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Wait! Don't buy tech stocks now

September 27, 2006

Ambareesh Baliga of Karvy Stock Broking says he would be comfortable with a 800-1000-point correction to start buying into the markets.

"But at the same time, I would surely not wait for that level and start entering. We have a stock list and target prices at which we will enter," he adds.

He further says the brokerage has a list of 37-38 midcap stocks with various price targets and a largecap list of around 15-16 stocks.

Excerpts from CNBC-TV18's interview with Ambareesh Baliga:

It was very quite yesterday, while there seems to be a surge of activity today. What's been happening in the market?

We hear there seems to be some basket buying, which took place some time back. Various figures are floating around and some are even saying that it was close to around 200 crore of basket buying. Possibly that is what has pushed it up.

But whatever said and done, there is tiredness in the markets and I think we will see this going ahead too because at higher levels, you are not seeing too much of buying coming in from the general public. So I think there would be weakness at higher levels.

Do volumes that haven't gone beyond that 35,000-40,000 mark, even though there are just two days to go before expiry, concern you?

That is true and it is clearly showing that participation is not there from the general public, which should have been there at these levels. That is a matter of concern, no doubt.

What do you expect to see after we have stepped out of this series because sometimes during the run-up to Thursday, the market tends to be quite volatile? Do you expect the markets to come off quite a bit?

I wouldn't hazard a guess. We have been cautious on the market for quite a while and every time one says caution, the market goes up 200-300 points. So I really will not hazard a guess right now.

All I can say is that we have been utilizing this opportunity to book profits. We have been doing that for the last three-four weeks and will continue doing that. As of now, we are more than 50% in cash. In case the markets go up to possibly 12500-12600 levels, we will sell more.

Is this for your frontline and midcap positions?

Yes. We have been selling across, wherever our short-term to medium-term price targets have been achieved, although we maybe positive on those stocks in the long run.

For example, we had bought Ranbaxy at around Rs 355-Rs 360 levels and our target price is around Rs 580-Rs 600 in the next two years. But when it reached Rs 420 levels, we started booking profits.

What have you made of this entire banking pack, stocks like SBI or ICICI Bank for that matter?

We are quite positive on most of the PSU banks. So we are saying pick up SBI, Bank of Baroda, even Punjab National Bank on dips.

In the smaller ones, we have been extremely positive on Dena Bank ever since it was close to Rs 23-Rs 24 levels because we are expecting an EPS of Rs 8 for it this year. This stock should be quoting at anywhere round Rs 40-Rs 42 levels.

Among the private sector banks, we are still not positive on ICICI and HDFC Bank. But at the same time, we are saying look at FY08, FY09 and possibly pick up the smaller private sector banks like Karnataka Bank or Federal.

Even though the breadth is not very wide, when you look at the top traders' counters on the NSE; TIPS Industries, Bank of Rajasthan; is there froth building up in that part of the market?

Especially when stocks like these start moving up, you can be assured that surely there are operators behind this. You really can't have general public coming and buying these stocks, because if you have not seen value in the last three years in these stocks, then I don't see how people can see value right now. So surely there must be people behind it.

When do you get back into the market in terms of Sensex levels because in terms of a correction, the knock doesn't seem to be deeper than 70-100 points maximum?

We are looking at a knock of around 800-1000 points for us to be comfortable to enter this market. But at the same time, I would surely not wait for that level and start entering. We have a stock list and target prices at which we will enter.

For example, for TISCO we earlier had an entry target at around Rs 430-450, which we have now increased to around Rs 460-470. So irrespective of the Index levels, if that price target level is reached, I will surely enter.

Is this that 30 list of midcaps?

We have a list of 37-38 midcap stocks and there too we have various targets. At the same time, we also have a largecap list, which has around 15-16 stocks.

Any particular take on the pharma space as a whole?

Basically the pharma space is more of long-term story, therefore I don't think much is going to happen in a month or two. But our picks in this space are Ranbaxy, Dr Reddy's in the larger ones and Ipca Laboratories, Wockhardt in the midcaps.

What have you made of this entire FMCG pack, the way you have seen the movements over the last couple of days, both on Hindustan Lever and on ITC?

This is one pack, which we have liked for quite a while now and again I don't think one should be looking at both Hindustan Lever and ITC from a short-term view. One should look at one and a half to two years, especially with the sort of retail expansion ITC is looking at. These are the stocks, which can easily give you nothing less than 25-30% return year-on-year, at least for the next two-three years.

Technology as a space has really moved up today. What are you expecting in terms of numbers and would you still advise buying these frontline stocks?

At least from short-term angle, I won't advise buying them at this juncture because you had a good run, especially in the last four-six weeks, after June quarter results.

I think the expectations for the September quarter are very high and unless those are surpassed, one really doesn't expect these stocks to move up much more from here. So at this point of time, one could ignore technology, at least in the short run.

You made the point of about 1000-point correction on the frontliners, what do you think would happen to the midcaps if such consolidation on the downside were to happen?

If the market falls 800 or 1000 points from here, I think midcaps will underperform and this normally happens whenever the market falls. So I think this time it will not be any different.

Of that frontline buy list, which ones do you like most?

I like stocks like Tata Steel, Infosys Technologies, Hindustan Lever, ITC, TCS and Ranbaxy. In banking, I like SBI, Bank of Baroda and quite a few of them. But I surely will not buy them right now; I will wait for my price.

What are your buy levels for Tata Steel, Hindustan Lever and TCS?

Tata Steel should be closer to Rs 460-470. For stocks like Infosys, possibly there should be a drop of around 5-8% from the current levels and same would be the case with Hindustan Lever.

