Why Q3 earnings will be keenly watched by D-Street

We have quarterly earnings around the corner which will further decide the market direction and we expect companies to deliver robust number.

   

The Indian equity market emerged as one of the best performers globally in 2018 in the wake of resilient macroeconomic factors despite heavy volatility. The Nifty index delivered a positive return compared to a negative return by major global indices.

With the controlled crude prices, strengthening rupee and positive macros India is likely to record even better economic performance during 2019. Also, with a major correction in international oil prices, trade and current account positions are likely to improve considerably.

However, we expect the market to remain volatile for the first half of the year driven by a series of global and local events like the US Fed’s rate action, the progress of US-China trade war, US' action against Iran’s oil exports and Central election.

Also, North Korean Kim Jong Un's warning to President Trump on taking a 'new path' in nuclear talks if the US didn’t relax economic sanctions adds up to the worry.

The auto sales number for December 2018 did not meet street expectations. Quarterly earnings that are around the corner and expected to be robust will chart the market direction.

Here are the stocks we are bullish on:

Asian Paints | Rating: Buy | Target: Rs 1,491

Asian Paints is India’s leading paint company and Asia’s third largest paint company, with a group turnover of ₹169 billion.

The company has to its credit a leadership position in its market, proven track record of adapting to changes in market conditions, professional management, history of innovative strategies in marketing, efficient manufacturing and logistics in place and prudent financial management.

In terms of growth, we continue to expect the Indian paints industry to grow at around 8-12 percent in the next few years and demand factors remain strong in terms of growth.

At CMP, We recommend a BUY on the stock with a target price of Rs 1,471 per share.

Indraprastha Gas | Rating: Buy | Target: Rs 319

The recent Supreme Court decision, which proposes that Indraprastha Gas buy Haryana City Gas Distribution will add to volumes and provide visibility for growth in the years ahead. Delhi’s green budget with plans to provide concession of 50 percent on the registrations of CNG cars will promote the cleaner fuel.

Environmental concerns in Delhi have brought to the fore the urgency of using cleaner fuels, which puts IGL in a sweet spot. IGL has a unique identity of a company with a rare mix of volume growth and strong margins, supported by relatively lower gas prices and supportive governmental initiatives.

We expect the volume growth momentum to continue for the company as State government will add 2,000 new buses in FY19, and expansion of its pipeline network in the new areas- Karnal, Rewari and part of Gurugram will add volumes from H2-FY19 onwards. We maintain our BUY rating on the stock with a target price of Rs 319 per share.

Hindustan Unilever | Rating: Buy | Target: Rs 2,250

Hindustan Unilever Limited (HUVR/HUL) is India’s largest fast-moving consumer goods (FMCG) company with a heritage of over 80 years.

With HUL being the largest FMCG Company with one of the largest footprints in terms of products and distribution network and its strategy to target volume growth primarily should drive healthy growth in medium term.

The company has also entered into health drinks segment with the proposed amalgamation of GSK Consumer business which we believe is value-neutral while earnings accretive for HUL at current ratio.

In terms of per capita, FMCG consumption India stands lowest within its developing country peers at just around US$29 as against Indonesia which amounts to almost double while China at four times India’s consumption.

For the H1-FY19, HUL has reported a growth of 11.2 percent in its revenues of which volume growth was around 11% for the period.

We expect HUL to grow at a CAGR of 13.5 percent in the next two years. We estimate the company to report revenues of Rs 401,280 million in FY-19E and Rs 457,561 million in FY-20.

MORE WILL UPDATE SOON!!

PSU banks look attractive after recent developments

All eyes would be on last budget of the current government to be presented before the general elections.

 

We expect volatility to remain in the market and street participants would now track global cues and Q3 earnings season. We believe Q2 earnings season has been mixed bag but Q3 can be much better. The monthly sales numbers of auto companies have been subdued in December 2018.

All eyes would be also on the last budget of the current government to be presented before the general elections. We do expect volatility as the central government may resort to populist measures to gain back popularity amongst the rural community especially farmers, after its loss in key states like Madhya Pradesh, Rajasthan and Chattisgarh.

