SBI-led weakness to continue, monsoon next trigger

May 21, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

It was yet another disappointing week for the markets as key indices corrected by about 1 pct as resumption of selling by foreign funds and a marginal rise in crude oil prices weighed on sentiment but the support levels of Nifty 5400 were not violated.

Two large-cap stocks which declared their Q4 results — L&T and State Bank of India — had diagonally opposite reactions in the market. SBI lost 11 pct in three days while L&T gained 11 pct in two days.

Investors were spooked after provisions for non-performing assets jumped 49.2 pct YoY for SBI while L&T amazed with higher than anticipated order inflows.

More than the individual impact, these companies have a bigger fallout on the market as they are leaders in their respective segments and engineer the future direction of the sector.

Banking stocks would continue to be under pressure as the RBI has issued a notification on enhancement of rates of provisioning for non-performing assets and restructured advances, but we believe it would be an opportunity to buy.

Upstream oil companies suffered a major setback after the government hiked the contribution of upstream oil companies toward fuel subsidies to 38.8 pct for FY 2010-11, up from 33.3 pct.

This comes at a time when ONGC’s FPO is supposed to be just around the corner and the stock has already corrected about 15 pct from its recent highs. However, we see some value-buying when ONGC dips to around 260 rupees.

Power is one of the beaten-down sectors in the last three years. Most of the scrips in the sector are in a dull phase and are currently lingering around lows. We see some buying in these counters on account of their defensive status. NTPC and Power Grid might remain intact in this cautious market environment.

The next key trigger for the markets will be the progress of monsoon as it will be an important determinant of the direction of inflation in the coming months. We continue to see correction in oil, metals and bullion and thus project inflation tapering off in the next 2-3 months.

That should herald the end of RBI rate hikes. These projections could go haywire if there is fresh infusion of liquidity with new or quasi-quantitative easing in the U.S. post June 30 and this event remains the joker in the pack.

On the domestic macro front, on May 26, the government will release data on some wholesale price indices for the year through May 14. This would be important data to watch out for.

Meanwhile, expectations of political upheaval will be prominent next week with Kanimozhi’s arrest. A long-pending cabinet reshuffle could also be announced sometime soon and will reconfirm the government’s intent on reforms.

Some important results coming up in the mid-cap space are BGR Energy, Dish TV, Tech Mahindra and in the large-cap space are GAIL, Tata Motors and Coal India. It’s the derivative contract expiry week but we continue to expect range-bound movement with strong support around Nifty levels of 5400.

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