Straight from the Specialists
India Market Weekahead: Need for caution as correction may be steep
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The Nifty extended its rally for the seventh consecutive week to touch 5600, returning 3 pct for the week and making it one of the best market rallies in recent times. The bourse continued to show strength on signs that euro zone officials would approve a long-awaited bailout for Greece next week to avoid any disorderly default.
The power sector continued to remain in the spotlight after the prime minister’s office asked Coal India to make the fuel available to private power producers which will reduce shortage of coal for generation plants. Our pick — Tata Power has gained around 30 pct so far this year; investors can continue to hold on to it.
The Air India debt restructuring plan involves conversion of its working capital loans from 26 banks to long-term loans of 10 to 15 years. As a result, the SBI gained significantly during the week. At levels of 2400 rupees, SBI trades at around 2.2x its P/ABV based on FY12E estimates that has suddenly crept above its five-year average P/ABV. Though this seems to be slightly on the higher side, markets are still giving it a thumbs up considering it is one of the biggest beneficiaries of a fall in interest rate scenario and improvement in asset quality. It would be wise for investors to book out at least partially as the asset quality is still an area of concern.
Amidst all positive news flows, Brent crude oil prices have inched up to $120/barrel over supply concerns which could threaten economic recovery. As India imports more than 80 pct of its requirements, the import bill is likely to rise, putting further strain on the current account deficit situation. This is probably one of the areas where the upcoming budget will surprise on the negative side.
High oil price has other problems like exerting pressure on inflation, rupee and corporate earnings. Stock markets seem to be ignoring this fact as of now due to the liquidity thrust from FIIs and sudden exuberance in the markets. But sooner or later, it will have to face the reality, which is when markets will probably have a hard landing.
The coming week is a truncated yet action- packed one. To begin with, euro zone finance ministers will take a final decision on the second bailout package for Greece at their meeting in Brussels on Monday. The Empowered Group of Ministers (EGoM) will meet on Friday to consider changes in the natural gas allocation policy in view of a sharp drop in output from Reliance Industries’ eastern offshore KG-D6 block. On the corporate result front, Ranbaxy and ABB are some key firms declaring numbers this week. We have the derivative contract expiry on Thursday which is expected to keep the markets volatile.
The much awaited IPO of the Multi Commodity Exchange opens for bidding on Wednesday. This will be the first public offer of 2012 and will be watched closely for investor response to gauge the market’s appetite for further issues. At an issue price of 860-1032 rupees, the offer is decently priced at around 16x FY12E P/E. It’s the first exchange in India to go public and combined with its various inherent strengths, this issue will definitely command a premium. We are recommending a ‘Subscribe’ on this issue.
The orientation of the market has turned towards “buy on dips”. Given this mindset, we are seeing intermediate corrections, but shallower than expected as a lot of cash is still waiting on the sidelines to be deployed. With 5600 levels conquered by Nifty, market men have started to project 6000+ levels for Nifty.
However, the markets are clearly running much ahead of fundamentals which haven’t changed much so far, except for the fact there is an indication of change in interest rate direction in RBI policy. We still have the uncertainty of elections and budget.
If the liquidity rush sustains for the most part of 2012, a new all-time high in the Nifty doesn’t seem an impossible task provided fundamentals catch up with valuations, which seems to be tough in this short time-frame. One should also take note of the fact it took $4.4 billion to push the Nifty up by 1000 points but in 2011, inaction from FIIs killed the markets — they barely withdrew $250 million and we gave up on the equity markets. Hence, we can logically assume this rush of FII liquidity is a must for our markets to sustain.
As I have been suggesting in the past few weeks, it’s prudent to book at every higher level as the correction may not be a mild one as we scale higher. We should also remember that this liquidity flowed into our markets at cheaper levels both in markets as well as the currency. Does the same logic hold today? Get into cash to a certain extent before it’s too late.