The strategy at present should be to invest in a phased manner in companies which are not connected to any political party, have a robust business model, strong earnings and cash flow visibility, low debt and backed by quality management especially on the corporate governance front.

Considering the above factors, investors can have a stock specific approach in midcaps and smallcaps as there are many companies which are trading at a discount of 50-70 percent to their peak price in early 2018. We believe the falling crude oil prices will benefit paint companies. On the other hand, there would be significant inventory losses for OMCs.

Last week, Finance Minister Arun Jaitley said on Thursday that creditors are expected to get Rs 70,000 crore as some of the big cases, including Bhushan Power & Steel and Essar Steel, are likely to be resolved in this financial year.

They have already recovered Rs 80,000 crore from 66 cases resolved by the National Company Law Tribunal (NCLT). According to FM, increase in conversion of NPAs (non-performing asset) into standard accounts and decline in new accounts falling in the NPA category show a definite improvement in the lending and borrowing behaviour. All these factors would augur well for PSU banks which are trading at depressed valuations.

For short-term investors, the strategy can be to sell on rise and buy on declines up to the general elections. On a safer side, we would suggest long-term investors to have a look at pharma MNCs, consumption stocks, auto stocks, PSU banks – trading at depressed valuations (looking better after the cleanup of NPA mess, progress made under the NPA resolution framework under IBC, faster resolutions under NCLT and proposed recapitalisation), IT sector and private insurance companies at the current moment.

Stock Ideas

3M India | CMP: Rs 20,357 | | Target: Rs 24,800 | Upside: 22 percent

We like 3M India due to its unique and sound business model. The company’s products touch life of citizens on a daily basis in some way or the other with products in different segments like abrasives, automotive, casting and splinting, dental, filtration, food service and hospitality, hand hygiene, marine maintenance and repair, medical device and optical components, orthodontic, painting equipment & supplies, patient monitoring, safety products, securement and immobilization-dressing securement, skin and wound care, sterilization monitoring, surgical solutions, tapes and adhesives, vascular access and wire and cables.

With renewed rigour around priority market segments such as automotive, infrastructure, energy and retail, the company is well aligned to address customers’ challenges with its strong expertise in science and innovation.

There is no similar and comparable company in India with its unique products. As the country prepares for the 2019 general election, there are expectations of more focus on execution and increased expenditure on infrastructure by the government. All this augur well for the company’s business segments that are focused on domestic growth in the future.

The company enjoys a strong balance sheet with virtually zero debt company. The significant correction in the stock price gives investors an opportunity to take a pie of this great company who had missed the bus earlier.

In the recent turmoil, the stock has corrected from levels of Rs 26,662. At difficult times like now, it is better to accumulate companies of such kind which can give you multibagger returns over the horizon of 5-10 years. In the near term, we expect an upside of 22 percent.

Eicher Motors | CMP: Rs 20,103 | Target: Rs 25,129 | Upside: 25 percent | Horizon: 9-12 months

The company's motorcycle division (flagship brand – Royal Enfiled) reported subdued monthly sales numbers in December 2018 which resulted in steep correction of the stock price in the previous week.

Royal Enfield aims to lead and grow the mid-weight (250-750cc) motorcycle segment globally, and Interceptor 650 and Continental GT 650 will help the company accomplish this. The company’s strategy of new exclusive stores format introduced in India and international market is also auguring well.

Volvo Trucks is the market leader in the premium truck segment. VE Commercial Vehicles Ltd, a Volvo Group and Eicher Motors joint venture, reported 2.4 percent increase in sales for December 2018 to 6,236 units.

We believe this company is available at cheap valuation only at distressed times. One may argue that Royal Enfield market share might be impacted owing to competitors introducing new range of bikes to compete with Royal Enfield.

We believe, the company will be able to manage competition in a good manner owing to its strong technical capabilities and high brand recall among customers. Brand loyalty for Royal Enfield is huge.

