'Avoid commodity related stocks'

Rahul Arora, CEO, Institutional Equities, Nirmal Bang Equities Private Ltd

What is your Sensex target by December 31, 2012? Why?

I think pessimism is at its highest right now with consensus stating that the market may have a lot more downside to it even from current levels but my view is that this pessimism is over done and the market on every account, from governance, to deficits to earnings downgrades, the rupee, the global macros and geo political risks and which is why India has underperformed as sharply as it has in CY11. I personally think we will actually see a strong H2CY12 and end the year somewhere between 5,500–6,000 on the Nifty. 

How much downside you see for Sensex and Nifty from present levels? By when do you think market will bottom out?

I don’t see much downside from 14700 / 4400 on the Sensex and Nifty, maybe 3-5% max lower than that and the bottoming out process should be complete by Q1CY11. I think Q2CY12 could be a consolidating / base formation period for a strong rally into H2CY12. 

What is your Sensex EPS estimate for FY12 and FY13? What are the possibilities of this estimates getting revised?

I think FY12 we’ll land up somewhere between 1100 – 1125 and for FY13 somewhere between 1185 – 1210 

Which are the three large-cap stocks you will recommend investors to buy at current prices for 2-3 years time horizon? Please give a brief rationale for your recommendations.

L&T, SBI and Reliance as valuations have reached very attractive levels. Being industry leaders, these stocks have underperformed the market big time in 2011 and my gut is 2012 could be their year.

Which are the stocks/sectors you will avoid in 2012? Why?

I would avoid commodity related stocks; as, if global growth is going to remain tepid I do not expect a run away rally in commodity related stocks. They may be in for some more pain, price wise and time wise. 

Which are the key events/triggers (both negative and positive) to look for from the stock market perspective in 2012?

From a political perspective US goes to elections so that will be critical in the 2nd half. Also if there is any kind of QE from the US or Europe that could find monies coming into markets like India. I would watch China very closely and how the growth rates of that economy shape up as it is very critical for the commodity cycle so also from a currency standpoint as to how China plays out and whether there is some kind of a hard landing in store. And domestically I am more hopeful on reforms post the UP elections concluding in early 2012, whether is a strong FDI policy or other reforms to boost the economic cycle going into the 2014 elections. The government domestically has a lot to do to make up its image and my hope and belief is, it will. 

Rupee has fallen 20% against the US dollar this year, affecting stock returns of foreign investors. How will this impact the market outlook for 2012?

We have a technical view of the rupee heading to 57, but if my call on the market is right then if it does head there, there could be a sharp reversal, but it looks like the market is factoring in a rupee of 50 – 53 average for the year and to me its in the price. The recent RBI moves are a statement that they will defend any sharp depreciation in the rupee despite repeatedly stating it will be market determined. I think the worst is in the price and 3-4% depreciation from here after a 20% depreciation already is not going to give anyone sleepless nights.