Crude oil, rupee, earnings to dictate market trend; these 10 stocks can give 28-94% returns

Higher crude oil prices and the rupee’s weakness will continue to dampen sentiment putting pressure on the fiscal deficit and bond yields in the short term.

  

Nifty, which continued to correct on Monday, has fallen nearly 4 percent from its three-month high of 10,900 that it hit earlier this month.

Rising crude oil prices, weaker rupee, weak corporate earnings and the political uncertainty in Karnataka dented the market sentiment.

Experts believe the consolidation is likely to continue for a while as investors will closely monitor the movement of oil prices and rupee, and the remaining corporate earnings.

We expect the Indian markets to remain rangebound in the coming sessions. Further course of market would be dictated by global developments, crude oil price and currency movement in near term.

However, stock-specific volatility would continue with on-going corporate earnings season, he feels. "We would advise investors to accumulate quality companies on dips."

Vikas Jain, Senior Research Analyst, Reliance Securities also said one would have to be very selective in the approach towards individual stocks from the current levels as lot of macros are changing with respect to higher crude prices and rupee weakness against the greenback.

Higher crude oil prices and the rupee’s weakness will continue to act as dampener putting lot of pressure on the fiscal deficit and bond yields in the short term, he feels.

Here is the list of top 10 stocks that can return between 28 percent and 94 percent in 10-24 months period:

Aurobindo Pharma: Buy | Target - Rs 909 | Return - 61%

Aurobindo received VAI status from USFDA post the company's adequate address of the concerns on the Bhiwadi plant. The assigned status by USFDA is positive development for ARBP as the status implies that the plant is unlikely to receive warning letter.

ARBP filed ANDAs on four Penems from the plant and currently supplies only Meropenem (market size: $98 million) to US and multiple Penems to emerging markets. There are three Penems of ARBP are under review including Doripenem (market size: $2 million), Ertapenem (market size: $383 million) and Imipenem/Cilastatin (market size: $18 million).

With Apotex recalled 36 lots of Tazo-Pip (3.375gm and 4.5gm/vial) in US due to elevated levels of impurities, there could be a possibility of Aurobindo to boost its Rx share in Tazo-Pip in near to medium term. While the recalled lot size is too small to assume market share expansion in near term, the ongoing organisational disarray in Apotex (promoted died with no heir apparent, CEO resigned with no captain in the ship) may led to the lower supply from Apotex or regulatory scanning from USFDA due to lingering of the issue.

Currently, Aurobindo produces Tazo-pip from Unit-12 and newly inducted Unit-16. Aurobindo received revenues of $22 million from Tazo-Pip in FY17 and expected to have revenues of $30 million in FY18E. While it will be too early to discount the possibility in earnings estimates, Aurobindo's 9 percent Rx share in Tazo-Pip may gain from 16 percent Rx share of Apotex going forward. We maintain Buy and retain target price at Rs 909.

UltraTech Cement: Buy | Target - Rs 4,989 | Return - 29%

UltraTech Cement has announced it will be acquiring the cement business of Century Textiles in a share swap deal.

In the near term, the deal will depress UltraTech margin, as its EBITDA per tonne is Rs 970 in FY18 versus Century Textiles’ Rs 445 (blended, including clinker volume). As Century Textiles’ cement book value is low (net block of Rs 2,400 crore, i.e., $27), depreciation burden is likely to be less. Thus, the deal would be EPS-accretive.

Our analysis indicates the deal could add Rs 5.5 to EPS by FY21E, i.e., the second year after completion of acquisition (we assume savings of 10 percent in fixed cost, 6 percent reduction in freight cost, reduction in cost of debt by 75bp and transfer fees of Rs 64 per tonne with a volume CAGR of 7 percent over FY18-21E).

After factoring in the acquisition in FY20 numbers (the first year), we upgrade EPS by 1 percent and target price by 2 percent to Rs 4,988. We upgrade rating to Buy from Accumulate due to 7 percent price correction since 25-Apr-2018.

Birla Corporation: Buy | Target - Rs 1,100 | Return - 51%

We believe the company will gain pricing power in the central region, accounting for 56 percent of overall capacity on limited capacity additions.

Cost structure also is expected to improve, as the company will be reducing the purchase of power from the grid in Reliance Cement (RCCPL) by installing a waste heat recovery system (WHRS) and use of alternative fuels.

