Option chain is indicating that nifty is likely to trade with negative bias in coming week as put writers at almost every strike price are covering are their short positions.
Initial euphoria fizzled out in last two trading sessions as Nifty faced heavy supply at 200-day moving average. Bears once again took the charge and Nifty closed at 10,526.75 with a weekly loss of 1.5 percent. Metal and technology stocks were under pressure which acted as a major component of fall.
Option chain is indicating that Nifty is likely to trade with negative bias in the coming week as Put writers at almost every strike price are covering their short positions. 10,500 put option lost 1.34 lakh contracts on Thursday and the unwinding was also seen at 10,600 strike price of 7.33 lakh contracts.
On the Call side, 10,500, 10,600 and 10,700 strike prices witnessed a substantial amount of fresh writing. The data suggest bulls look tired for the time being and support is getting weaker.
Technical setup is also favouring the bears. Nifty failed to hold on to its 200-DMA and breached the rising trend line support on the previous trading session. RSI has formed a bearish reversal pattern that suggests prices could go sideways with a negative bias.
Below 10,500, Nifty is likely to touch 10,410-10,225. On an upside, 10,736 will act as a major resistance for the week as it is 61.8 percent retracement of the previous week range. But, further downside is possible only if 10,225 is breached decisively. Key events to watch for in the next week: GDP data for India and the US, crude oil inventory for the US, fiscal deficit data for India.
We suggest three small-cap stocks available at a discounted rate for a tenure of one year:
Cheviot: Buy | CMP Rs 725 | Target: Rs 892 | Return: 23 percent | Medium term
The flagship of Cheviot Group witnessed substantial growth in production with better capacity utilisation during the FY18 and significant growth in exports. The company’s export oriented unit at Falta Special Economic Zone has been at ease.
It offers a series of jute shopping bags, pick according to need, essentially for promotional, fashion, beach, etc. Efforts are being made to increase customer base in conventional and diversified hessian fabrics.
The company has reported net sales of Rs 101.84 crore during the quarter ended September 30, 2018 as compared to Rs 90.44 crore in the previous quarter. Cheviot has a negligible debt with low equity and around Rs 250 crore of investments, is financially sound.
Moreover, a nod to raise jute packaging for food grains to 100 percent from 80 percent and 20 percent for sugar in 2018-19 would provide a push to the stock. Barring unforeseen circumstances, the outlook for the current year appears to be promising. We value cheviot at Rs 892, which corresponds to 10x P/E.
PPAP Automotive: Buy | CMP: Rs 374 | Target: Rs 462 | Return: 24 percent | Medium term
PPAP holds pan India presence - a total of nine plants, including two JV, in four locations. It also has a strong customer base including Maruti Suzuki, Honda, Nissan, Toyota, Isuzu, GM, Mahindra, Ford among others.
Moreover, PPAP will develop parts for 23 new models for its existing and new customers like Hyundai and MG motors. It is expected to start production within the next two years. During the quarter, 21 percent of the part sales were from new vehicle launches.
It has reported a strong set of numbers for the quarter. Revenue from operations for the Q2 stood at Rs 118.6 crore, EBITDA at Rs 24.2 crore, an increase of 14.9 percent. EBITDA margin stood at 20.4 percent. PAT increased to Rs 11.6 crore, and EPS was at Rs 8.3 as compared to Rs 6.6 for Q2FY18.
Acknowledging vigorous performance, strong customer base, low equity base, we recommend buying with a target of Rs 462.
Bharat Gears: Buy | CMP: Rs 170 | Target: Rs 220 | Return: 30 percent | Medium term
The company clocked a steady performance in Q2 with 19 percent growth in revenue over last year. EBITDA grew by 48 percent and PAT grew extremely well at 157 percent YoY. EBITDA margins for the quarter grew to 11.28 percent from 9.05 percent and PAT margins at 2.67 percent against 1.24 percent in previous year.
Moreover, capital structure is expected to remain leveraged at similar levels over the medium term, given the increase in term debt on account of debt-funded capital expenditure.
In order to meet the capital expenditure of up to Rs 60 crore, the company has lined up sources of funds through a rights issue of equity shares up to Rs 15 crore, term loan of Rs 35 crore from KKR India Financial Services Private and remaining Rs 10 crore from internal accruals.
It would help the company’s upcoming expansion plan and envisages a similar volume growth in the medium term. In addition, the rights issue could also benefit existing shareholders.
Considering the company's strong balance sheet, significant profitability in future, we estimate P/E of FY19E at around 12x, share price turns around to be Rs 220.
The author is a senior research analyst at Rudra Shares and Brokers.
Disclosure: Rudra or its research analysts, or his/her relative or associate do not have any direct or indirect financial interest nor any other material conflict of interest at the time of stock recommendation, in the subject company. Also, Rudra or its research analysts, or his/her relative or associates does not have actual/beneficial ownership of one percent or more securities of the subject company. However, Rudra or its research analysts, or his/her relative or associate may have positions In Futures & Options.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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