Regarding the LMD and HD vehicle production, we expect the company to increase the same to an average of about 300 vehicles a day in next three months of this financial year as against about 260 vehicles a day, till December 2018.

We advise investors to stick with a quality company like Eicher Motors during difficult times as history has proved that great companies always bounceback when bull run starts.

MORE WILL UPDATE SOON!!

IT firms expected to deliver strong Q3 earnings; slowdown in US could be a risk

FY19 guidance by Infosys and HCL Technologies, and next quarter guidance by Wipro will also be the key metrics to watch out for.

 

Indian software companies, which will kick off Q3 earnings season later this week, are expected to continue to do well in December quarter driven by consistent growth in US business and BFSI segment, and rupee depreciation, brokerage houses said.

But the only risk, they see, is any slowdown in the US economy going ahead.

According to brokers, the range for revenue growth in constant currency (CC) could be around 1-5 percent along with cross-currency headwinds, largely aided by big deal wins.

Despite seasonal weakness due to furloughs in Q3, we expect the top 5 Indian IT largecaps to register healthy USD sales growth of 1.5-4.8 percent QoQ in CC (with Infosys at the lower end and HCL Technologies at the upper end) with cross-currency headwinds of 50-80bp," CIMB said.

The research house expects robust growth in financial services (BFSI) across most companies. "Increasingly, the ramp-up in large deal wins for most companies should help boost growth."

Edelweiss also agreed and said as seen in previous quarters, robust growth in digital and large transformational deal wins should accelerate revenue and lead to positive management commentaries.

In a seasonally weak Q3 attributable to furloughs and holiday season, the research house expects the top-5 IT players—Tata Consultancy Services, Infosys, Wipro, HCL Technologies and Tech Mahindra—to clock 2–3.3 percent QoQ revenue growth in constant currency.

Depreciation of major global currencies against the USD is likely to hurt revenue growth again by 40–70bps QoQ, but at the same time, the INR's depreciation against the USD would lift margins 40–60bps QoQ, it said.

The rupee fell nearly 10 percent against the US dollar in 2018 as the dollar appreciated by 1.3 percent against pound and 1.9 percent versus euro in Q3.

On the operational front, margin expansion is expected to continue in December quarter on rupee depreciation and operational efficiencies, and as a major portion of the cost increase was already witnessed in the first half of FY19.

CIMB expects the top 5 Indian IT companies (except Infosys) to report a 10-30bp QoQ rise in adjusted EBIT margins, led by marginal currency benefits, ramp-up of deal wins and ongoing operational efficiencies.

With increasing supply-side issues in onsite locations, management’s views on margin outlook in near-medium term will be a key thing to watch.

Edelweiss expects the maximum margin expansion sequentially for the quarter.

The broker expects margins at the top-five IT companies to expand 70–100bps driven by INR depreciation and operational efficiencies.

During Q3FY19, the INR on average depreciated 2.7 percent against the USD, which should increase margin by 40–60bps for the quarter. Headwinds such as visa costs and wage hike are behind now. However, the impact will be limited due to lower utilisation owing to furloughs, investments in digital and localisation, and training of freshly inducted employees.

In the case of Infosys' full-year revenue guidance, most brokerages expect Infosys to maintain its guidance, but CIMB and Motilal Oswal expect the IT firm to revise up its lower-end of USD sales growth guidance to around 7-8 percent, from 6-8 percent in CC terms, with its increasing order book. However, Edelweiss, Jefferies, PhillipCapital and Nirmal Bang expect the company to retain FY19 revenue guidance.

For HCL Technologies, brokers do not expect any changes in its USD sales growth guidance of 9.5-11.5 percent for FY19 in CC terms. For both companies, they also do not expect any change in their EBIT margin guidance for the full year.

Key things to watch out for would be the commentary on the deal-flow and CY19 IT budgets, commentary surrounding Brexit, US tariffs on Chinese imports, commentary from largecaps on client IT spending, pricing pressure, growth in digital services, BFSI outlook, Europe revenue growth rates, and changes in employee matrix, viz., hiring and attrition.

