Covid, global cues will weigh on stock markets

Spooked by continued high number of Covid cases, increased number of States going for lockdown, fears of higher US inflation and interest rate hike in the US due to increasing commodity prices; markets corrected during the week ended.

After rising around 3 percent in previous two consecutive weeks, the Sensex corrected 473.92 points to close at 48,732.55, and the Nifty declined 145.35 points to 14,677.80. The broader markets corrected less than frontline counters. The BSE Midcap index declined 0.49 percent and the BSE Small cap index was down 0.08 percent. After selling nearly Rs 12,000 crore in April, FIIs are net sellers to the tune of Rs 8,700 crore in the month of May till date.

Buying from DIIs was also subdued with purchases of just Rs 891 crores till date in May against the buying of Rs 11,360 crore in April. Indecisiveness among the institutional players and inflation worries from US dragged sentiment. Volatility due to inflation fears and uncertainty over the second wave of Covid-19 kept market participants on their toes in the week ended. After a gap of more than six months the next Goods and Service Tax Council meeting is being convened on May 28.

As per GOI projection, the shortfall was expected to be Rs 1,56,164 crore in 2021-22, without taking into consideration the impact of Covid Wave-2. IIP rose by a sharp 22.4 per cent in March after two months of contraction, helped by the year-earlier low base due to the first Covid wave. Retail inflation eased to a three-month low in April to 4.29 per cent from 5.52 per cent in March due to softening food prices.

The latest pandemic wave is expected to significantly moderate the sharp rebound in GDP growth that was expected in the first quarter. Most high-speed indicators such as automobile sales, mobility indices and e-way bills have shown a decline in economic activity. Former RBI Governor Raghuram Rajan indicated that Covid-19 pandemic is probably India's greatest challenge since independence and added that in many places the government was not present to help the people for various reasons.

Economy observers expect GoI to come out with a "new" stimulus package to annul the impact of Covid second wave on economy. Important companies that will release their earnings in the coming week are Bharti Airtel, Tata Motors, Hindalco Industries, State Bank of India, Shree Cement, Indian Oil Corporation, HPCL, Federal Bank, Aarti Industries, Canara Bank, Zee Entertainment Enterprises, JSW Steel, United Spirits, Amara Raja Batteries, and Amber Enterprises India. Market players expect the stock-specific action to continue given the quarterly earnings season, and feel the market will closely watch Covid-related updates, progress of the vaccine drive, global cues and movement in commodities.

Heard on the Street

For investors, that 'gut feeling' can be more powerful than they realize. If only financial markets came with traffic signals: indisputable indicators of when it is safe to keep going, when you need to slow down, when you must stop. Imagine how much easier investing would be if you could rely on such green, yellow or red lights. Unfortunately, these unambiguous signals don't exist. Investors fill much of the absence with anecdotes and gut feelings, which can be more powerful than you realize.

Such soft indicators can help you make hard decisions, but only if you rely on them in the right ways. Gut feelings don't arise only from your gastrointestinal tract. Evolution finely tuned our bodies to potential changes in risk and reward, preparing our ancestors for fight or flight in the presence of prey or predators. In today's world, the same mechanisms make our hearts race, palms sweat and muscles tense up when we expect our portfolios to take a sharp rise or fall.

When most financial assets are overvalued by traditional measures and when nightmare and nirvana scenarios are both plausible; the solution is to adopt rules and procedures that enable you to listen to your gut without being ruled by it. Don't just heave a hunk of money at (say) SAIL or Tata Steel because it's "going to the moon." Write down how likely, in a percentage range, you think it is to reach your target price by a certain date. List, in as much factual detail as you can, three reasons why. (If all you're going on is a hunch, then write something like "I have a gut feeling" three times.)

Finally, use your estimate of the probability you are right to determine how much you invest. When the target date arrives, check the outcome against your original forecast and reasoning and see if what you wrote down at the start can teach you anything about how to make your next investment. Did the stock price end up near your predicted price roughly when you expected? How much of your rationale was right? If all you went on was intuition, did it turn out to be reliable? A gut check just might keep your gut from hijacking your brain.

