Market may see a shift towards smaller cap IT stocks

We are looking at midcap and smallcap IT. This includes companies like Sasken, Zensar Tech and even smaller companies in that zone, says Nooresh Merani, Founder, www.nooreshtech.co.in.

How did you read Thursday’s blow to the traders? A lot of stop losses got triggered because of a 1,000-point fall on the Sensex. We have come from March lows to October highs. How are things developing now?
The move from beyond 11,600 to almost 12,000 was at a very low breadth. When I say low breadth, I mean all the other indices like the midcap, the smallcap and even the Nifty 50 equal weight were not catching up on the move. So that was not a very strong move in that sense. So what we have seen on Thursday is just a normalisation and we need to get into a range going forward. Till the time we do not see a clean trend across broader indices, we would expect the markets to be range-bound and overall we have made a very strong move from the lows of 7,500 in March and 12,400 was the previous high. So at 12,000-12,400, we would expect some resistance in the coming weeks and months going forward. We would expect getting into a range from here on.

Is there merit to look at stocks which have got beaten down a whole lot in the FMCG and banking largecaps? Does it merit some stock picking or not yet?
Nifty IT was a clear leadership move right from the time the Nifty IT started breaking at about 16,000-16,500. We started off with HCL Tech, Infosys, TCS and almost every IT company has participated. And we would expect some bit of pause in the next couple of months for the largecap IT because the move has been strong there, very overbought.

These companies are not very small. Most of the large IT companies have really large market caps. we would expect some pause in the IT segment. Maybe we would see a shift towards the smaller cap IT. We have started seeing some breakouts in Oracle Financial Services, Zensar Tech, Sasken, etc. A lot of small caps have come into the 52-week radar. That is where the shift could be going forward.

In terms of FMCG. the only stock which I am watching closely really is ITC wherein we have seen a huge amount of change in terms of the shareholding patterns. The FIIs have gone from 20.89% a few years back to almost 14.5% and similarly, there is a similar increase in mutual funds. The cumulative OI is very high. Whenever there is huge volume that is the time we will watch for a turnaround and that would be a zone of 150-160 where we will watch out for a turnaround or maybe even take a pre-emptive buy around those zones or whenever it crosses 175-180. So selectively in FMCG, we would look at ITC more as an action after price reactions. Either it shows momentum or it cracks down to 150-160. Apart from that, Hindustan Unilever, Nestle have shown very weak trends in terms of a bounce back. I would be an avoid on all the other FMCG stocks.

What are the midcap stocks on your radar?
In the midcap space, we are looking at midcap IT and smallcap IT. So companies like Sasken, Zensar Tech and even smaller companies in that zone. Secondly from the same zone, we do not like banks as much as though we expect the Bank Nifty could head up to 25000 in the medium term. Maybe we would look towards a Muthoot Finance and Mannapuram which show great leadership in the NBFC space and where the stock prices have shown great leadership even when the market corrected. So, we would go with gold finance companies in the short term.

In the midcap space, there’s a reversal zone which we are looking out for. Gas companies like MGL, IGL and Petronet have corrected a lot. Once they start showing some reversal signs which we have seen in the last couple of days, those are the names we are watching out for.