Investors should stay away from penny stocks at this juncture: Rusmik Oza

The Nifty50 decisively remained above the 200-WMA the previous week and closed way above the resistance market of 10,375. This could have led to some kind of short covering.

Post the break-out of 200-WMA, we are witnessing more action in the beaten-down stocks that are doing catch-up.

Q) What is your outlook for the coming week and important levels to track?
A) Since the Nifty50 has crossed the 200-WMA and closed above it for the two consecutive weeks, we can expect it to go and test the 200-DMA placed at around 10,900 levels.

Closing above the psychologically (important) mark of 10,500 also supports the thesis of Nfity-50 going to ~10,900 mark shortly.

Q) Small and midcaps have outperformed in the first six months of 2020. Will the momentum continue in the next six months? If yes, what will drive the rally in the broader markets?
A) Mid and smallcaps are basically playing catch-up as the Nifty crossed the 10,000-mark. From the peak levels, the Nifty50 is still down 15 percent whereas the Nifty Midcap 100 Index is down 31 percent and the BSE Smallcap Index is down 38 percent.

Both mid and small caps missed participating in the last two years when the Nifty50 recovered sharply. In the very near future, as the Nifty will attempt to go closer to 11,000-mark, we can expect sharp up moves in the select mid and smallcap stocks.

However, one needs to be very careful while buying mid & small caps stocks and they should know what they are buying.

One should clearly stay away from penny stocks at this juncture. Since the Nifty50 is trading close to ~22x on a one-year forward basis, valuations are stretched and we don’t expect the Nifty to go or sustain above the 11,000-mark.

Also, there is hardly any valuation gap between the Nifty-50 and Nifty Midcap 100 Index. This makes us remain cautious on mid and smallcap stocks.

Q)  IT services major Tata Consultancy Services’ board will meet on July 9 to approve the financial results for the June quarter. What do you expect from the Q1 results for India Inc?
A) The March quarter results were significantly below expectations. Net profit of Nifty50 declined by 41 percent, which is 30 percent below our expectations.

The net profit of most sectors declined sharply on a YoY basis. A few sectors like banks, healthcare services, pharmaceuticals, and telecom delivered decent YoY growth in earnings.

Many companies have not given guidance for FY21 because of the ongoing impact of COVID-19. We expect Q1FY21 results to be a washout and could also be disappointing.

We have never come across a situation where almost two months out of three have seen near-zero activity. The maximum downside that has got built-in FY21 estimates will come from Q1 numbers.

For example, we have seen a cut of 21 percent in our FY21 revenue estimates and 40 percent cut in our FY21 earnings estimate (between Pre-COVID and now).

On similar lines, our FY22 revenue and earnings estimates have gone down by 13 percent, and 23 percent, respectively.

Q) The auto sector was back in focus after the June month numbers. What is your outlook for the sector?
A) We have a neutral view of the auto sector at this point in time. Our views and ratings vary across stocks within the sector. For example, we are negative on Maruti Suzuki & TVS Motors but positive on Bajaj Auto and M&M.

The MoM figures are positive as there is some pent up demand for the previous two months that is getting fulfilled.

Going forward, the increased cost of ownership from the higher cost of vehicles post-implementation of BS-VI norms and higher prices of diesel and petrol will dent demand.

For our auto and auto ancillary universe of stocks, we saw a sharp 21 percent cut in revenue and 86 percent cut in earnings estimate for FY21 (i.e. between Pre-COVID and now).

We expect a sharp bounce in the net profits of companies in FY22 due to the very low base of FY21. Few ancillaries segments like batteries and tyres which derive more volumes from the replacement market should do well in FY21. Both of these ancillary segments could also benefit from lower raw material costs.

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