India Markets Weekahead: Bulls in control but no catalysts for next big move

May 24, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

The Nifty continued to move up, gaining 2.4 percent to close above 8,450 for first time in four weeks, although the momentum seems to have slowed.

People look at a screen displaying India's FM Jaitley presenting the budget on the facade of BSE building in MumbaiThe earnings season has been disappointing so far, barring a few intermediate surprises. However, hopes of a timely monsoon and a rate cut by the RBI may keep the bulls going for a while.

Chinese markets continued to be the best performers due to the central bank’s stimulus, although factory activity contracted for the third successive month. European markets bounced back on hopes of a bailout for Greece but the composite PMI declined to 53.4 in May, which is a three-month low. Federal Reserve chief Janet Yellen’s comments that U.S. stocks are expensive and confirmation that a rate hike in September is on track spooked markets. Jobs data also continued to disappoint.

Among the key results at home, ITC’s Q4 earnings were well below market expectations due to a drop in cigarette volumes. The company’s other business segments also performed poorly with a decline in hotel and agriculture revenues. FMCG revenue growth was also muted.

Asian Paints and Pidilite also disappointed. Volume growth is under pressure, especially in the rural markets, while the pricing environment still remains challenging across the FMCG sector. Britannia Industries stood out by continuing to surprise the street with strong numbers every quarter. This could be attributed to lower input prices, especially of imported skimmed milk. Considering the weak demand environment and steep valuations, it’s time to review the FMCG portfolio.

Banking major SBI reported improved earnings with its net NPAs declining to 2.1 percent in the fourth quarter, compared to 2.8 percent in the earlier quarter. However, the company’s stock closed in the negative territory and I am not surprised. The bank seemingly sold its bad assets to asset reconstruction companies, thus reducing the visibly high figure. The new provision norms for restructured assets will exert more pressure on the balance sheets from the current quarter. I am still worried about NPAs in public sector banks and I don’t expect the situation to improve till the economy shows clear signs of rejuvenation.

Tata Steel too disappointed despite watered-down expectations. Bajaj Auto’s earnings were in line with dismal projections and the stock surprisingly rallied on expectations of a better performance in the current quarter.

On the macro data front, merchandise exports totaled $22.05 billion in April 2015, a decline of 13.96 percent compared to a year ago, while imports declined 7.48 percent to $33.04 billion in the same period. The trade deficit for April was estimated at $10.99 billion, slightly higher than last year. If not for low oil prices, the country would have been in a much more dismal situation. The bad news is that oil prices seem to have bottomed out, at least in the near term.

Brokers trade on computer terminals at a stock brokerage firm in MumbaiThe Narendra Modi-led government completed a year in the saddle and the report card seems to be mixed. Although most people rate the government high on foreign policy and in improving India’s international standing, the gap between expectation and execution at home seems too wide for comfort. I hope this is a wake-up call and there is a concerted effort to deliver on promises in the next few months.

Volatility is expected to remain at fore ahead of the derivative contract expiry on Thursday. The derivative positions this month are the lightest for this year, which means that downside could be limited till expiry.

The last batch of quarterly earnings from India, the trend in global markets, and the progress of monsoon will be keenly watched in the coming week.

Some of the key results expected this week include BHEL, ONGC, NTPC, HPCL, Tata Motors, Tech Mahindra, GAIL, Coal India, Hindalco Industries, BPCL, Sun Pharma, M&M, Cipla, Bosch and IOC.

I would reiterate my cautious view on the markets despite their continued upward move. I don’t see any major catalysts on the horizon to provide a fresh impetus for the markets to overcome the negativity of disappointing earnings and the government’s below-par performance. Utilise the upside to increase cash in your portfolio.

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