Slowdown in overall economy and corporate governance issues in certain companies has somewhat restricted the outperformance of midcaps versus frontliners
We believe that the rally in midcaps would not be broad-based going forward, as witnessed in 2017. It would be limited to companies with the sound fundamental track record, healthy growth prospects and no corporate governance issues, Ajit Mishra, Vice President Research, Religare Broking said in an exclusive interview to Moneycontrol's Sunil Shankar Matkar.
Q: Lot of stocks hit all-time high in the recent rally like Bajaj Finance, Bajaj Finserv, HDFC Bank, Titan Company, Kotak Mahindra Bank, HUL, Nestle, Asian Paints, ICICI Bank, etc. What is your advise and what are your overall expectations in terms of returns in next one year?
The recent rally in the above stocks was led by the announcement of deduction in corporate tax rate from 34.9 percent to 25.2 percent as most of these stocks come under the higher tax bracket.
The savings resulting from the tax cut is likely to spur EPS growth and could be re-invested by corporates to fund capex and augment revenue growth. This led to heavy buying by investors in these fundamentally strong counters. However, since these stocks are around an all-time high, consolidation or profit booking cannot be ruled out.
We believe any further upside will be led by corporate earnings outcome in the coming quarters which is also likely to reflect the impact of the other measures taken by the government to revive the economy.
Q: After more than 2 percent weekly rally, do you expect the upside to continue in coming week and Nifty to surpass 11,700-11,800 levels?
Markets are currently seeing a consolidation after the recent rally and we expect the positive bias to extend further in the coming week. However, the upside seems capped and Nifty could face profit-taking around 11,700-11,800 zone. On the downside, 11,350-11,250 zone would act as support.
Q: Bank Nifty gained 3.5 percent for the week, but its open interest at eight-year low in September series. What is your take on further movement in the index and can it add more in coming week?
Bank Nifty outshined mostly sectoral indices of late and likely to see consolidation in line with the benchmark index. Having said that, indications are still favorable for further surge however participation could limit largely to the private banking majors.
Q: On the technical front, what are your top 5 stock ideas for coming week and what returns do you expect from those stocks?
Havells India: Buy | Last Close: Rs 713.80 | Initiation range: Rs 705-710 | Target: Rs 750 | Stop loss: Rs 690
Havells has witnessed decent profit-taking after the sharp rally and retraced close to the support zone of multiple moving averages on the daily chart, offering a fresh buying opportunity. We advise initiating fresh longs as per the given levels.Ramco Cements: Buy | Last Close: Rs 755 | Initiation range: Rs 755-760 |
Target: Rs 810 | Stop loss: Rs 735
Ramco Cements has formed a cup and handle pattern (which generally act as a continuous pattern) on the weekly chart while holding above the support zone of the long term moving averages. It has witnessed a marginal dip of late, providing a fresh opportunity to those who missed the chance earlier.
Divis Laboratories: Buy | Last Close: Rs 1,664.80 | Initiation range: Rs 1,640-1,650 | Target: Rs 1,750 | Stop loss: Rs 1,600
We are seeing a mixed trend in pharma index and Divis Labs has been witnessing consolidation amid volatility while holding firmly above the support zone of the long term moving average (200 EMA) on the daily chart. Indications are in the favor of breakout in the near future. We advise creating fresh longs in the given range.
Aurobindo Pharma: Sell October Futures | Last Close: Rs 600 | Initiation range: Rs 604-608 | Target: Rs 575 | Stop loss: Rs 620
Aurobindo has been reeling under pressure for the last several months. After testing the monthly support zone around 530, it witnessed rebound but failed to surpass the resistance barrier of 200 EMA on the weekly chart and witnessed a sharp plunge from thereon indicating a negative trend to extend further. All indications are pointing towards gradual decline ahead thus we advise using any bounce to go short as per the recommended levels.
REC: Sell October futures | Last Close: Rs 126.65 | Initiation range: Rs 128-129 | Target: Rs 120 | Stop loss: Rs 132
RECLTD is currently hovering around the neckline area of a distribution pattern on the daily chart and likely to continue with the corrective bias ahead also. We advise using any uptick to initiate fresh short positions in the given range.
Q: Nifty IT and Pharma indices underperformed the market this week, do you expect strong revival in coming week?
Since IT and pharma get a major share of revenue from overseas markets, these sectors are not the key beneficiaries of recent tax cut announcements.
Further, effective tax rates of many IT and Pharma companies are already low due to special economic zones (SEZs) benefits or R&D benefits and are close to the revised tax rates.
We believe, currently, investors’ focus may remain on companies which are key beneficiaries of the tax cut and therefore IT and pharma counters may not witness much buying interest in the coming week. However, IT sector could witness some revival later in anticipation of decent Q2 earnings, while pharma sector (on a broad level) may continue to underperform given its sector-specific issues.
Q: Even after the strong government move, midcaps failed to outperform frontliners. Do you feel in rest of FY20, midcaps will be able outperform frontliners?
The sharp decline in midcap and smallcap stocks from 2018 has definitely alleviated valuation concerns. However, the slowdown in overall economy and corporate governance issues in certain companies has somewhat restricted the outperformance of midcaps versus frontliners.
Going forward, we believe the rally in midcaps would not be broadbased as witnessed in 2017, but it would be limited to companies with the sound fundamental track record, healthy growth prospects and no corporate governance issues.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
Unlock 75% more savings this festive season. Get Moneycontrol Pro for a year for Rs 289 only.
Coupon code: DIWALI. Offer valid till 10th November, 2019 .