Apart from this, a strong pipeline of capacity addition would ensure it will grow faster than the industry. Thus, we reiterate Buy rating on the stock with a revised price target of Rs 1,100 from Rs 1,229 based on enterprise value per tonne of USD 110 on FY20E capacity.

JBM Auto: Buy | Target - Rs 560 | Return - 45%

We believe, JBM Auto's core sheet metal business (body-in-white and chassis) will continue to deliver strong earing growth helped by 1) Accelerated growth in passenger vehicle's segment, 2) Increasing revenue from Ford, Tata Motors, M&M, RE, HMSI and VECV, 3) benefits of operating leverage.

Also, strong order book of tooling division business will boost margin and profitability. Moreover, proposed amalgamation of its subsidiary JBMAS and JV JBMMA into a single entity will be synergetic and EPS accretive.

We reckon 35 percent PAT CAGR over FY18-FY20E; fuelled by improving operating leverage, richer product mix and acquisition of new clients. We value stock at Rs 560 (18x FY20E EPS) and maintain Buy.

KEI Industries: Buy | Target - Rs 580 | Return - 29%

KEI Industries posted strong turnkey revenue, leading to 17 percent revenue beat in Q4FY18. Bottomline also surpassed estimate around 30 percent. Key

highlights: a) Q4 & FY18 cables volume grew around 18 percent—reasonable in light of tepid housing demand—attributable to KEI’s diversified business, & is better than peers; and b) exports (up 21 percent YoY) & extra high voltage (EHV; up 65 percent YoY) helped KEI outpace peers, driving overall utilisation above 90 percent.

We revise up FY19/20E EPS 4/6 percent factoring in higher growth. We believe, strong return on capital employed (RoCE) and earnings spurt will be complemented by rising B2C traction driving free cash flow over FY18-20. Maintain Buy with revised target price of Rs 580 (Rs 550 earlier).

Dollar Industries: Buy | Target - Rs 656 | Return - 66%

Stewart & Mackerch Research iniates coverage on Dollar Industries (DIL) with a strong Buy rating.

It has a wide range of men's, women's and kids' innerwear. It has been given the status of an “export house” by the government of India.

On the back of favorable policies by the government towards development of businesses in India coupled with aggressive organic and inorganic growth, Dollar Industries is expecng a healthy growth of 15-20 percent per year for a period of 5 years. Aggressive brand building exercises would lead to the Company accruing 15 percent EBITDA in a period of next 3 years.

Internet penetration and urbanisation are the key areas which Dollar Industries is targeting in order to carve out a market share in the premium and super-premium segments with the help of e-commerce, modern outlets, and EBO models. The company is radically trying to change the way it operates by transforming itself to a value-driven, innovation inspired, asset light and brand powered company.

We assign a P/E(x) multiple of 36.10 on FY20E EPS, to arrive at a target price of Rs 656.

Brokerage: SMC

ONGC: Buy | Target - Rs 261 | Return - 41%

The company achieved good performance during Q3FY18 and management expects demand for crude oil would continue to rise from the strong consumption growth in petroleum products and prices are expected to firm up sharply.

It is expected exploring and other activities would get benefit from free pricing, strong demand and stabilising capacity additions, thus we expect the stock to see a price target of Rs 261 in 8 to 10 months time frame on a target expected P/E of 11x and FY19 (E) earnings of Rs 23.75.

Tata Chemicals: Buy | Target - Rs 941 | Return - 28%

The company’s cash-cow business – soda ash and sodium bicarbonate – has been performing well across geographies. Apart from that, the company has begun focusing on growing other segments, as evident from the launch of new products under pulses and expected commissioning of the HDS plant in FY19 and of the nutraceuticals plant in 1HFY20.

We largely maintain estimates, and expect Tata Chemicals to deliver 10 percent revenue CAGR and 7 percent PAT CAGR over FY18-20E. We value Tata Chemicals on an SOTP basis to arrive at a target price of Rs 941. Maintain Buy.

Suven Life Sciences: Buy | Target - Rs 350 | Return - 94%

Analysis indicates company’s earnings have reached a sustainable base and will continue to improve on this base going ahead. We expect the core CRAMS base (Core CRAMs around 13 percent CAGR FY14-18) coupled with the commercial/pre-commercial supplies that have started ramping up company is on better earning trajectory.

