Important lines to watch out would be on quarterly earnings management comments from across the sectors which would play a key guiding point to assess future outlook of the respective business.
We believe as the lockdown has been extended by a month, it would undoubtedly generate more pressure on financial system which might climax in reaction in the stock market especially in financial stocks like banks and NBFC's and some profit taking attempts in Bank Nifty may creep into the market anytime next week, Prashanth Tapse, AVP Research at Mehta Equities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: The market snapped three-week losing streak and climbed 6 percent last week. Does it mean the June month will be good for the market?
Overall Indian markets consolidated last two months and inched higher in the last week of May supported by global rally. Indian market's underperformed attributing to extended lockdown affects and lack of near-term direct stimulus from the government to jumpstart demand in the economy. Looking at the uncertainty still on cards, this bull-bear volatile phase is likely to continue for next few more months, before investors can see any significant lasting upmove in the indices.
Despite tensions rising between the US and China, with Trump accusing China of contributing to the early spread of the coronavirus and US officials criticizing China's moves to impose a new national-security law on Hong Kong, focus will be on Mumbai, Delhi, Hyderabad, Kolkata and worst effected cities, and how these cities will overcome the economic outbreak to re-open business economy.
We suspect, the street will not get confidence until there is a medical solution to COVID-19. Investors will keenly watch FIIs & DII behaviour and the movement of USD/INR will also be tracked minutely. At the moment, concerns over coronavirus and the consequent economic distress are weighing on the rupee, which along with outflows from local equities may push the rupee to sub-77.50 levels soon. A lower rupee will make imports more expensive for India.
Technically speaking, Nifty index is at 'Make-or-Break' level with immediate resistance near 9,693, if it holds above the same in coming week, then 9,882/9,962 levels can be tested, but if it breaks the same then 9,210/8,949 levels can be seen in June 2020. However, a decisive break of the 9,900-10,000 range still looks quite difficult and another round of equity sell-off cannot be ruled out.
Q: Bank Nifty gained strength and rallied nearly 12 percent last week. Do you expect the uptrend to continue in June as well?
Traders are worried on Bank Nifty bouncing too fast amid deterioration in the economic and earnings outlook following the lockout imposed to restrict the spread of COVID-19. A large part of the recovery in the market from March lows was because of central banks resolving to pump more liquidity into the system. But money managers still believe that the market rally is not reflecting the real economic picture, which is only expected to worsen in coming quarters.
We believe as the lockdown extended by a month, it would undoubtedly generate more pressure on financial system which might climax in reaction in the stock market especially in financial stocks like banks and NBFC's and some profit taking attempts in Bank Nifty may creep into the market anytime next week. Hence we advise in a cautious way to reduce positions and protect some profits at higher levels.
We could also see reaction on Monday after digesting the Friday's GDP Growth figures which was 3.1 percent in Q4 FY’20; however it was higher than what was estimated by the street. We must take it into consideration that it would turn out to be worse post lockdown wherein GDP growth number would actually turn negative in Q1 FY21E on the back of declining consumer demand and slowing private investment as well.
Q: Do you think the market rally was because of expectations of another stimulus package for demand revival? Do you personally expect the demand revival package to be announced soon?
We think Indian market's performed a bit in the last few sessions on the back of news stating Moderna coronavirus vaccine has shown signs of success in early human trial and also received USFDA approval to begin the phase 2 trial of its vaccine and reopening of major global business economics like US. Globally market would celebrate for early success of vaccine which seems to generate an immune response that may help protect people as well as global economics from the deadly virus infection.
Back to domestic, Indian markets actually underperformed to global markets attributing to extended lockdown affects and lack of near-term direct stimulus from the government to jumpstart demand in the economy. The Rs 20 lakh crore government support was much-needed stimulus given by the government will reassure businesses and will help restart various industrial activities and bring back the momentum of all economic activities, but if it's implemented rigorously into the right sector and at the right time. Only disappointment was of no relief package for middle class people who are also been affected significantly in COVID-19 crisis would remain a concern.
Q: What are your top five favourite stocks which one should definitely have in the portfolio?
Granules India: Buy | CMP: Rs 171 | Target: Rs 205 | Return: 20 percent upside potential | Investment Period: 6-9 months
We believe Granules India is a leading global midcap Pharma value chain company manufacturing all the Active Pharmaceutical Ingredients (APIs), Pharmaceutical Formulation Intermediates (PFIs) and Finished Dosages (FDs). It is also homes the one of the World's largest Paracetamol API facilities providing Ingredients for Paracetamol, Metformin, Ibuprofen, Guaifenesin and Methocarbamol. The recent news stating that government lifted restrictions on export of active pharmaceutical ingredients (API) of common pain reliever Paracetamol would be beneficial going forward. The management also expects to settle and resume the plants in a few days. They plan to bring the facilities to 25 percent working of the capacity immediately and slowly improve it to 50 percent which would be reflected in Q1FY21E. The promoter has announced that the recent buyback would lead to a meaningful reduction of the pledged shares which acts as positive catalyst for the stock.
HDFC Life Insurance: Accumulate | CMP: Rs 523 | Target: Rs 612 | Return: 17 percent upside potential | Investment period: 6-9 months
Investor looking for a high quality business with consistent earnings growth, HDFC Life offers the best in class investment opportunity to accumulate at the current levels. We see opportunity for insurance industry amid COVID-19. We believe people would start realizing the importance of insurance and the backing it provides in the trying times like the current ones.
