Despite Omicron variant scare, earnings delivery holds the key

Driven by a gush of liquidity, low returns from other asset classes and strong interest from domestic investors throughout the year, the benchmark indices ended the year 2021 on a strong note during the last week of the year. The year 2021 witnessed a strong recovery amid continuing challenges from subsequent variants of Coronavirus to outperform its global peers. The BSE Sensex and the NSE Nifty delivered stellar returns of 22 per cent and 24 per cent in 2021, respectively. The broader markets, however, have outperformed the benchmarks during the year. The BSE mid-cap and small-cap indices delivered more than 38 per cent and 62 per cent returns in 2021, respectively. However, it is pertinent to recall that the markets corrected nearly 10 per cent between October and November amid outflows from FIIs. The strong momentum in 2021 was bolstered by robust retail participation, economic recovery, vaccine coverage and rising appetite for Indian goods and services.

Direction of the markets in the first week of the New Year 2022 will be dictated by macroeconomic data like Manufacturing PMI and Services PMI, Omicron situation, monthly auto sales data, FII fund flows, international crude oil prices, rupee movement and global trends. Sectorally, Capital Goods and IT are expected to continue outperformance, while auto, PSU stocks are poised with favourable risk-reward setup. Despite lingering fears surrounding surging Omicron cases, the domestic market is expected to maintain its resilience supported by a healthy long-term growth forecast for the domestic economy. While the market trend might be volatile in the near term on account of potential risk from Omicron variant and fragile global cues; in the long run, strong earnings delivery along with positive macro-economic data would hold the key to drive markets upwards.

Market Musings: Every bull-run has its side-effects and the latest one was no exception to this phenomenon. The unprecedented rally in the stock market may have brought cheers to the investing community. However, it has also raised concerns about a potential risk, particularly to retail participants, arising out of unwarranted exuberance in illiquid, penny stocks that have been scaling dizzying heights on the bourses. Many such stocks have emerged as multi-baggers despite poor credentials. This trend is akin to the frenzy witnessed during the dotcom boom of 2000, which saw many dud companies in the sector rally to abnormally high levels on speculative activity. A decade later shares of mining, trading or export companies were targeted by the operators. Many small investors were lured to invest in a large number of penny stocks only to find their hard-earned money taken away by smart operators, many a time acting in connivance with the unscrupulous promoters. The current boom phase, it appears, is no exception to the victimising tendency prevalent among small gullible investors. There are indications that they may have been chasing penny shares of fundamentally weak companies, thereby risking their investment.

An analysis of the trading pattern in the current market shows share prices of many lesser-known or unknown companies have spurted to unprecedented levels even though their fundamentals hardly inspire any confidence. Many such examples figure on the list of the stocks that have consistently been hitting 52-week highs on BSE. The sharp gains could have been the outcome of normal trading practice without a possibility of any foul play by the entities related or unrelated to the respective companies. Some possibilities such as restructuring of operations, capital reduction, change in management, turnaround hopes could have been the triggers behind the spurt in valuations. While these triggers may have their merit, they hardly justify precariously high valuations in some of the cases.

The jump in the share price of a company of unknown credentials, can't be an accident or windfall, but is possible because of manipulations in a pre-planned manner by an interested broker and entry operators. The abnormal gains, however, have prompted the exchange to keep some of them under surveillance, signalling caution to investors. Caution is the Buzzword for 2022.

Quote of the week: You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets — Peter Lynch

When hit with recessions or declines, you must stay on the course. Economies are cyclical, and the markets have shown that they will recover. Make sure you are a part of those recoveries.

F&O / SECTOR WATCH

Settlement week witnessed brisk trading in the derivatives segment. Rollovers in Nifty futures were at 79 per cent (last month 83 per cent), well below 3-month average of 81 per cent. However in value terms it was flat at Rs17,907 crore versus Rs19,262 crore. Market wide rollovers stood at 93 per cent (last month's market wide 94 per cent) in value terms Rs1,56,522 crore which is lower than last month Rs1,68,830 cr. Maximum Call Open Interest (OI) was seen at 18,000 strike, which will act as a crucial resistance level in the January series. Call writing was seen at 17,400 strike, followed by 18,200 strike and 18,000 strike. Call unwinding was seen at 17,200 strike, followed by 17,000 strike and 16,900 strike. Maximum Put OI of 31.96 lakh contracts was seen at 17,000 strike, which will act as a crucial support level in the January series.