FY19 guidance by Infosys and HCL Technologies and next quarter guidance by Wipro will also be the key metrics to watch out for.

Commentary on 2019 outlook will be keenly watched especially given recent concerns over US economy and growth uncertainty indicated by Accenture.

MORE WILL UPDATE SOON!!

Stock Ideas

ITC The share price of ITC has been trading in a primary up trend and is seen sustaining above the rising trend line joining the lows since CY08 signalling strength and positive price structure. During the last 15 months, the stock has been consolidating around the major support area of  265-270. It underperformed other FMCG stocks during the same period. However, the stock recently witnessed a rebound from the major support area  265-270 and is providing fresh entry opportunity with a favourable risk/reward set up.

Action: Buy, Target Price:  313, Time frame: 6 Months UNITED BANK OF INDIA In the recent recovery from 10500, the banking space took the lead once again and were major gainers in the index. At the same time, the midcap and small cap space has also started witnessing some traction. We believe that while the Nifty may continue its consolidation in the range of 10500-11000, stocks from the midcap space are likely to outperform in the near term. Hence, midcap banking stocks like Union Bank of India may witness good upsides on the back of short covering. Action: Buy, Target Price:  102, Time frame: 3 Months EVENT UPDATE:-BANK OF BARODABank of Baroda announced swap ratios for the merger with Vijaya Bank and Dena Bank. As per the announcement, every 1000 shares owned in Vijaya bank & Dena bank will receive 402 & 110 shares respectively of BoB. The swap ratio values Dena bank at ~ 3000 crore (25% discount to 2nd Jan 2018 Mcap) & Vijaya bank at ~ 6266 crore which is close to 5% discount to its market cap. The swap ratios as announced will lead to 22% dilution vs 25% dilution estimated for the merged entity and ~ 29% vs 32% estimated on existing BoB equity capital. MORE WILL UPDATE SOON!!

Allocate 30-40% of portfolio to small & midcaps for wealth generation; Here's how

For aggressive investors, ideal equity portfolio allocation should be somewhere in the range of 30-40 percent with respect to small & midcaps.

If I tell you select midcaps still offer good value at current levels, would you believe it? Well, the way mid and smallcaps collapsed in 2018, chances are bleak that anyone would want to invest in the broader market.

Yes, it is true that retail investor portfolios are bleeding as most of them went overweight in small and midcaps last year after witnessing a strong rally in 2017 when the Smallcap index rose about 60 percent and saw more than 160 stocks that more than doubled investor wealth.

But, after steep correction in 2018 – when the S&P BSE Midcap index fell 13 percent and the S&P BSE Smallcap index dropped 23 percent — valuations have become slightly attractive as compared to the beginning of 2018.

Even the thematic mutual funds fell sharply from what they were quoting at the beginning of 2018.

For aggressive investors, ideal equity portfolio allocation should be somewhere in the range of 30-40 percent with respect to small & midcaps, suggest experts.

With a longer time horizon, all these temporary tsunamis-like gyrations appear to be small ripples. I don't feel perturbed by the volatility. We have a firm conviction that they will give good returns in the long run.

Briefly, the carnage in mid and small-cap stocks was caused by mutual fund selling owing to the new categorization of MF schemes, GSM/ASM circular of SEBI, changes in equity taxation, governance issues, recent IL&FS crisis, etc. The LTCG tax also impacted the investor sentiment.

So, should one invest in mid or smallcaps in 2019? Well, the answer lies in one's risk-taking ability, and stock selection remain the key.

IIFL, in a note, said that investors in 2019 should focus on sustainability of earnings growth than the percentage of growth while investing in the current round of market uncertainty.

As small and midcaps are down by more than 30%, one can start to bottom fish in good quality companies but avoid averaging stocks whose fundamentals have deteriorated significantly,

So what is the right portfolio composition for you this year? Most investors who were overweight in 2018, as well as 2017, have already reduced their exposure.

