Tuesday, August 01, 2006

Ramesh Damani Says Sensex is likely to be in a trading range of 9000 to 11000.

Ramesh Damani Says Sensex is likely to be in a trading range of 9000 to 11000.

Ramesh Damani, Member BSE says that Sensex is likely to be in a trading range of 9000 to 11000, and that technical indicators suggest a bearish trend. He adds that, right now markets are a stock pickers paradise.

CNBC-TV18's exclusive interview with Ramesh Damani:

Q: How are you feeling about the market at 10,700?
Damani: It was a nice 400 points gain. Especially on Monday the market moved from negative into positive territory and then built on the gains. But my view still remains that the market has seen the highs for the year and also probably the lows for the year. Markets are in a trading range of 9000 to 11000 and if the market has to take out 11,200 then it would need a sharp improvement in liquidity, volume and also in breadth. However, none of that is happening at least imminently.

Q: But does it look like less of a bear market, which was the scenario about 3 months back? When the big fall happened?
Damani: It is very hard to say whether it is a bear market or bull market and that one will know only with a perspective of hindsight. It is very hard to call it when it is a running target, there is still some evidence, markets have made a top at 12,500 and that will not be violated easily. A lot of technical evidence still points to a bear market and clearly this range can go on for a while before the market decides which way to go on. So I am not a person to say whether this bull market has ended or a new bear market has started. There is some technical evidence that suggests that we made a top and in that case we have to say that it is a bear market.

Q: Fundamentally how are things looking for you, we have gone through the full earnings season, are you happy with what you have seen this time?
Damani: Absolutely and it is hard not to be happy. The key test to suggest at which stage the market is in, is how the market responds to news. Typically it has been shrugging off good news and responding to bad news fairly viciously until the last 3-4 days. So while it is hard to be displeased with the earnings that came out of say Sterlite or Tata Motors or a Bharti Telecom , but there is a growing sense that maybe all this is factored into the price. The gains may be harder to achieve, but I do agree that markets are a stock pickers paradise. If one remembers, Infosys during the middle of 1994-95 bear market started its 100 or 1000 fold gain. So one will find some great quality companies in India in the midcap segment. The carnage that we are seeing in cash and by all means as I had recommended allocation to cash, I would certainly step back and buy some cash shares which are offering attractive valuations.

Q: What about sentiment, which got badly bruised after that big correction. Have you seen things coming back to an even stage, not that it necessarily would indicate where the markets heading. But just as a barometer, do you think it is still bruised and you do not see the same level of conviction having come back?
Damani: Yes, it is totally bruised and the public is staying away and that has reflected in the low volumes and the high volatility that we are seeing. This is because volumes are low, and the movements get exaggerated either way. It will take a while before retail investors come back because every time we go through a May 17, 2004 kind of correction, it does damage the confidence that people have in the market.This is because people feel that overnight something can happen, which is really unfortunate. May be our systems need to be re-examined to see that we do not go through this kind of fall for no apparent reason. Since outstanding positions are so high, it is going to shake the confidence of investors as a long-term investments vehicle on the stock market

Q: Banks remained the toast of the market last week. Where do you stand on PSU banks? Do you think they are hammered or is it just a dead cat bounce that we saw this time?
Damani: The great proverb to understand the market is that ‘liquidity is mother’s milk for all bull markets’ and the error of cheap money that all emerging markets saw between 2003 and 2006 seems to be effectively over. So now that companies will have to show productivity gains, the easy availability of capital, which insured the same sales growth or acquisition growth, is probably over. So it will be very hard for companies to match the kind of earnings space that they were on, in the last three months.
Coming to the specific point about banks, in a rising interest rate environment, which I think we are in and with oil prices rising and the dollar depreciating, interest rates will head higher and hence there will be enormous pressure on banks’ margin. So they will remain under pressure for the balance of the year almost certainly because consumer credit, housing loans, auto loans will slowdown. So there will be pressures on bank margins, definitely.

Q: What did you feel the best about at the end of this earning season? What stood out for you really?
Damani: Infosys Technologies of course has to be number one with the stunning results. Among my portfolio, two stocks that I really enjoyed seeing results for was McDowell; and thanks to market cap or market forces, this company had an absolute turnaround with strong sales growth and profit; even the laggard companies can perhaps change. Another company in my portfolio is Nucleus Software that came out with exceptionally good results. So among midcap stocks, these two really showed a lot of promise and among large caps, it is hard to top the technology boys.

Q: It’s long since you spoke about dark horses; give us some interesting ideas?
Damani: The cash has been so badly mauled in this whole thing; there are interesting absolute values emerging in the sector. When one is trying to analyse this market, there are two things you do. I think it is a big correction in the bull market then, in which case you buy the leadership stocks and commodity stocks. But if you are trying to position yourself for the new bull market, one wants to see the themes of the new bull market address. So I will address the later part of the question whenever the next bull market starts. I look at the travel and tourism space and it seems that it will boom in India because of the number of airlines coming up and the number of trips that we are taking etc. Stocks we like, which seems to have exceptionally good value are Blow Plast and VIP; they are likely to be merged and the merger has been announced in a 1:1 ratio. Both stocks rate around Rs 90 with a buck and a quarter dividend built into them and about Rs 200-225 crore for the merged company, with sales of around Ra 500-600 crore, it looks fairly cheap on a price-to-sales ratio. We see a strong secular growth for them. They have a national brand name, there will be a strong secular growth in the travel industry. It is a story like McDowell’s that for the next few years has maximum focus on the business, builds its brand. They have got a China strategy, a European strategy and a domestic brand name. I think it offers a compelling value and I own it for disclosures sake and I think it makes sense to take a nimble at that.

Q: Talking of tourism; you wouldn’t go about buying Air Deccan?
Damani: I took a look at it and I do own shares from the IPO. I think Air Deccan's strategy will work in India and they need to learn to execute in a much better way. At about USD 200 million market cap, at this point, I would probably take a look at it. But given the fact that it is already clawed at number two position, I don’t think any investor should ignore the stock. This myth about ‘airlines never make money’ is just a myth. I can point out Singapore Airlines, South-West Airline, it is just that one has to get the model straight and I think Air Deccan has got an interesting model to begin with and a lot of drive and passion to build a great network and so at some point, I would definitely look at it.

Q: What is the next trigger for this market, the earnings are through, what is the next thing that can galvanize it and inject some serious momentum into it?
Damani: Even I am scratching my head; it remains a very jittery market because if the Dow for example, overnight came 300 points down, then we would certainly fall. So what would galvanise the market is the opposite end of the question. I think if the nuclear deal is signed, then it would be a good step forward. The macro economic environment continues to remain problematic in terms of oil, interest rate and global conflicts. I am also hard pressed to come out with what could take the Index back to 12,500.

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