Mkts to stay volatile in run-up to Budget: Experts

Experts give their opinion on how the market will function up to the Budget. They are of the view that by and large the market will remain flat and at some stage there will be corrections.

Jyotivardhan Jaipuria, Head of Research, DSP Merrill Lynch, said the run up in mid caps had been sharp. "We are seeing a correction now." India has done well as compared to other emerging markets, he said.

According to Jaipuria, the markets are likely to remain flat up to the Budget. "The trend is likely to remain volatile. We are looking for cues from the Budget."

Shankar Sharma of First Global said, there is a 70-80 per cent chance of a substantial downside from here. "The risk-reward ratio has turned unfavorable. There is not much action visible in large caps. I am also not comfortable with the market internals."

He feels the correction in mid caps was due as the stocks had rallied a lot. "The markets are in shaky territory. I am not comfortable trading in the last few days."

Excerpts from CNBC-TV18's exclusive interview with Shankar Sharma and Jyotivardhan Jaipuria.

What do you make of this mid cap and small cap correction and do you think there is more to come?

Sharma: This was pretty much due because they have had a pretty good run through December. So, it is not completely unexpected. Having said that, what has been causing concern to us is that we think the markets are now into very shaky territory. And frankly I would be surprised if you saw the markets sell-off from here rather than gain from here. The last few days of trading have not given us a great deal of comfort.

So, our sense is that midcaps were due for a sell-off. Largecaps have done very little in the last month or month and a half. Today, you saw Reliance, an ICICI Bank. But this is like scattered trade. It is not like a convincing enough rally and too a fag end rally. It doesn’t make us feel very good about the internals of the market at the present moment.

What’s your sense going into this earnings season? Do you see it as a largecap polarised market because midcaps and smallcaps have started underperforming? What do you see the market doing from here to the budget then?

Jaipuria: Both the largecaps as well as the midcaps have had a good run. The midcaps had run up much sharply than the largecaps. So what we are seeing is a bit of bigger correction in the midcaps than in the largecaps.

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If you remember India has done very well relative to most other global emerging markets. So India is probably one of the best performing ever since the SEBI P-Note regulations came into place. So to that extent what we are seeing is just a very small correction.

I agree with Shankar that probably from hereon market will be flattish upto the budget. We will have these spikes because in the last one week we have seen markets go up and then come down, in a matter of hours again go up. So it has been very volatile. We will probably keep seeing that volatility and the only thing which will probably hold the markets up is a bit of expectation of a good budget coming through.

What is making you shaky about the market, valuations in pockets or do you think it is the polarised nature once again, the narrowness that is causing some concern?

Sharma: The IPO market for one, definitely. Not so much the secondary market. When I look at the valuations that exist in the IPO market, a company like Future Capital Holdings should get a valuation of what it is getting, probably USD 1.2 billion on a Rs 3 crore profit for March ’07 and 200-300 employees. It is great for them; they can sell the stock and all the very best to them.

I am just saying that if the market is becoming so non-discriminating between start-up companies and existing established companies, and that nobody is really paying attention to business fundamentals and everybody is projecting that growth is a given, you would get the capital and growth would come, all those things. I have never seen them play out that linearly in my experience. Obviously things change, times change, all of us can be very wrong.

My sense is that we have had a pretty good run, everything to do with the stock market, including financial services companies. I dare say all these things are now hitting a level wherein the chances of even a small market downslide will sort of really accentuate the fall in steeply priced IPOs and for that matter a lot of steeply priced equities. A lot of them reside in the midcap and smallcap space. I see companies routinely trading at 50-80 times forward earnings. I am not so sure that all those companies merit those valuations. I think the market eventually will come to its senses and those situations are never happy things when they actually happen.

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So, all of us sit and say that look it won’t trade at 80 times earnings, maybe it will trade at 60 times earnings. But when compression starts, you really can’t tell how far they will compress. That is the biggest thing about markets. They will surprise you either way. So, a lot of things in the IPO market give us a lot of cause for concern.

I am not making a case that the secondary market is frightfully expensive. It is just that the global situation currently is not very pleasing. We just heard that Merrill Lynch might take a USD 15 billion write-off. All those things are again factors to watch out for. Of course India has been the standout market and that has been our case in the last few months that India will be a market that will outperform.

But looking at the largecaps, they are largely saturated; the smallcaps have done the trick. What is the new thing that will come out of the bag to drive the market higher?

How do you see the relative performance between largecaps and midcaps now because last three months midcaps have outperformed hugely as you were describing from hereon do you think the whole market needs to drift down a bit, consolidate or do you think largecaps will now outperform midcaps?

Jaipuria: I think markets needs to probably drift down a bit and what I am worried about is the global situation and the impact of that on India in terms of earnings, in terms of the economy; I think India is relatively immune but it’s just relatively and so in the absolute sense there will be some fall out also on India both on the economy as well as on earnings and that is what will lead to a downward drift.

In the downward drift probably largecaps will do better than the midcaps. The midcaps probably could fall more than the largecaps will fall.

You spoke about future capital. What are your thoughts on the Reliance Power IPO? The grey market suggests that it will go on to list at Rs 900. At that price how would you approach it?

Sharma: I think we will simply say that it is expensive but who is to say that it won’t trade at Rs 1,500 upon listing. At this point of time being contentious in terms of doing valuation etc is probably a stupid thing to do and we have to believe in the Greater Fool Theory in practically all IPOs that I am seeing coming out.

I think the stock will do well post listing because once you get so much capital, the capital will get put to work in one form or the other and I am sure people have got it figured out that its not so much the great market premium as much as what happens after the grey market premium becomes actually the market price. So I think there is still room on the upside for lot of the new listings that one is going to see. Now whether everything sustains a year from now that’s another matter but I doubt if the guys buying in today will be shareholders 12 months from now in most of the IPOs. I think people will simply flip.

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I was talking a number of fund managers and they all were saying that it’s all a beautiful Greater Fool Theory thing at play. We don’t look at prospectus; we don’t look at numbers or fundamentals any more. But it’s just that if you are not participating and you miss out on a two-bagger like Reliance Power - you look stupid. These things keep working for reasonable length of time. I think the stock will do well post listing.

What’s your sense of valuations in this space and do you think for the moment the market will continue to ignore valuation concerns and momentum will keep them flying?

Jaipuria: Valuations in the space are expensive; there are lots of issues coming up and the good thing would be that we would see lot more power coming up in India. So to that extent probably five-seven years down the line, this power shortage we see in India will probably ease off a bit once lot of these power projects come into space.

We are underweight the sector at the moment because there is too much optimism on how quickly these would come up in the way they are valued. They are discounting earnings quite forward into the future. So overall we are negative at the moment. Since all this come up we prefer playing it through the engineering companies who are likely to supply equipment to these people, who build these power plants that’s probably easier way to play these.