But, if you are an aggressive investor, IIFL said you could allocate 32 percent towards smallcaps, 40 percent in midcaps, and 28 percent towards largecaps, this is in accordance to their model portfolio in December.

 

 

Since small and midcaps are down with double-digit losses in 2018 there is an opportunity to find good quality stocks at attractive valuations in these segments but avoid averaging stocks whose fundamentals have deteriorated significantly, suggest experts.

We are focused on stories, which are benefiting from crude price fall. Also, we are seeing some improvement on liquidity side for NBFCs which will help in a rebound in credit growth which will aid growth to these companies.

At any given time, one should invest based on their risk profile. There is no hard and fast rule; an aggressive person can invest 70 percent in equities, 20 percent debt, and 10 percent in gold, whereas a person with a moderate risk appetite can invest 50 percent in equities, 35 percent in debt, and 15 percent in gold.

He further added that from a tactical allocation perspective, one can increase weight in equities with a bias towards smaller and mid-cap companies.

B Gopkumar, ED & CEO, Reliance Securities told Moneycontrol that investors should allocate 60 percent towards largecaps, 40 percent in midcap and smallcap for a risk-neutral investor with no immediate cash requirements is advisable.

  

MORE WILL UPDATE SOON!!

2019 to be a good year for mid-smallcaps; 15 picks by that could return 5-93%

Indian equity benchmarks outperformed global markets in 2018. In fact, Brazil (up 15 percent) and India (3 percent on Nifty) were only gainers during the year.

Favourable macros (sharp fall in crude oil prices), easing US-China trade tensions, liquidity support to NBFCs after credit crisis and rate cut hope helped the market end the year on a positive note, but gains were capped by global growth concerns.

The performance of broader market was quite bad in the year gone by as BSE Midcap and Smallcap indices lost 13 percent and 24 percent, respectively.

But 2019 is going to be good for the overall market, experts said, adding the first half could be volatile due to general elections but second half is expected to be good and the focus would be on earnings, macros and global factors.

Sharp decline in crude prices, appreciation in INR versus USD and fall in Bond yields augurs well for the market, however uncertainty regarding elections in 2019 might keep markets volatile.

Mid and smallcap earnings were hurt more due to crude currency and interest cost increase. Therefore, reversals in the same should lead to better earnings revival in small and midcaps, hence, we believe that 2019 will be a good year for small & midcaps.

Amara Raja Batteries

We expect healthy volume growth across segment for Amara Raja. Due to the correction in the lead prices we expect the benefits to come through in the second half of FY19. Company has also announced the capex of Rs 540 crore for adoption of advanced stamped grid technology in automotive batteries. Also the company is in the process of increasing its 4W battery capacity to 12.5mn units.

AIA Engineering

Due to large order received in FY18, company is well placed to deliver 18 percent volume growth in FY19E. EBITDA per tonne will improve by 8 percent YoY due to decline in chrome prices, in fact there is possibility of beat to our estimates due to INR depreciation.

Apollo Tyres

Apollo is well placed to benefit from strong growth in TBR (truck and bus radial) market in India as it commands pricing premium in TBR market vs other domestic players. Hungary will start showing profit gradually in FY19 and will report strong profitability in FY19.

Aurobindo Pharma

Bag-line issues should get resolved by Q3. Ensuing quarters to remain strong given limited competition in Valsartan price hikes. Acquisition of Sandoz's derma biz to start contributing from year-1 of consolidation itself. Integration can take our estimates higher by 20 percent (annualised).

Avanti Feeds

CY18 turned out to be a very difficult year for aquaculture sector mainly due to 1) Sharp fall in the international shrimp prices, which in turn led to 25-30 percent drop in farmgate prices. 2) Key raw materials for shrimp feed i.e. Soymeal and fishmeal firmed up by 15-20 percent in CY18 which led to margin pressure for the feed companies. Though Shrimp culture in India declined by 25-30 percent in Q2FY19, but Avanti Feeds was still able to improve its feed market share to around 45 percent from 43 percent at FY18-end highlighting the strength of their business model.

