See mkts heading lower to 12k levels: JP Sinha

JP Sinha of Mangal Keshav believes that the main culprit for the market downside is the oil prices. According to him, the market at 13000 levels is attractive for long term investor but for the short term investors, it is quite risky.

He feels that overall year 2008 has not been good and could  deteriorate further. He said that both the earning and valuations are declining, therefore the markets can move back to 12000 levels in the short-term.

Excerpts from CNBC-TV18’s exclusive interview with JP Sinha:

Q: Do the levels that we are trading at surprise you? Do you think there is more downside?

A: The one and only culprit are oil prices and everything else is revolving around that. In the near-term, it does not give much of confidence that oil prices are coming down. So, I would rather look at that as more of a signal rather than looking at where the value is. In terms of pure absolute level, 13,000 is attractive for a long-term investor but in the short-term, there are more pains, which are yet to come.

Lot of macro data other than inflation has so far been very strong. It does not give a good outlook so there could be some faltering on those sides. In a nutshell, 2008 calendar year numbers does not look to be quite good. Going forward we are expecting it to deteriorate from the current level. So even at 13,000, though the valuation to some extent looks attractive, it is still if you factor in the outlook and the headwinds does not provide much upside.

Q: What kind of range are you working with though for the market right now?

A: At this point in time, it’s difficult to talk about range because initially we thought that 14,000 as a level where purely on the valuation it would be attractive. We have lot of downgrades in terms of earnings estimates because of the impact both from the topline coming down because of demand and the rising costs, interest costs etc. So, we are seeing both earnings, valuation and the PE band decline. To that extent, we could move back to 12,000 levels in a very short-term    

Q: Would you buy anything from the metals across ferrous or non-ferrous?

A: The main question is what we are trying to find out? Are we just looking at relative gains or absolute gains? It’s difficult to talk about absolute gains at this point in time and when one is talking about relative gains. I would rather prefer the defensive sector than something, which is more volatile, and more leveraged ones. So it is a question of relative out performance where the defensive sectors like pharma or FMCG or to some extent auto players could be benefited. But other than that, it’s time to stay slightly away.       

Q: Any thoughts on sugar?

A: We continue to remain bearish on the sugar pack. Whether the prices are likely to sustain at the current level is not known despite knowing the fact that there could be some lower production from Brazil side or some shortfall in terms of demand supply globally which is around 1 million tonne which is been talked about. I do not know whether the domestic prices are likely to sustain at the level which they are and that doesn’t augur well because the cost are rising. You have already got into high leverage balance sheet which itself maybe dragged. So, I would rather avoid this sector at this point in time. 

Q: What’s your sense in this whole infrastructure space there is some dribs and drabs of buying coming into the stocks there. Would you accumulate here or do you think this is just a dead cat bounce?

A: I would be looking at these stocks selectively. During euphoria we have seen the valuations going berserk and similarly at the time of panic, we are again seeing the downside valuations being hammered. That’s why there is a lot of pessimism, which is emanated across the board.

The business model looks robust, the financials are unleveraged and the cash flows are strong. In some of the cases particularly in the infrastructure and construction, the challenges are there but still the visibilities are fairly high. There could be some margin contraction but cash flows remain strong, valuations have come to a level where it makes it a case to buy.

So, that is where we are selectively buying and particularly this is one sector where we are slightly favouring midcaps other than largecaps and in other sectors we are more towards largecaps.

Disclosures:

I personally do not hold any of the stocks discussed.