Don't see breach of 5300 as change in trend: JRG Sec
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It’s been a slow, but steady, slide down for Indian equity indices. After the fireworks of July and the beginning of August, a slight consolidation phase has set in on Dalal Street.
The 50-share NSE index closed below the 5300 level - for the first time in last three and half weeks - ahead of F&O settlement day tomorrow. The index fell 46.80 points to close at 5,287.80. Meanwhile, the 30-share BSE Sensex lost 140.90 points to 17,490.81.
Over the past five sessions, the indices have lost around 2.5%, despite strong foreign institutional inflows. Analysts lay lame to the logjam in Parliament, which has created yet another stumbling block to the reforms process in the economy.
In an interview to CNBC-TV18, Anand Tandon of JRG Securities says that the market will continue its range-based trading for a while and fall a little more, but is not too worried about this move. “It is not as if you are seeing any kind of a trend change to make us feel any more apprehensive, so perhaps it is just a simple correction for the time being,” he said.
However, technical analyst Sudarshan Sukhani of s2analytics.com believes that the near-term trend for the market is downwards. He sees the breach of the 5,300 level as a clear indication that the market is headed lower, and therefore advices traders to take short calls.
Tandon, on the other hand, says that the next trigger for the market is the Q1 GDP number, which will be released next week. He says that the actually number will not be of importance, but the street will keep a close eye on the direction in which the economy is headed.
Below is an edited transcript of his interview with Udayan Mukherjee and Sonia Shenoy.
Q: In the last five sessions we have lost 2.5%. Do you see more of a southward move now?
A: I was expecting that next month would be the one that would be weak. It had obviously moved forward a bit, but then the market does tend to surprise. I think it is still in a channel, it may continue to fall a little more, but it is not as if you are seeing any kind of a trend change to make us feel any more apprehensive. So perhaps it is just a simple correction for the time being.
Q: Is the punishment on some of these weaker balance sheet names that we have seen for the last few days warranted or is it overdone?
A: When you say weaker balance sheet names I presume we are talking about some of the infrastructure companies. If you look at it really from the fundamental point of view, I think it is warranted. All said and done, the equity value of money of these companies is negative, and if you were to assume that not much changes in the interest rate scenario, and more importantly their ability to lever down some form or shape, then there is no particular reason for the equity to trade even at the levels at which it is right now.
That said, historically, we have always seen that heavily levered companies are not the ones that have the problem, it is the banks that take on the issues. So I would imagine that at some stage it will get sorted out, so you have to look at it as some bank restructuring the loan instead of the balance sheet by itself.
Q: How would you approach JP Associates considering the debt issues that continue to plague it?
A: The issue that the heavy debt companies have is the ability to raise fresh capital at lower rates. This also holds for those which have got overseas bond borrowing. We found that most of them are not in a position to rollover, barring those which happened earlier in the year.
So from that point of view, it will continue to remain a drag. I am not particularly sure what is hurting JP Associates today because I have not been able to keep track of the news. But I would imagine that the concerns on debt will keep coming every now and then. Right now we are looking at a rating downgrade which may be the immediate cause for concern. I do not think that there is any great equity value in any of these companies, so it’s not surprising that the fundamentals are catching up.
Q: We have seen a sell off in most companies which have FCCBs concerns. What's the recommendation to the investors who hold such companies?
A: At any point of time you have to look at what the business looks from then on rather than looking at when you bought the stock. The question that you are trying to ask now is whether or not we will be able to see an interest rate restructuring. As I mentioned, if you are looking at domestic companies with domestic borrowings, I would argue that the case for banks taking the hit seems to be reasonably high. That said, the Reserve Bank of India has been trying to push back a little bit in terms of restructuring. But I know several cases where restructuring has happened at fairly favorable terms.
However, when it comes to the international borrowings, I think that’s less easy to manage because the investors there are lot more demanding. Therefore, there will be a greater amount of work to be done in terms of either repaying that or finding areas of loan. So, broadly speaking, you have to look at those which can be restructured or those that may find it more difficult. If those are from the domestic market, you have to look at it from a option point of view rather than just saying that it looks bad right now and therefore it may continue to do badly. It’s quite possible that it will get restructured, the pay will be passed on to banks and the company may emerge smelling of roses.