As RM prices (Soymeal and Fishmeal) have stabilised now and international shrimp prices have started inching up on demand revival in USA, company would be able to improve its operating margins going ahead. After a sluggish FY19, we expect FY20 revenues/PAT to grow by around 26 /42 percent YoY.

Coal India

Demand momentum to remain strong driven by power, other sectors. Over the last few months, Coal benefitted from lower stock of pit-head coal at power plants. Many non-power sector companies which got linkages in auctions were not getting promised supplies as sales were diverted to fulfill power sector needs; however, now they should drive volume growth as extra demand from power sector eases a bit.

Fuel supply agreement (FSA) realisations see healthy growth on price hike; e-auction realisations move sharply higher: FSA realisations increased 9 percent YoY due to benefits of the Jan’18 price hike.

Gujarat Ambuja Export

GAEL, one of the leading agro-processing companies in India, with its new plant will become the largest maize processor of country (around 21 percent market share by capacity). We expect GAEL to capture incremental demand of starch and its derivatives, higher value added derivatives shall support margins going forward & also expect utilization levels of oil extraction business to improve hereon. Overall we estimate 17 /23 /20 percent revenue/EBITDA/PAT CAGR over FY17-20E.

KEI Industries

GOI's focus on developing world class infrastructure has increased significantly. With initiatives like 'DDUGJY', 'IPDS, 'UDAY', 'Make In India' and 'Housing for All' is likely to spur strong demand for wires & cables.Strong order book with excellent execution capabilities will act a key driver for EPC business.

KPIT Technologies

KPIT has approved a composite scheme for (1) amalgamation of Birlasoft with KPIT, and (2) demerger of engineering business into KPIT Engineering Limited (KEL). KPIT-Birlasoft will focus on IT services business while KEL’s shares will be separately listed and shareholders would receive one share of KEL for every one held in the merged entity. Overall the deal creates value unlocking for existing shareholders with an option to own IT services and ER&D businesses. We believe, KPIT presents an attractive opportunity to ride the Automotive ER&D story in India.

Lumax Industries

We expect Lumax EPS to grow at 30 percent CAGR over FY18-21E driven by shift towards LED from halogen lamps in automotive lighting. Company is gaining share in HMCL models as later's main supplier has not coped up with technological changes in lighting and is in financial trouble as well. With 68 percent of sales from 4Ws and 28 percent from 2Ws, company has fairly diversified portfolio.

Mayur Uniquoters

Prices of major raw materials for Mayur Uniquoters — PVC resin, plasticiser and yarn — had risen by around 15 percent in first half of FY19 due to an increase in crude prices and INR depreciation. Now with decline in crude oil prices, raw material prices have also started moderating sequentially (but still up 10-15 percent YoY) which in turn would aid gross margins going ahead in Q4.

Company has also taken a 4% price hike effective from Oct'18. Also, export volumes should exhibit a healthy growth in second half of FY19 after a decline in first half FY19 as de-stocking exercise at USA subsidiary is over.

SP Apparels

FY19 will see strong growth in garments revenues with demand from existing customers orders normalizing and new customers giving incremental orders. Garment margins will be aided by rising utilization levels and favourable currency. Retail revenues will continue its revenue growth trajectory on continuous stores additions and rise in same-store-sales growth of existing stores. Retail margins which turned positive in FY18 will further increase on strong sales growth. SPUK will see robust growth on a low base.

Teamlease Services

TeamLease is a structural and scale play on the formal employment growth in India with market leader positioning (around 6 percent market share) in a fragmented and unorganised market, coupled with asset-light and collect & pay model.

FY19 could be constructive driven by healthy pipeline and improving conversion. Pipeline build-up is being driven by vendor consolidation in few large accounts, while on-boarding of associates for a BFSI customer could help 4QFY18.

Whirlpool

Whirlpool continues to deliver strong performance on the back of continued market share gains in WM and refrigerator categories mainly at the expense of Videocon. Extreme focus on distribution network along with new product launches to plug-in the portfolio gaps are likely to act as key volume drivers for Whirlpool.

