Time to look for some contra bets

June 4, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Indices were able to show some respite after a dismal performance in the last five weeks. However, foreign investors failed to push the Nifty beyond its well established 5600 levels. The increased option activity at 5600 and 5400 also confirms a trading range with a downward bias.

The number of stocks in scam-led selling has grown this week with Sun TV and Spice Jet losing almost 45 billion rupees in market capitalisation while Reliance Communications was able to regain some of its losses.

We believe that going forward, a few companies would pose a tremendous opportunity for long-term investors. Sun TV, due to its sound business model with a huge subscriber base, cash-generating ability and six billion rupees cash in books would surely become attractive on further fall. This stock has historically enjoyed around 50 percent premium over its listed competitors. A further fall to 200-220 rupees could make it an investment bet.

While India Inc looked concerned as the telecom scam probe progressed, the country received its first monsoon shower two days ahead. Early indications provide hopes of an ease in food inflation and growth in rural economy, needless to mention growth in allied sectors like consumer, FMCG, auto and even cement.

We believe there would be sector rotation and hence some contra bets from laggard sectors could take a leap. Such probable sectors/stocks which can outperform broader indices are Reliance in Oil & Gas, hotels especially East India and Indian Hotels, infrastructure such as Hindustan Construction and GMR Infra. A further fall could make automobiles and cement attractive.

Auto numbers were slightly better than expected with the exception of Tata Motors. Bajaj numbers were commendable while M&M was sidelined due to dismal quarterly numbers and equally depressive guidance. In such an environment, we prefer Maruti and Bajaj over other peers in this sector.

Weak GDP numbers last week suggested moderation in growth due to which RBI would ease its tighter monetary stance. Next week, the EGoM panel on diesel pricing and IIP numbers would be the event the market would look into for further direction. Broadly, the result season is over and there would be hunger for event- based activities in the market.

Trade the market with caution as the view is biased on a downside but utilise the investment opportunities the market would throw up. In addition to liquidity, an investor would need a lot of patience and conviction in a market like this.

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