Value buying to emerge in key large caps

By Ambareesh Baliga
May 28, 2011

Selling pressure continued over fresh concerns of Europe’s sovereign debt crisis with derivative contract expiry providing the volatility. The market-wise rollovers were almost 83.2 percent as compared to 82.8 percent last month.

On the sectoral front, most of the rollovers were seen on the short side. Select long rolls were seen in pharma, OMCs and FMCG sector whereas sectors like infrastructure, banking, capital goods and technology saw short positions getting rolled in the month of June.

Index heavyweights Reliance Industries and ONGC remained in the limelight on reports that the subsidy share of upstream oil companies for FY12 will be restored to 33 percent from 38.5 percent in FY11.

PSU OMCs also edged higher on hopes of a fuel price hike. BHEL fell on FPO plans as market participants expected the FPO pricing to be at a discount to the ruling market price to attract investor interest in a choppy scenario. Similar stock behaviour was witnessed at the time of announcement of ONGC and SAIL FPOs. Hence, we expect a consolidation at lower levels in BHEL now — which could be a buying opportunity.

Fiscal 2011 results continued to provide stock momentum. Tata Motors fell after giving out a cautious outlook on the current macro-economic environment which could adversely impact demand for commercial vehicles with continuing concerns of high commodity prices and rising costs impacting its commercial vehicles division.

Overdependence on JLR too would result in lumpiness of earnings. Tata Steel and Coal India flared up on good March 2011 quarter results but we expect metal stocks to correct on our expectation of softening of metal prices especially steel and aluminium. For the coming week, key large cap results are ONGC, IOC, Oil India and Sun Pharma.

Value buying is expected to emerge as most of the negative news and earnings-related surprises have already been factored in the prices. Last week’s expected political fallout due to Kanimozhi too was misplaced.

Markets could react positively if the country receives good monsoon indications in south-west part of the country. Valuations have come to reasonable levels with P/E at 14x forward earnings. This could provide investors with a good entry point.

OMCs are likely to see heightened activity after panel of ministers will finally meet on June 9 and discuss increasing diesel, kerosene and cooking gas prices.

In the event of Nifty breaking 5350-5400 band and settling below, then there is possibility of 5100 being tested, though the spirited rally of the last two sessions reduces the probability of markets breaking the band.

However, we believe that it makes good sense to go out for value shopping now in any ‘downtick’ days as the key large caps like BHEL, Infosys, SBI, etc. have given significant corrections.

Post QE2 scenario and worsening euro zone could result in the next correction for the world markets, including emerging markets towards the end of June.

Hopefully, Indian markets would be at a higher level of 5700/5800 at that point of time, hence the correction may not hurt us too much and we could be slated for the next bull run on a firmer footing.

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