Key focus this week on ongoing Q3 earnings

Stocks Are Forever

• Mcap-to-GDP ratio reached 100% for first time in 2020-21
• Now, it’s 118% on estimated 2023-24 GDP, an all-time high
• Bulls should plan for lower returns ahead

Boosted by the earnings-led rally in technology stocks, the domestic stock markets ignored higher-than-expected US inflationthat may delay US Fed decision to start cutting interest rates and geo-political tensions in the Red Sea area; markets closed at new record highs for the week ended. NSE Nifty rose 184 points to 21,895 points, and BSE Sensex jumped 542 points to 72,568 points. In the broader market, the Nifty Midcap-100 and Smallcap-100 indices underperformed benchmarks, rising only 0.25 percent and 0.7 percent respectively. After a significant buying in December, FIIs net sold Rs3,900 crore worth of shares in the week ended January 12 and for the current month, their net selling was a little more than Rs600 crore in the cash segment. DIIs were also net sellers for the month to the tune of Rs438 crore, but for the passing week, they made strong buying of Rs6,858 crore in the cash segment helping the market to hit a new high. After airstrikes by the US & UK in the Houthi-controlled areas of Yemen, tensions in the Red Sea area have escalated and all focus will be on international crude oil prices in coming weeks. Experts feel the geo-political tensions will keep supporting the oil prices. Concerns about a broader conflict in the Middle East and potential direct involvement by Iran posed threats to output and flows in a region responsible for a third of the world’s crude production.

CPI inflation accelerated to a four-month high of 5.69 percent in December, while the IIP grew at an eight-month low of 2.4 percent in November. Coincidentally, both numbers were lower than economists’ expectations of 5.9 percent and 3.5 percent, respectively. If one takes the average for October-November 2023, the Indian economy is performing far better this year, with industrial output up 7.0 percent year-on-year in October-November 2023 compared to a growth of just 1.8 percent in the same two months of 2022. The key focus next week will be on the ongoing Q3 earnings season. After the solid start given by technology companies last week, expectations are very high on several large companies’ earnings.

Nearly 200 companies will be releasing their December quarter numbers during the coming week with a major focus on RIL, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Hindustan Unilever, Asian Paints, LTI Mindtree, InduSind Bank, Ultratech Cement, and Jio Financial Services.Among others, Angel One, Federal Bank, ICICI Lombard, Jindal Saw, L&T Tech, Union Bank of India, Credo Brands Marketing, Network18 Media & Investments, TV18 Broadcast, ICICI Prudential Life Insurance, InnovaCaptab, Jindal Stainless, Polycab India, Poonawalla Fincorp, Hindustan Zinc, One 97 Communications (Paytm), RBL Bank, and IREDA will also announce numbers in the coming week. US markets are closed on Monday on account of Martin Luther King Day.

Market Musings: Coming back to the short term, it’s safe to say that the past four years were highly unusual. The gains from the pre-Covid peak were the best for any four-year period in the past half-century from a pre-bear market peak, and the past four years included two bear markets. Some of the unusually rapid return to form this time is thanks to the rapid recovery of the economy from lockdowns, which was itself in part because of pent-up demand. But much of the rebound in both economy and markets was thanks to massive government deficit spending, which isn’t sustainable. Some of the rest is because stocks are even more highly valued than at the pre-pandemic peak. The Buffett Indicator, also known as the market cap to GDP ratio, is a valuation metric that compares the total market capitalization of all publicly traded companies to the country’s GDP. The formula is simple: Total market capitalization/GDP. The indicator measures the overall stock market valuation and determines whether it is overvalued or undervalued. Crudely put, this is the price-to-sales ratio for an entire country. Over the years, the reading of this ratio has been that a figure below 50 per cent makes a market undervalued and a figure above 100 per cent makes it overvalued. On an average annual basis, the Indian market, as represented by all stocks on the National Stock Exchange (NSE), crossed a market cap-to-GDP ratio of 100 per cent for the first time in 2020-21. It is now 118 per cent on estimated 2023-24 GDP, an all-time high. For real returns to continue at historic levels from here, the economy will have to start delivering profit without so much government help, or valuations will have to rise even higher—both big asks. This doesn’t mean stock prices are sure to fall, or that the India will break its long-term record of no real losses over two decades. But even bulls should plan for lower returns ahead.

