Rally tough to sustain, markets seen rangebound

July 9, 2011

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

Frenzied buying by FIIs and supportive global market cues saw the Nifty surpassing the psychological barrier of 5650-5700 but it encountered profit booking, losing some shine on Friday.

The week saw two major policy actions by the government. The GoM revised and approved the draft mining bill. The bill is proposing sharing 26 percent of profits after tax for coal miners and 100 percent of royalty for non-coal miners. This resulted in sharp correction in Coal India stock as it could result in a 15 percent fall in the EPS.

However, we feel this provides a good entry opportunity in this blue-chip stock that holds immense potential. It will also be a part of the Sensex from August 8 as it will be replacing Reliance Infrastructure.

This change is expected to see Coal India stock appreciating in the coming days as ETFs and index funds have to realign their portfolios as Coal India has higher free-float market capitalisation.

We also saw the government giving an approval to phase III licensing for FM stations in India. Phase III will open up expansion potential for FM radio to an additional 227 towns, boosting growth for radio advertising. It also increased FDI from the current 20 percent to 26 percent. We believe this will benefit ENIL and Sun TV to some extent. We maintain our bullish view on ENIL but Sun could continue facing pressure due to the dwindling fortunes of the promoters.

HDFC kick-started earnings season with a decent performance. The coming week sees two big IT companies declaring numbers — Infosys on July 12 and TCS two days later. Markets expect a marginal increase for Infosys FY12 EPS guidance but the stronger rupee could play spoilsport.

For India Inc as a whole, we expect margins of most companies to be under pressure on the back of increasing raw material prices and interest rates along with moderate revenue growth.

Companies laden with high debt, such as infrastructure firms, are expected to see a rise in interest costs which will likely tone down profits. In such a scenario, one should prefer companies with adequate pricing power which enables them to pass on the margin pressure.

We also have IIP data for the month of May releasing next week along with monthly inflation numbers. This, in addition to the IT results, will provide enough material for volatility in the markets.

In stock specific action, sugar counters may see continued buying on recent reports the government is contemplating decontrolling the sector. Shree Renuka Sugar, Balrampur could see interest but we suggest booking profits as bumper production will keep prices subdued.

Fertiliser stocks may be in the limelight on reports the government is considering changes in the urea policy. The GoM would be taking stock of the Reliance-BP deal and that could be a deciding factor for Reliance. The cabinet reshuffle too is overdue.

The current rally seems too sharp to sustain. Hence, we might be heading towards some rangebound, confusing sessions.

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