Put writing was seen at 17,600 strike, followed by 16,500 strike and 17,300 strike.

The Implied Volatility (IV) of Calls closed at 15.68 per cent, while that for Put options closed at 16.50 per cent. The Nifty VIX for the week closed at 16.57 and is expected to remain volatile. PCR of OI for the week closed at 1.66.

Bank Nifty saw increase in rollovers at 83 per cent against 80 per cent last month. Expect support at 36800 and resistance 38200 levels. With Q3 results on horizon, adopt stock-specific approach. Sectors that can outperform in the January Series are Auto (2 wheeler &tractor), capital goods, FMCG, pharma and IT. Passenger vehicle (PV) sales fell for the fourth consecutive month despite strong demand in the local market in December, as the global shortage of semiconductors cramped production across automakers, including market leaders Maruti Suzuki and Hyundai Motor India. It is interesting to observe that Tata Motors has overtaken Hyundai Motor India to become the second-largest seller of passenger vehicles in the domestic market for the first time in close to a decade in December 2021.

Manufacturers indicate that supply constraints of semiconductors have been progressively improving. Start accumulating automobile counters. The average revenue per user (ARPU) is a key matrix for profitability of telecom companies. Ahead of 5G spectrum auction, telecom companies have been eyeing improved ARPUs by tariff hikes. The government's relief package to the telecom industry has given a breather to telecom carriers, especially Vodafone Idea, which has been struggling in a hyper competitive 3-private player market. Punters expect surprising gains in Vodafone.

Stock futures are looking good Aurobindo Pharma, Hindalco, JSW Steel, Kotak Bank, Lupin and Ramco Cement. Stock futures looking weak are Alkem, MCX, Shriram Transport, Tata Steel and UBL

STOCK PICKS

Indian Acrylics Limited

Indian Acrylics Limited is engaged in manufacture and sale/trade of acrylic fiber/yarn and related activities. The company's geographical segments include within India and outside India. Its product range includes staple, tow and tops in regular and high shrink. Its Acrylic Fibre products include Normal Bright Staple Fibre, Semi Dull Luster Staple Fiber (Non-Shrinkable), Normal Bright Staple Fiber (Non Shrinkable) and Normal Bright Staple Fiber (Shrinkable). Its Acrylic Tow includes Normal Bright Staple Fibre. Its Acrylic Tops include grey or dyed. The company's production facility is located at Harkishanpura, and has a capacity of approximately 42,000 metric tons per annum and over 5,400 metric tons per annum of tow to tops conversion. The company offers products that are used in garments, including sweaters and shawls, work clothing, furnishing fabrics (indoor and outdoor), blankets, carpets and toys. It uses Du Pont technology to manufacture dry spun mono component fiber. Natural textile fibre Cotton has seen very sharp increase in price, leading a shift to synthetic textile fibre by many textile manufacturers. Compared to other peer companies like Vardhaman, Pasupati and Indo Rama Synthetics, present share price of company is yet to factor the turnaround in the sector.

Company is expected to report turnaround performance in next two quarters. Buy for target price of Rs35 in medium term. Keep stop loss at Rs14 in case of sharp market correction.

Cerebra Integrated Technologies Limited

Cerebra Integrated Technologies Limited is a pioneer in providing eco-friendly, innovative and economic e-waste recycling solutions. Other businesses of the company include Electronic Manufacturing Services (EMS), Enterprise Solutions & Infrastructure Management (ESD) in India and Value Added Distributor (VAD) and IT Services provider for companies in Dubai. The company has garnered a lot of top-notch clients for its new DaaS initiative and acquired quite a few clients for ITAD and also partnerships. The company offers e-waste recycling and management services, such as repair, refurbish and reuse of all electronic and electrical equipment; waste management at source; recycling of all collected e-waste (Zero Landfill), and Web-based trading, services and accessibility. The company has doubled its capacity from the current capacity of 20,000 MT and has large number of companies including MNCs who have signed up on long term projects for fulfilling their EPR (Extended Producer Responsibility) targets. The company has been collecting laptops, desktops, networking equipment and waste electrical & electronic equipment like refrigerators, air conditioners and washing machines and recycling them at its plant near Bengaluru. Buy for medium term target of Rs175.