Stocks Are Forever. That Doesn’t Mean Now Is the Time to Buy.

Quote of the week: The four most dangerous words in investing are, it’s different this time — Sir John Templeton

Follow market trends and history. Don’t speculate that this particular time will be any different. For example, a major key to investing in a specific stock or bond fund is its performance over five years.

F&O / SECTOR WATCH

On the back of better than expected Q3 performance from IT majors and sector rotation by market players; the derivatives segment witnessed a brisk trading. On the weekly options front, the maximum Call Open Interest was seen at 22,500 strike, followed by 22,300 & 21,900 strikes. On the Put side, the 21,700 strike owned the maximum Open Interest, followed by 21,000 & 21,800 strikes.The Bank Nifty index displayed strength by overcoming the initial hurdle at 47,500, signalling potential upward movement towards the 50,000 mark.The Nifty Put-Call ratio (PCR), which indicates the mood of the equity market, jumped to 1.43 (the highest level since December 27) on January 12. The above 1 PCR indicates that the traders are buying more Puts options than Call, which generally indicates an increase in bearish sentiment. India VIX was up by 3.72 percent to 13.10 during the week ended January 12, after a 12.91 percent fall in the previous week. Overall derivatives data indicates that 21,800-21,700 is expected to be an immediate support for the Nifty, with an immediate hurdle on the higher side at 22,000.On the sectoral front, IT and PSU Bank durables stocks led the gains. The Nifty IT index jumped 5.1 per cent with Infosys soaring eight per cent and TCS rising 3.9 per cent after their December quarter results and the associated commentary kept hopes alive that the environment may not deteriorate further. The numbers were nothing stellar, but sometimes no bad news is also well received by the markets with loud applause feel industry watchers. It would be worth revisiting the hope rally in IT stocks that is characterised by historically high valuation amidst historically weak business trends. A quick turnaround is not impossible, though looking at data, it does appear so.

Stock futures looking good are Ashok Leyland, Biocon, PEL, Maruti, ONGC, Tata Consumer, Sun Pharma and Wipro. Stock futures looking weak are Alkem, Bharat Forge, MCX, Metropolis, Balrampur Chini, HDFC Life and IEX.

(The author is a senior maket analyst and former vice- chairman, Andhra Pradesh State Planning Board)

Uno Minda Ltd

Uno Minda Ltd, commonly known as ‘Uno Minda’ or ‘The Company,’ is a leading global manufacturer of auto components and systems, holding a leadership position in all its product segments. The company is primarily engaged in the manufacturing and assembly of safety and security systems and their associated components for the automotive industry. Its diverse product portfolio includes mechatronics and vehicle access systems, wiring harness, interior plastics division, advanced technologies and aftermarket. Its mechatronics include ignition switch cum steering lock, keyless entry, mechatronics handle, immobilizer-fuel tank cap, aluminum die casting, compressor housing, alternator and starter motor. Its aftermarket products include helmets, fiber parts, wiper blades, ball bearings, two-wheeler air filters and lubricants. It offers its products for auto original equipment manufacturers (OEMs). Its products are designed to cater to a range of vehicle segments, including two-three wheelers, passenger vehicles, commercial vehicles and off-road vehicles.

The company is also a leading player in both four wheeler and two wheeler alloy wheel with annual manufacturing capacities of approx. 4.5 Million and 3.6 Million wheels, respectively. The Seating division came into existence with the conclusion of the merger of Harita Seating Systems Limited (HSSL) with Uno Minda Limited.The company entered into a Joint Venture agreement with TACHI-S Company Limited (“TACHI-S”), a global seat system creator headquartered in Tokyo, Japan for manufacturing and marketing of seat recliners for four wheeler passenger vehicle in India. The company has upgraded its existing products for electric vehicles as well as has built one of the most formidable EV specific product portfolios in the industry. Under the umbrella of the EV product portfolio for EV 2W and EV 3W, Uno Minda now has an array of products under production and supply, including a battery management system (BMS), on-board charger, off board chargers, RCD cable, body control module, smart plug, telematics and sound box. Buy on declines for medium term target of Rs1400.