Stable margins in-light of increase in crude oil prices, rise in raw material costs and weakening of INR against USD by taking timely price hikes and cost saving initiatives. With INR/USD currently at around Rs 70 levels, we expect Whirlpool to improve profitability albeit with a lag towards Q4FY19 and Q1FY20 on the back of recent price hikes, fall in prices of crude oil & key raw materials.

Yes Bank

While bond yields have spiked up of late, we believe the spike in bond yields for financial entities will normalise in a month or two given that RBI has been proactive in managing liquidity. Also incremental lending rates have started trending up and pressure on NIMs would moderate in second half of FY19. Divergence from FY18 asset quality review and selection of new MD&CEO remains a key monitorable.

While the overhang event of key person risk has played out, we believe that at around 1.5x FY19E ABV, Yes bank offers a good upside potential from current levels.

MORE WILL UPDATE SOON!!

Market Outlook

Equity benchmarks continue to trade with high volatility and closed the week lower by more than 1% on back of weak global cues as concern over global growth lead to decline in global equities. Broader markets also witnessed profit booking after recent outperformance as the Nifty Midcap and Nifty small cap indices to close lower by 1% and 0.6% respectively. The S&P BSE Sensex closed at 35695, down by 381 points or 1% while the NSE Nifty closed at 10727, down by 133 points or 1% for the week. Among the Nifty Constituents, Asian Paints, Sun Pharma, Infratel and Bharti Airtel were the top gainers. Whereas Bajaj Finance, HCL Technology, Hindustan Unilever, L&T, ONGC, Reliance, Tech Mahindra, Ultratech Cement, Metals and Auto stocks were major draggers on the index. The weekly price action resulted in a bear candle with a long lower shadow signaling continuation of the consolidation and buying demand at lower levels. The index has been maintaining the rhythm of not correcting for more than 61.8% retracement of the last up move and time wise not correcting for more than three sessions, since October low 10005. In the current scenario, the Nifty on Friday’s session rebounded after 61.8% retracement of the last up move (10534-10923) along with two consecutive sessions of decline. So we expect the Nifty to maintain the same rhythm as in the current scenario and witnessed a pullback in the coming week. Nifty in the last three weeks has been consolidating with positive bias in the broad range of 10500-11000, lack of faster retracement in either direction makes us believe that going ahead the Nifty would continue with its current consolidation in the broader range of 11000-10500 with a positive bias amid stock specific action as we are entering the Q3FY19 result season. The broader trend in the index remains firmly bullish as index is seen forming higher bottom at the 61.8% retracement of the previous up move since October 2018 low (10005). We believe any intermediate breather towards 10550-10500 should be used as incremental buying opportunity for up move towards 11000 levels in the coming weeks being the upper band of the last three weeks’ consolidation and high of December 2018 placed at 10985. Going ahead, we believe the Nifty has strong support near the key value area of 10535-10480 region. Thus, sustenance above 10535 (on a closing basis) would aid the Nifty to form a higher base, as it is confluence of:   upward sloping trend line drawn adjoining subsequent lows of October and December of 10005 and 10334, respectively, is placed around 10530 last week's low is placed at 10535 despite multiple attempts, the Nifty has managed to end above 10480 since November 2018 amid elevated volatility The broader market consisting of Nifty midcap and small cap extended its breather after the recent outperformance We believe the corrective decline is a sign of healthy consolidation that offers a fresh entry opportunity. The improving price structure of the Nifty midcap and small cap makes us believe the broader markets would form a higher base that would augur well for next leg of up move. Results during the coming week: TCS, Infosys, Indusind Bank, Tata Elxsi, Bandhan Bank.