Futures & Options /

Sector Watch

On the back of earnings, derivative segment continued to witness sharp stock specific moves. Nifty closed below 14700 levels while Bank nifty managed to take support at its 100 days exponential moving average and ended the week above 32000 levels. Option segment witnessed maximum Call open interest at 15,000 strike, followed by 15,300 and 14,900 strikes; and maximum Put open interest was seen at 14,000 strike, followed by 14,500 and 14,600 strikes.

Call writing was seen at 15,000 strike, followed by 14,900 and 15,300 strikes, while Put writing was seen at 14,600 strike, followed by 14,400 and 14,700 strikes. The Implied Volatility (IV) of calls closed at 18.64 per cent while that for put options closed at 19.75 per cent. The Nifty VIX for the week closed at 20.08 per cent. PCR OI for the week closed at 1.52 indicates more puts writing than calls. Option data indicates a wide trading range for the Nifty between 14,400 to 15,000 levels for coming sessions.

Metal prices, especially those of steel, have been on the rise since the last year when the pandemic hit the shores. Nifty Metal index has delivered over 250 per cent gains from the lows of March 2020, outperforming other sectoral indices throughout. Despite the multiple tailwinds of sturdy demand, production cuts and supply-side constraints pushing prices higher; given the recent sharp rally across the board in metal stocks, industry observers expect mild correction in stock prices in near term. Use the correction to buy JSW Steel, SAIL, Tata Steel and Vedanta.

Spooked by fears of impact of rising Covid cases on business and economy, banking stocks witnessed selling pressure. State Bank of India would be reporting earnings on May 21. It is expected to report strong earnings growth for the March 2021 quarter on the back of decline in provisions, and strong net interest income & pre-provision operating profit. Punters expect rebound in bank counters. Buy ICICI Bank, SBI, PNB, Canara Bank and BOB. Stock futures looking good are DLF, ICICI Bank, Pidilite Inds, Powergrid, REC, Tata Consumer and Zee Entertainment. Stock futures looking weak are Cholamandalam Finance, Indus Tower, Muthoot Finance, PEL and Naukri.

STOCK PICKS

Chambal Fertilisers and Chemicals Limited offers urea and di-ammonium Phosphate (DAP). The company's segments include Fertilisers and other Agri-inputs segment, Own Manufactured Phosphoric Acid segment, shipping segment and software & others segment. The Fertilisers and other Agri-inputs segment includes manufacture and marketing of urea, single super phosphate (SSP) and purchase and sale of other fertilizers and agri-inputs.

The Own Manufactured Phosphoric Acid segment includes manufacturing and marketing of Phosphoric Acid. The Shipping segment includes transportation of crude oil and liquid products through vessels owned and hired by the Shipping Division. The Software & Others Segment includes software business, power and infrastructure activities of the Company.

Why we are recommending

1. One of the largest Agri‐Products Company in India. Annual production of more than ~3.3 million MT of urea. Company accounts for over 13 per cent of the total urea produced in the country. Largest single site Urea manufacturer – significant economies of scale New Urea Plant (Gadepan‐III) one of the most energy efficient urea plants in the world.

2. Strong Balance Sheet, Zero short term debt and financially sound. Selling a portfolio of products valuing over Rs. 12,500 crore annually.

Buy between Rs245-255 for medium term price target of Rs425. In the event of sharp correction in the market, keep stop loss at Rs215. Risk / Reward ratio is 1:6.

NACL is an established agrochemical company in India, founded in 1993. The company started as an Active Ingredient manufacturer and has built a sizable business in Domestic Retail, B2B and Exports, with many of the customers being large MNCs with longstanding relationships. The company has also emerged as a strong player in the formulations business with over 50 products covering all major crops.

In formulations, the company manufactures products in all major categories such as Insecticides, Herbicides, Fungicides, Plant Growth Regulators and Nematicides. NACL is in process of increasing the existing Plant capacity of 10,000 MT/Annum to 25,000 MT/Annum.

Why we are recommending

1. Presence across the value chain i.e Technical > Formulations > Research > Retail > Farmer Outreach. Strong product portfolio that is spread across insecticides, herbicides, fungicides, plant growth regulators and nematicides.

2. Long standing business relations with Multinational agrochemical companies.

3. Reports of the company being an acquisition target. Possibility of takeover by a Multinational or Indian major is not ruled out in next couple of years.

Buy between Rs 45-48 for medium term price target of Rs 75. In the event of sharp correction in the market, keep stop loss at Rs 40. Risk / Reward ratio is 1:6.