In an exclusive interview with Leena Chandan of Myiris.com, brokerage house, Firstcall India Equity Advisors spoke about markets and Indian economy outlook.

Firstcall India Investment Banking of Firstcall India Equity Advisors (P) (FIEA), is a leading financial services provider in India.

The company`s research caters to the needs of the largest news wire and media houses of the world namely Reuters, Thomson, Capital IQ, Themarkets.com, Emerging Markets Euro money Publications-UK. The Company is among the major players in the Debt and Equity markets.

> Where do you see Sensex/Nifty 3 and 6 months from now? Which sectors/stocks are you betting on?

We see that Sensex may touch 20,000 range while Nifty at 5,933 range in next 3 months. In the six months period, Sensex may touch 22,000 range while Nifty would be in the 6,526 range.

Our market`s long term (major) trend is up. A close below the last intermediate bottom of 14,600 / 15,000 will provide support levels for the market once again to see an uptrend; if at all correction is due for whatever the reasons may be.

Sectors to watch are Automobiles, Capital Goods with Engineering Thrust, Information Technology and Metals.

> The news is doing rounds that economy is finally on a revival mode. How far do you agree with it?

The quarterly result analysis of over 2,000 companies, however, reveals that a secular demand growth is still a few quarters away and the current growth largely reflects the impact of the government`s stimulus packages. The sectors that were direct beneficiaries of the fiscal largesse are automobiles, metals and tyres, witnessing a volume growth, while others are continuing to improve their productivity by going in for effective cost reduction, thus able to show good net levels but top line growth still remains a concern.

Overall, there is no sign of a demand growth, if we go by topline numbers, but India Inc is expected to back on growth trajectory firmly in the coming 9 months time. There is a clear improvement in sentiment. There is a slight sequential improvement in performance and investors need to watch next two quarters before jumping into any conclusion for long term investments.

However the liquidity is high on the sidelines waiting for investments in Indian Markets. Considering that fundamentals even as above stated are finding good reception from the overseas investors. If we go by liquidity and the confidence of overseas investors on India Inc amidst global concerns is making Indian markets to see new highs.

> Which factors from the valuations perspective can one look while picking stocks in the current market scenario?

Valuations based on a company`s ability to generate cash flow can provide better visibility at a time when P/Es look stretched. If you are looking at plum stock picks that will stay ripe for years to come, you will probably be guided towards two parameters: P/E ratio and P/BV multiple. The P/E ratio is one of the oldest ways to show the value of a stock, and indicates how much you pay for every rupee of a company`s earnings. While the `P` stands for the current stock price, the `E` denotes the company`s annual earnings per share (EPS). A P/E ratio is arrived at by dividing a company`s current stock price by its annual EPS. So if a stock has a high P/E ratio, then it could be overpriced, but the sheer liquidity is re-rating this P/E and providing for good upside even when the P/E ratio looks stretched. This very fact of liquidity is providing good trading short term opportunities for investors.

> Corporate India is trying to raise funds from all nook and corner, with special ref. to IPOs. However participation of retail investors and employees is next to negligible. Why according to you are these categories not inclined?

While it may not be appropriate to paint all IPOs with the same brush, history tells us that investors are wary of IPOs that sells dreams at a too high prices.

Initial public offerings are back, so are investors who have not learnt their lessons. There is nothing more disturbing for an investor than missing out on potentially of high returns through IPO. Some have made millions that way, but most seem to have lost money in the recent IPO listings.

The frenzy among retail investors is not back to where it was in January 2008, but is rearing its head. A risk-return analysis of past IPO`s suggested that investors are looking cautiously for value based stories at this point of time, where fixed return rates are not significant for locking the money in fixed deposits and the same is the case with Mutual Funds in terms of NAV`s. IPO`s still may attract retail investors provided the valuations looks decent.

> Going ahead, how do you see the corporate India performing as regards to Q3 earnings?

The September 2009 quarterly result of India Inc. does provide mixed results. Companies which got benefit out of stimulus packages showed good topline as well as bottom-line growth, but companies which could not find any benefit from stimulus packages have gone for cost cutting and improvement of productivity irrespective to topline growth support. Thus, India Inc is showing exemplary trend of survival by adopting all the required means to stay afloat irrespective of overall global continuing mixed trend on account of growth.

The aggregate net sales of 1,700 Indian companies that reported their quarterly results for the September quarter, excluding those in oil & gas, banking and financial sectors, declined marginally by 0.6% compared with the year-ago period. And this is the slowest quarter India Inc witnessed in several years.

The manufacturing sector, which will play the key role in economic revival, is still grappling with problems. The aggregate net sales of 1,200 manufacturing companies (ex. oil & gas) marginally declined in September 2009 quarter. And this is the first time in last several quarters that topline of this segment witnessed a decline. More importantly, the sector doesn`t seem to be responding much to the government action to pull the economy out of slowdown. It is true that higher base of September 2008 quarter might have slowed down the comparative growth numbers. But this fact, alone, can`t explain the revenue decline in sector. Almost half of all the companies in two key industries, capital goods and basic material reported a decline in topline.

The basic material segment, which includes sectors such as metal, cement and chemicals, reported a y-o-y decline of 13%. Bulk of this decline has come from lower commodity prices. The capital goods sector, however, grew at a mere 3%, the lowest quarterly growth rate posted by the sector in the last three years. Barring a few players, the sector is still going through a challenging phase.