Important data releases in next week:

US: FOMC Meeting Minutes, Core CPI (MoM) (Dec), ISM Non-Manufacturing PMI (Dec) EU: Unemployment Rate (Nov), ECB Meeting Minutes UK: GDP (MoM) (Nov), Manufacturing Production (MoM) (Nov) Japan: Nikkei Japan PMI Services (Dec) India: Industrial Production YoY (Nov)

Previous Week Highlights

Growth for Eight core industries in November 2018 came in at 3.5%, lower than 6.9% YoY growth in November 2017. The slower growth was largely on account of a higher base decline in output of crude oil and fertiliser by -3.5% and -8.1%, respectively. The RBI has allowed a onetime restructuring of MSME loans in default as on January 1, 2019 with overall exposure per borrower not exceeding 25 crore. Banks/NBFCs will have to provide 5% additionally on the restructured loans while the restructuring has to be done by March 2020. According to media reports the central government is to announce direct benefit transfer scheme for farmers, where farmers will receive  4,000 per acre per season plus interest free crop loan up to 1 lakh per farmer. The scheme is estimated to cost the government ~230,000 crore on annual basis. The government is working on a 18,000 crore subsidy scheme to revive gas-based power plants under which it proposes to offer imported gas at subsidized rates to stranded and underutilized projects. The government is looking at subsidizing electricity tariffs by around 1.75 per unit to make it affordable at about  4.50 per unit. At present, all the nearly 25,000 MW of operational gas-based capacity is stressed because of fuel supply constraints. Brent Crude prices closed higher at about US$ 57.11/barrel as compared to previous week’s close of US$ 53.48/barrel. Gold prices ended higher at $ 1293/ounce as compared to last week's closing price of $ 1281/ounce. Bond yields also ended higher at 7.45% as against last week's closing of 7.39%. MORE WILL UPDATE SOON!!

Derivatives Strategy

Market Strategy

Nifty has key support placed at 10600 which is in proximity of highest Put base of 10500. The volatility has not seen any major jump due to writing seen in these Put strikes. We believe the consolidation to prevail above these levels. The Call OI base at 11000 has become highest and broader consolidation is expected to pan out with midcap and small caps to remain in focus. In the last couple of sessions, heavy writing was seen at near the money strikes of 10800 and 10900 for January series. Hence move above 10850 levels is crucial for fresh uptrend. The premiums in Nifty futures have remained quite high at 50-55 points. Historically it is seen Nifty enters into consolidation at such high premiums. If the global risk-off abates, the markets may eventually start moving higher. On Z-score reading of long Nifty & short S&P pair, the current score is above 3. This kind of outperformance trend by the Nifty has not been seen in over a decade. This suggests that if the US and global risk sentiments fail to recover, the Nifty could also give up its resilience trend.

Index Outlook

Bank Nifty : The volatility remained extremely high in the first week of the new year as the Bank Nifty saw sharp whipsaw on both the sides. However, it concluded the week on an optimistic note mainly triggered by fresh buying in few private bank leaders. The IV’s moved near 17% which is providing more head-room for OTM option writing. Open interest in Bank Nifty at the inception of the series was one of the lowest since August 2014. As the week progressed fresh OI additions of 24% was seen supported by positive Delta. However, premiums continued to remain high for Bank Nifty future which is indicating towards possible consolidation in coming weeks. Call OI blocks is seen in 300 Call strike of SBI. Same activity was also seen in few private banks which is likely to keep the index move in check. OI concentration remains high in 27500 strike Call and once the index manages to close above this levels, short covering trend can be seen. However, weekly low near 26900 is likely to be the strong support area.

Derivatives strategies

Weekly future recommendation:

Sell Hindustan Unilever (HINLEV) January future in range of 1785-1790. Target: 1705 Stop Loss: 1840

Adverse global news flows has pushed a bout of profit taking in Nifty as well, with the Index falling to its key support of 10600. While there is continued support from banking and financial space, there is fatigue seen in the FMCG space. Sectoral leader, Hindustan Unilever, is also struggling to move past 1840 levels. The current OI in the stock of 10.4 million shares has making of higher leverage (as the current OI is one of the highest in trailing 1-yr). As a large part of these positions were created above 1780 levels, decline in the stock is likely to trigger leverage based closure, pushing the stock lower. MORE WILL UPDATE SOON!!