Though the markets have gained considerable ground in January, Dipen Shah, Head-Fundamental Research, Kotak Securities tells Puneet Wadhwa that reforms and action on the fiscal deficit front can take them higher. He expects the Sensex to touch 19,500 by December. Edited excerpts:


Do you expect the Indian equity markets to correct significantly given the run-up seen in January? What are your Sensex / Nifty targets for the fiscal and calendar year-end?

The markets have risen in January sharply as significant foreign institutional investors’ (FII) money has flowed in post the release of funds by ECB. We also had no significant global negatives and in India, the index of industrial production (IIP) and inflation data were positive. The cut in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) also helped.

We believe that more reforms and action on the fiscal deficit front is needed for the markets to sustain and move up from the current levels on a sustainable basis. Additional fund flows may take the markets higher in the short term, though. The target for December 2012 is at about 19,500 for the Sensex.

FMCG as theme attracted a lot of investor interest in 2011. Which sector, in your opinion, could emerge as a possible “investment theme&" in 2012?

We currently have a positive bias on sectors like information technology (IT) and Banking (private sector) and think these should do well in the current year.

How has the results season panned out thus far? What are the key takeaways from the results announced?

The results have been largely in-line with estimates. The expectations from the results were already low and that has helped. Banks and IT have reported better-than-expected results. However, the guidance from IT companies was subdued. Capital Goods stocks also caused concerns because of the muted order bookings during the quarter. Smaller companies in capital goods reported lower-than-expected results.

Margin pressures have continued and higher interest rates have also impacted profit growth. However, the revenue growth has been strong. Forex fluctuations have had a significant impact on several companies. It has helped certain sectors (IT) whereas some companies have been negatively impacted (provisioning for MTM hits and also a hit on imports).

What is your assessment of the capital goods space given the December quarter results of Bhel and L&T?

The sector is under stress and needs the investment cycle to re-start if stocks have to perform. As of now, there are fewer orders being released and that is impacting the long term visibility for the sector. The results of large caps have largely met expectations.

What are you advising your clients at the current juncture? Which sectors are you underweight and overweight on?

We recommend taking a measured approach and accumulate fundamentally sound stocks, which have transparent managements and are available at reasonable valuations. We are cautious on sectors like cement and metals, while being positive on select stocks in sectors like IT, private sector banks, Infrastructure and logistics.

Do you expect the commodities to cool-off in the current year given the slowdown in Chinese economy?

We believe that, the sluggish global demand may keep commodity prices in a range in the immediate term. Any significant liquidity push in Europe or elsewhere will have a positive impact on the metals prices. We will watch out for the next liquidity push from Europe.