Most pain in mkts may be over: Raamdeo Agrawal

Raamdeo Agrawal, Director and Co-Founder, Motilal Oswal Securities, said it is too early to say if today's rally can be sustained. "One should not write off crude oil bulls so early as it is likely to resume its gains. We have not yet seen the worst in US financial markets."

Valuations are around 12-13 times earnings, so most of the pain may be over, he said. "We are seeing some stability in markets, but don't expect large buying."

Agrawal feels the profitability of steel companies will not suffer due to low cost structure.

Excerpts from CNBC-TV18s exclusive interview with Raamdeo Agrawal:

Q: Is the rally sustainable?

A: It is too early to say because after so many days of a sustained downturn, there is a good day of relief. After 7-8 days of major downswing, you get one-day of 600-700 points upmove on the back of USD 8-10 of decline in oil.

But I was speaking to a few people in global fund management and commodity markets. They were saying dont write-off the oil bulls so early because they seem to have a pretty good grip on oil prices and the producers are also more or less with them. So, it is too early to say that oil is completely off the curve and happy days are here. With respect to the kind of crisis unfolding in the US financial sector, we are yet to go to the worst in terms of write-offs and the challenges that are ahead. So, I would still be little cautious at this juncture.

Q: Do you think any upmove would be more in the nature of a relief rally or a trading rally at this point, not a final bottom?

A: Some stocks stories are actually good, whether in banks or telecom or auto. They should not be treated in the same league as other stocks. Till recently, everything was going down. Whatever you sell, you are right at any price. So that divergence must happen and this particular quarters results will also help in that process.

But at these levels in the market, clearly good stocks or great stories must start showing their strength. Firstly, there should be a divergence between a good stock and a bad stock. After that, some kind of broad rally will start.

Q: The only sector that got punished today was metals. What have you made of all the suggestions of a price band for steel and how that might impact the sector?

A: You keep getting conflicting views. Unfortunately, the industry is not a very generic industry. For example- its not like steel produced by every producer is of the same type. So, you cannot have price control.

Then, there is lot of value additions and the components are made and then the products are made. So, this is one industry where it is very difficult to actually dictate the price because one producer is integrated for one raw material and the other producer is integrated for other two raw materials also.

So, the profitability of the industry is dependent on scale and the level of integration and things like that. So, it will be very tough for the government to have a sensible price control kind of a mechanism over there.

Their compulsion is to control the so-called Wholesale Price Index (WPI) and there is some national objective to help the government in terms of managing inflation. But I dont think that eventually profitability will suffer big time because the cost structure is so low for Tata Steel and lot of other companies that they will still make lot of money in the days to come.

Q: How are you summing up the Ranbaxy situation after all the volatility of the last few days?

A: In Ranbaxy, we were very fortunate to do trade on the very first day or second day. But the way, things are opening up now and suddenly this US FDA inquiry is being given so much prominence, which was not there till the deal happened. Suddenly there are things that were not there in the picture. Whether the media is playing too much out of that or not is not clear.

Actually, even the US FDA is getting much more sensitive because the deal has happened. But somehow there is too much attack on the current deal. Going by whatever we have been hearing from the management and what we can read in the terms of the deal, the probability of the deal going through is far higher. I would put it more at like 80-85% than the deal not going through.

In any case, at Rs 440-450 whether the deal is going through or not, fundamentally it is a reasonably good buy.

Q: Do you still think that there is much more to go by way of time before this bear market gets over?

A: Yes, it looks like. There is still life in the bulls where there is one little excitement and people come and pull the market big time. Look at the severity of the problem in the US markets and what it can do to the global situation. It is just about six months since we saw the peak. Probably, this will be the year when you will see the top as well as the bottom.

So, in terms of declines, even at Rs 950-1,000 EPS and current valuations of about 12-13 times, we are done in terms of the bulk of the decline. Day before yesterday the markets were down almost 5%. If you look at the actual total market cap drop, it was less than 2%. There is a lot of noise and excitement in terms of the market going down and the actual damage is much less in terms of the decline in the prices of the broader market.

So, there is some stabilisation happening in terms of valuations. But I would not think that suddenly buying will emerge and we have created a bottom. There is still some more time there

Source : Moneycontrol.com dt. 17 7 2008