Even though there has been a slowdown in the last 2 months in terms of adding new policies, we still believe HDFC Life is optimistic on protection growth and as soon as things get normalised in near future people will look for brand and take up policy for life. HDFC Life continued to be the market leaders in terms of total new business received premium with a leading market share in the private sector compared to others. Hence we believe the stock to deliver steady returns over the medium term.
BPCL: Accumulate | CMP: Rs 342 | Target: Rs 395 | Return: 15 percent upside potential | Investment period: 6-9 months
We like BPCL business best in segment operating four refineries with a combined capacity of 38.3 million tonnes per annum, which is 15 percent of India's total refining capacity of 249.4 million tonnes. BPCL also owns 15,177 petrol pumps and 6,011 LPG (liquefied petroleum gas) distributor agencies in the country. Besides, it has 51 LPG bottling plants. The company distributes 21 percent of petroleum products consumed in the country by volume as of March this year and has more than a fifth of the 250 aviation fuel stations in the country.
We believe the key catalysts for BPCL is developments on disinvestment which should keep news flow supportive. The proposed strategic disinvestment of its entire shareholding in BPCL looks to sell it to an overseas oil firm. The government has for the second time extended the deadline for bidding for privatisation of India's second-biggest oil refiner Bharat Petroleum Corp (BPCL) by over a month to July 31. On valuation parse BPCL is trading at an attractive valuation of 1.8 times P/B (3-year avg P/B is above 2 times) and stock is trading at P/E: 8.2 FY21E with good dividend yield above 5 percent.
Tata Consumer Products: Buy | CMP: Rs 366 | Target: Rs 420 | Return: 15 percent upside potential | Investment period: 6-9 months
We like Tata Consumer Products (formerly Tata Global Beverages) business which is on its way to becoming a diversified FMCG company with the addition strong foods portfolio from Tata Chemicals (salt, pulses, spices) to its already strong tea, coffee and water portfolio both in India and internationally. We believe the acquisition of the consumer products portfolio of Tata Chemicals is transformational strategic plan for Tata Consumer as it provides long-term revenue growing opportunities. We also consider a positive opinion on recently managerial change with Mr Sunil D’souza (ex Unilever, Coca Cola, PepsiCo, Whirlpool) taken over as MD & CEO in April 2020. Tata Consumer Products would be in a unique position to leverage the strong brand, wider product portfolio and distribution reach to serve the growing aspirations of consumers across the country. Hence we hold a positive outlook on the counter.
Mishra Dhatu Nigam: Accumulate | CMP: Rs 201 | Target: Rs 250 | Return: 24 percent upside potential | Investment period: 12-18 months
Mishra Dhatu Nigam is a government promoted leading manufacturer of special steel, super alloys and titanium alloys catering to niche end-user segment. We like Midhani business model and its presence in one of the few metallurgical plants of its kind in the world, designed to manufacture a wide range of special metals and alloys using integrated and highly flexible manufacturing systems. Midhani also aims to expand geographically and operate from multiple locations. The company has been servicing the requirements of core strategic sectors like defence, space, power and nuclear for nearly three decades. Company is a strategic material supplier/ partner to Indian defence, space and energy sectors and last year Midhani’s growth has been primarily driven by space and energy sector due to increased number of launches by ISRO and ‘Make in India’ program respectively. Hence we believe vocal for local tagline Midhani would stand well placed to tap the opportunity.
Q: What would be key triggers (positive as well as negative) to look at in June month and what should be one's strategy?
The only trigger market would respect and celebrate will be phase wise lockdown re-opening plan. We advise traders to attempt for book profits at higher levels as any rallies might be shortlived.
Important lines to watch out would be on quarterly earnings management comments from across the sectors which would play a key guiding point to assess future outlook of the respective business. Early Monsoon forecast 2020 would also be a positive catalyst for markets in coming weeks.
Negative trigger would be US – China trade war, Hong Kong's anti-government protests and escalating tensions between India-China dispute.
Strategy for June 2020: Attempt for book profits at higher levels.
Q: Reliance Industries Rights Entitlement has been closed for trading now. What should be the next, and what could be the listing price on June 12, and what is the strategy one should consider once the RIL partly paid up rights shares list on June 12?
As on date it would be difficult to assume the listing price before the right issue closes (June 3, 2020) as its purely depend on the demand and subscription figure which would determine the listing premium or any discount. As of now only 8-10 percent of the issue size is subscribed as per available exchange data which is below market expectation. Market expects it would be listed with a decent upside - if the right issue gets fully subscribed as per street expectation and any under subscription would result in 5-6 percent discount opening on listing day.
We have been advising our shareholder/investors to exercise the rights and 'subscribe' to the issue offered by RIL which is similar to that of investing in a company future growth and remain invested in the stock for at least 2-3 years. Investors should also look at factors such as growth prospects and the reason behind the company's decision to come out with a rights issue and so on. We believe that the telecom and retail business will be key growth drivers for the company over the next few years while the company’s foray into e-commerce through its JioMart platform will be a value creator for the shareholders in the long run.
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