Capital goods sector is a very important sector for the recovery and represents the investment sentiment among corporate. Both the consumer segments, consumer cyclical and consumer non-cyclical, reported better results in the quarter. Both segments grew at around 15%, which is higher than the growth rate seen in the last 3-4 quarters. It shows that consumers have more confidence than corporates.

The aggregate raw material and power and fuel cost of 2,000 companies declined by around 6% and 9%, respectively, the steepest fall in at least 12 quarters. Lower operating expenses resulted in an 11% y-o-y growth in aggregate operating profit, the highest in the last four quarters.

The aggregate operating margin at 19% reflects the expansion of 30 basis points on a sequential basis. The concern, however, is that there is little scope for many companies to further tighten their internal expenses. Also, September 2008 quarter represents the peak of commodity cycle and hence there was a sharp decline in raw material cost in September 2009 quarter. But such a drop may not be there in next two quarters. Hence we may not see any further expansion in operating margin going forward, unless the demand really picks up.

The impact of a lower interest regime and companies` reluctance to raise more debt was also visible in September 2009 quarter. The aggregate interest expense in the quarter remained almost flat when compared with the same period last year. The depreciation, a fixed non-cash expense item, however, grew at its usual pace but faster than operating profit. As a result of all these factors, the aggregate net profit grew at a lower pace of 4%, reckoned on a y-o-y basis. This growth rate in net profit, however, is the highest in the last four quarters.

> Market regulator has imposed a pure auction method for institutional investors in which the institutional bidders could bid at any price above the floor price instead of restricting them to bid in a band fixed by investment bankers. This is soon likely to be extended to public issues as well. How will this impact the pricing and valuations of FPOs and IPOs?

Today, companies going in for IPOs clearly have no idea of what the market price is, so they simply rely on the judgment of the merchant bankers who fixes a 20% price band in which all bids are made - once all bids are in, the banker decides on a price and then makes a pro-rata allotment to all bidders. If, however, investors are allowed to bid above a certain floor price fixed by the merchant bankers, the company can discover the real price (which could be double the merchant banker-set floor price) and those investing can be confident of getting the full amount they`re interested in as the pricing is left out to the investors choice rather than that of Merchant Bankers and Companies. In which scenario, the buyers market for stocks prevail and the buyers dictate the pricing trends, which is a scenario in developed markets like USA.

> Gold or equities? which one is safest assets today? What is your strategy one should follow in the current market situation to build a secure portfolio considering most moderate approach?

For many of us who have been investing in financial instruments, the relentless rise of gold poses a problem because we have no easy framework in which to think of gold. Till as recently as a couple of years ago, gold lived in a completely different world from stocks, funds and debt products. There was no easy way of investing in gold except for buying it as jewellery or coins and bullion trading was a mysterious word that was inhabited by a different set of species altogether.

Gold investing was very much an out-of-sight and out-of-mind phenomena. Since then, the arrival of commodity exchanges, Gold Exchange Traded Funds (ETFs) and gold stock funds has made it trivially easy to invest in gold without having to worry about purity and physical security. Just as important is the fact that these have made gold easily comparable to other investments. When an investor looks at fund performance data or any other mutual funds portal, he can`t help comparing the returns of gold based investments with equity-based ones. Since about 2005, gold`s returns make it looks like a great investment compared to anything else. And it`s not just the returns, but the stability when compared to equity that the investor notices. The steepest fall in gold since 2005 has been the 20% it lost from March 2008 to October 2008.

There are two more factors that make them like gold, if only at a sub-conscious level. One is the simplicity of decision making. Gold is gold and that`s all there is to it-all the ETFs deliver identical results. Unlike an investor in equity or equity-backed products, there aren`t hundreds of choices. Secondly, most Indians seem to come mentally pre-configured with a propensity to view gold as an ideal vehicle for safe long-term investing.

At an intellectual level, many of us have bought into the logic of why gold doesn`t make sense. However, we are a gold-coveting culture and have descended from generations who have lusted after gold. It takes very little to convince us that gold is a great investment, even though the long-term evidence is decidedly patchy. Today, the value of gold is increasingly driven by the demand and supply of paper gold on financial markets. It is a financial asset and is clearly subject to the same volatility as other financial assets as investor interest flows in or out. We could well be in a gold bubble which is just as ephemeral as the stock or oil or real estate bubbles were.

However, it is undeniable that many investors have started buying gold-backed securities of one kind of another as short-term trading opportunities. In the mutual fund space, there are actually two distinct kinds of gold-related funds available. One is the straightforward Gold ETFs. These closely track the price of gold itself and deliver profits and losses that mirror investing in physical gold.

Over the last one year, gold has gained 44% but these funds have gained more than twice that. Will the gold run last? If you look around, you will see as many cheerleaders as skeptics.

As per us investment in Gold and returns in terms of gains is notional, when it comes to the issue of Selling. But it is not the same case with equities, which provide easy exit and entry at any given point of time. Hence we still prefer 80% of portfolio filled with equities and just 20% on experimental basis with Gold.

> What should the retail investors do in the prevailing stock market conditions?

Retail investors may take some more time to regain confidence in the primary market but they seem to be gradually making their presence felt in the secondary market.

Leading retail brokers say they are seeing an increasing number of clients returning to the market. The only difference this time around is that investors are taking smaller bets, and quickly booking profits even if they are not large. Specifically indicating a trading trend.

Growing retail investor interest can also be gauged from the fact that indices tracking the SME (small and medium-sized enterprises) space have outperformed and also many SME issues are pipelined to tap the market keeping in mind the retail investor`s appetite for low priced issues.