Have you taken a look at LML and TVS Motor, the smaller stocks in auto space?

LML is going to be a speculative stock right now, especially after the BIFR (Board for Industrial and Financial Reconstruction) case was announced as it had a major fall from Rs 16 or Rs 18 levels. It has just taken a U-turn right now, but we really do not expect anything to come out of the BIFR case because earlier Mahindra & Mahindra seem to be interested in this company, but I believe now they are not any more.

So for LML, the upside is very limited and people should utilise this opportunity or possibly if in next one-two days in case it moves up, to exit.

TVS at the current juncture is more than fully priced. So at this point of time, I would also ignore TVS.

Do you think this market might step in to earnings having crossed its all time high?

It is difficult to say, but like I said earlier, in case it touches 12,500 levels or crosses its earlier high, I would utilise that opportunity to sell. I won't like to hazard a guess right now.

What are your views on the HP-BP duo? Have you recommended selling out for your clients who are holding positions or do you think both these stocks have more momentum?

I think I can hold on especially since the oil is on the way down. One can still hold on because we were expecting a price of closer to around Rs 345-350 for HPCL, if the oil would have touched $50-60 but it didn't. So I think people can still hold on because as of now, USD 54-55 for oil is still being talked about. Therefore it looks like HPCL could touch the level of Rs 340-350.

Have you taken a look at any of the new listings; ACE that listed today and Atlanta yesterday or maybe the other couple of ones that listed yesterday?

I surely cannot talk about ACE and Atlanta because we manage both the issues. But all that I can say is we left enough for the investors at the table and that clearly shows in the performance of these stocks in the last two days.

What are your views on the capital good stocks, BHEL in specific and maybe even on Suzlon?

We have been positive on both these stocks and for BHEL, we just gave a technical call with the price target of around 4-5% higher than what it is right now.

We have also been positive on Suzlon, it being a sunrise sort of industry and with the kind of orders it has been getting in the last couple of months. So over the next two years, we are positive on both these stocks.

You are not a big fan of the real estate space, but from the entire midcap universe in this space, Indiabulls Financial Services is the one that really seems to be recovering fast?

That is true, but as compared to pure real estate plays, we are more positive on the construction space and looking at the stocks like Hindustan Construction and Unity Infraprojects, which we have been recommending for quite a while. They have done very well in the last two-three days.

There are so many of these smaller sectors that have emerged over the past month or so. Have you looked at paper as a sector and do you have any particular likings there?

We have been looking at paper for quite a while now, but most of the paper stocks really haven't performed. The best performing stocks as far as the larger ones are concerned are BILT and to a certain extent Tamil Nadu Newsprint and Papers.

Among the smaller ones, Orient Paper has performed extremely well, but it is for a different reason than actually paper itself. Going ahead, over the next one and half years, we really don't see much of a rise from here.

Do you have a buy on any of these relatively newer listings like an Everest Kanto, Educomp, Alstom Projects?

We have a buy on Everest Kanto, especially looking at the sort of demand, which exists for cylinders, especially the CNG cylinders. At least for the next two-three years one can expect a good story as far as Everest Kanto is concerned. so one can still remain positive on that stock.

Educomp had a very good move in the last couple of days, so at this point of time we really don't see it going up much more from here. From a longer-term point of view, one should look at atleast 10-12% lower than these levels to start buying.

Have you seen anything interesting in the midcap cement space?

If you look at Kesoram and Century, the two have moved up quite a lot. Among the larger ones, we are positive on ACC and Gujarat Ambuja even at the current juncture. Earlier we were waiting for Rs 90-Rs 95 levels, but that never happened. But then, it is consolidating very well at the current levels. Looking at the next 1-1.5 years, one can still buy Gujarat Ambuja at the current juncture. But for ACC, I would possibly wait for a while.

How do you gauge the sentiment at this point, is it retail or even the domestic institutional lot? How are they feeling about the market?

From the institutional side, most of the hedge funds are still playing around in this market. But if you are talking of the HNI and retail, I can see a lot of caution from their side. Quite a few of them had burned their fingers in May-June this year and so they are yet to get back in full shape in the market. For now, they are still looking at booking profits wherever possible.

Unless those people come back, you cannot really have a market, which is sustainable at these 12,200-12,500 levels. For sustaining the markets at higher levels, you surely require a much broader participation and so unless that comes in, sustaining is quite difficult. This is why we are saying you should see a decent drop from the current levels.

Are investors still stuck in sectors like sugar and metals now?

It is just not sugars and metals, but people are stuck across most of the midcaps because again in this rally you haven't seen all the midcaps performing, which were doing so in March-April-May. Quite a few of them are still quoting at 30-40% discount to those levels, which we had seen earlier. I think most of the retail and HNI customers are stuck in those stocks.

Given that crude has fallen so much; do you like any counters in the aviation space?

We like a stock like Deccan Aviation from the long-term point of view. People will wake up and take a look at it at least over the next two and a half to three years, when they start making profits.

If you have just three airlines existing in India in the next four-five years, then I think they will be Indian, Jet and Deccan. So one should look at stocks like Deccan closer to around Rs 70-75 levels and not at Rs 110-112 levels. This is because for next two years, whatever said and done, they will be making huge amount of losses. So there is no way this stock can shoot up much beyond Rs 115-120 levels.

The only trigger that can possibly come for a stock like Deccan Aviation is the foreign participation as and when the government allows that.

What do you see post earnings for this market? How are you expecting earnings to shape up this time around?

Especially after the advance tax figures, the expectations and the markets have gone up. So surely after the results, one could possibly see a dip.

Any disclosures?

Yes, especially on the stocks that we have discussed. You can safely assume that my clients and I would be holding it.

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