likes JBF Industries, Philips Carbon Black and Radha Madhav Corporation.
Excerpts from CNBC-TV18's exclusive interview with Rahul Shah:
Q: Where are we headed from here, 17,200? Earnings beckon, it’s a month of Fed and RBI, how do see the month panning out?
A: Last week, the markets have had an unprecedented run. After the Fed meet, you saw the Sensex, Nifty moving in a very flamboyant fashion. This could be precursor to the rate cut in domestic markets. The rise has been too fast and too soon. A lot of small value stocks and not necessarily small market capitalization stocks like JP Hydro, RNRL, and MRPL have moved up and a lot of market participants are feeling left out.
Going forward, I feel there is huge polarization between largecap and midcap stocks, which are still languishing at 15,000-15,500 levels, and that according to me is an opportunity.
Q: What are you advising your customers at this juncture? Would you tell them to take some money from the table in heavyweights, which have done well, and invest in these value stocks that you are identifying?
A: They could continue to ride their longs in frontline stocks. However, we would strongly recommend to put some money into midcap stocks where the growth prospects are strong. The earning momentum is there and they are available at much better valuations.
Q: You don’t buy the argument that earnings could actually take precedence over the kind of liquidity flows that you are seeing or do you think the later will dominate earnings regardless of a disappointment?
A: We are seeing liquidity not only in Indian markets but markets overseas also. However, we will get to know who is sailing naked when the tide turns. There is liquidity but I would at this level go and put money in midcap stocks rather than putting fresh money in longs.
Q: We have seen sugar rally on days. We have seen midcaps cement and midcap steel turn active on days. Are there any pockets of strength that you are identifying that look attractive on a valuation parameter?
A: There are 4-5 stocks that we like from the midcap sector. The first is Nava Bharat Ventures, which is a pure play on power. We expect at least 50% appreciation from current levels. We continue to like JBF which we first recommended at Rs 110 and this is a play on POY chips. We believe this stock has still miles to go.
There are couple of more stocks like Alembic which is a play on pharma. Phillips Carbon is not only a play on carbon black but also on co-generation power. There are lots of stories. Radha Madhav is one stock, which we strongly recommend. It is a play on FMCG and now pharma packaging. There are a lot of stories where the risk is much lesser and probability of appreciation is much higher.
Q: What would be the pick of your pack in the heavyweights?
A: We continue to like cement sector. We are bullish on Century Textiles, Ambuja, and ACC and continue to hold India Cements and Madras Cements.
Q: What are you factoring in terms of overall earnings growth for FY08 and perhaps FY09 as well?
A: If you look at the scenario where the GDP is growing at say 8% and if we have a cut, then it is a classic scenario to be in where you will see PE expansion taking place. I believe that markets have risen too fast and too soon, and may correct. It is difficult to time it but we have a bull case here.
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