Is it time to buy IT stocks?

N Jayakumar, MD of Prime Securities thinks that the markets will make new highs and may go much higher than what most people believe. Sushil Kedia, Head of Institutional Equities at K&A Securities feels that it would make sense for the RBI to lose a battle and allow the rupee to go down to 39.

Q: Talking about the IT stocks, those are the big numbers and people are waiting for the opening week. Are expectations now fairly low that they really cannot disappoint too much?

N Jayakumar: I think the expectations have moderated from Rs 43-44 level to 40.50. Look at the way, the US dollar has moved during the last few days vis-à-vis emerging market currencies, like the Kiwi dollar, the Australian dollar, the Brazilian Real, and a few other currencies like the Canadian dollar that have climbed up, virtually at an all time high against the US dollar. It is only a matter of time before 40.50 breaks.

An important statement that came from the Ministry of Finance on Thursday, said that the MSS, the Market Stabilization mechanism that they have, will actually no longer be enhanced.

This means that in a sense, the government is willing to let the rupee strengthen. Starting Monday, you will actually have the physical flows hitting the DLF allotment, the ICICI allotment and whatever overseas ADR money that might come back to India.

About USD 10 million of physical flows are waiting to get into India. However most institutions do not put up the full money as there is only a commitment money. So in a physical flow sense, it would be daft for RBI to sit and defend 40.50 when USD 10 billion is walking in. 39 will be a great level. So the way I see this is, the RBI is putting up a posture saying they want to defend. In good economic parlance, it will probably make sense to lose this battle and allow rupee to go down to 39.

Q: Terrible news for the IT companies or do you think they will manage with higher volumes?

Sushil Kedia: IT stocks that had been underperforming like anything, had formed various highs for this year sometimes in March. These had been continuously coming off, until February, they made their highs, giving very clearcut a technical buy signals. With TCS, Infosys, Satyam, yet on a composite Index basis, the CNX IT Index is at best rallying up a bit from here.

PAGE_BREAK

So one cause of concern and something which one needs to really watch for in the next week is the IT results. If they do not really pan out fine; then it maybe still a meritorious hypothesis that a large and deep correction maybe feasible on Nifty.

Q: We did not control the prices in the first place. We had only influenced prices; there was no freeze in prices. So, what is the Finance Minister, Chidambaram clarifying about? Why were the markets so excited if he is saying that there is no freeze, or there is no price control?

N Jayakumar: My sense is that we tried to influence the prices and yet they went up.

So, it is in some sense a resignation to the fact that the market forces have taken over and the government may have attempted to talk down cement prices, but in some senses it did not succeed. So, probably it is a resignation to the fact that ultimately people will do what they want to and it is premarket. So that is good news at one level, because clearly the government is not using any other measures to say that prices will not go beyond this.

So, from that perspective, the markets did receive some clarity. Now, does it mean that with imports being freely allowed, the cement manufacturers will actually make more money? I think that is a different issue altogether.

The markets had gone down significantly more than they needed to because they felt that prices were controlled. Now they have moved up because they feel that the prices can move up if demand-supply warrants it. Perhaps with free availability of cement imports, maybe the prices may not go up significantly more, but at least the perception of a controlled industry in not there.

Q: So would you buy cement now or do you think they have run-up enough in the last few days?

N Jayakumar: I’m not really a great fan of cement stocks, especially some of these commodities where the government is so keen to control inflation. Nothing prevents them from dropping duties, which they have been doing in a whole host of other cases.

Q: How are they looking on the charts?

Sushil Kedia: The three major stocks in cement on the Nifty, they all have a very tight pocket to handle on opening on Monday.

PAGE_BREAK

Q: But Thursday, Friday signified a breakout or?

Sushil Kedia: I think that was a significant jump prices took. When prices are jumping up, that does not really stabilize a trend in which you go ahead and invest in. ACC, has just trundled past a very significant downtrend line, though it has closed higher than that, but the intraday patterns are clearly showing that it is going to tail from here.

Monday morning decides what happens to ACC on an investable and tradeable timeframe. Gujarat Ambuja has gone into serious momentum divergence and that’s another parameter by which you choose to find a reversal. And Grasim has given the TD sequential cell count momentum divergence. One needs to be very careful here.

Q: What kind of listing are you expected on DLF, are you a fan of real estate stocks?

N Jayakumar: You cannot ignore DLF, Unitech and a few others in this space. I expect listing to be at Rs 560-570, its what the sort of whimper is.

Rs 555-560, will not surprise me; to see it actually stabilize between Rs 580 and Rs 600 very quickly because the number of first time buyers who have walked in to the stock or have applied for the stock are quite a few. I think that there is going to be some serious overseas interest in this.

My own sense is Rs 580-600 could well be stabilization zone. It is not cheap by any sense. But in most markets that you are entering for the first time, you are not expected to get market dominant stocks very cheap. I think people will end up owning real estate stocks because it will be a must in their portfolio and it will be expensive but they will live with it. That is the way I would look at it.

Q: Are you looking at the other new issue that has opened - BEML?

N Jayakumar: Unfortunately, it is an institutional issue in every sense of the word. There is lack of clarity on a whole host of fronts. It is a decent company but to an extent we can’t run away from the fact that it is not going to excite the individual. So, my suspicion is that the QIB may well be taken up but the retail portion I think will find subscription pretty tough.

PAGE_BREAK

Q: They have got a fairly large retail portion?

N Jayakumar: It is a merchant-bankers' call; so there is the risk of sort of stepping on professional peers. But I genuinely feel that it won’t attract individual interest as much as it will draw mostly QIBs and institutional buyers.

Q: We begin a July season almost at the beginning, what 15% higher than June, that doesn’t worry you?

N Jayakumar: It doesn’t bother me because also what is happening is that as newer stocks get more popular, money flows into that as well. So we are also adding number of stocks. I mean you go back to the frontliners where you really expect Index level corrections if they were to happen.

So you go back to a Reliance, you go back to a State Bank stock. If memory serves me right, even three years ago, State Bank’s outstanding position would have been 10 million shares. If I am not wrong, give or take 5%, it will be 10 million shares today.

Go back to Reliance; I think we have moved ahead in life with an outstanding position of almost 20 million shares at one point in time. Today it is down to 7.5-8 million shares. The values may have moved up. So I don’t think significantly there has been any great excess that has happened. So Rs 80,000 crore is a function of new stocks coming in, new players coming in and newer means of protection and arbitrage people are doing. So I think it’s new horses for new courses.