One more molecule addition to commercial phase further enhances FY20E earnings outlook. However, FY19E consolidated number would see higher R&D spend as the SUVN 502 phase II trials are expected to conclude (remaining R&D spend of $10 million would be spilled over FY19E and FY20E, which larger portion in FY19E.

With one of the best management with a focus on NCE development, this investment adds a huge option value from its current NCE pipeline called SUVN 502 (in Phase II A, trials ongoing). We have a Buy rating with to 20xFY20E EPS, resulting in target price of Rs 350.

Newgen Software Technologies: Buy | Target - Rs 500 | Return - 94%

Newgen Software Technologies is a software products company offering a platform that enables organizations to rapidly develop powerful applications addressing strategic business needs.

Newgen is currently trading at 22.9x FY18 P/E, which is reasonable in our view, given strong growth prospects. It has healthy balance sheet & scalable business model. Company continues to strengthen the horizontal product platform with vertical service accelerators.

We strongly believe Newgen can drive innovation and adopting solutions in line with rapidly evolving technological trends. Considering the above, along with the growth drivers; we recommend a strong Buy to investors with a target price of Rs 500 with duration of 18-24 months.

MORE WILL UPDATE SOON!!

Time to sell Nifty in range of 10,500-10,600; next target placed at 10,325

Considering the technical and derivative evidence discussed above, we believe that the trend of the Nifty has turned bearish for the short term.

   

The Nifty50 has been falling for the last 5 straight sessions with a total fall of 423 odd points from the recent high of 10,929, registered on 15th May 2018.

After forming a bearish “Gravestone Doji” candlestick pattern on the daily charts on 15th May 2018, Nifty has now breached the crucial support of its 20-days and 50-days EMA, to close at 10,516 on Monday.

In the previous week, Nifty formed bearish “Engulfing pattern” on the weekly charts. This bearish pattern is now confirmed, as Nifty witnessed a follow-up selling during the first session of this week.

The relative strength index or the RSI oscillator has formed a negative divergence and has reached below the benchmark level of 50 on the daily charts of Nifty, indicating a negative trend.

MACD indicator has shown negative crossover on the daily charts. The Nifty has also closed below the previous bottom on the daily chart.

The next support for the Nifty is seen at 10,440 and 10,325, which happens to be 50 percent and 61.8 percent retracements of the entire upswing seen from 9,951 (23rd Mar 2018 bottom) and 10,929 (15th May 2018 Top).

From the Derivative perspective:

During the last week, long unwinding is seen in the Nifty and Bank Nifty Futures’ where Open Interest in the Nifty and Bank Nifty fell by 2 percent and 9 percent with Nifty and Bank Nifty falling by 2 percent each.

The Nifty open interest Put call ratio (PCR) has fallen to 1.30 levels from 1.66 levels seen a few days back. This fall in the Nifty Open Interest Put call ratio is largely on the back of Call writing at 10,600-10,700 level.

On the higher side, Nifty is likely to find immediate support in the vicinity of 10,450-10,500 level, where Puts have been written earlier.

Foreign institutional investors (FIIs) created fresh shorts in the Index Futures’ segment during the last week, where they net sold contracts worth Rs 1,240 crore with open interest going up by 38,675 contracts.

In the Stock Futures’ segment too, FII created fresh short positions in the stock Futures’ segment where they net sold contracts worth Rs 908 crore with open interest going up by 48,987 contracts.

In the Option segment too, FIIs net bought 41,840 contracts of Index Puts and sold 13,281 contracts of the Index Calls, suggesting they are creating bearish positions in the Index Option segment too.

Considering the technical and derivative evidence discussed above, we believe that the trend of the Nifty has turned bearish for the short term.

We advise traders to remain short and utilize any pullback in Nifty to create fresh short positions. The ideal range of shorting Nifty would be 10,550-10,600. Targets for the Nifty short are seen at 10,440 and 10,325 and keeping a stop loss above 10,700 on a closing basis.

Here is a list of top three stocks which could give up to 9.5% return in the short term:

Wipro: Sell| Target: Rs 245 | Stop-loss: Rs 280 | Return 7.5%

Despite being a part of the IT sector which is clearly outperforming in the current market scenario, Wipro has failed to perform and is weakening further on the charts.

On the weekly charts, the stock has confirmed a breakdown from the bearish head and shoulder pattern. The stock is currently trading below its 50, 100 and 200-DMA, indicating a bearish trend on all time frames.

The stock price has been forming lower tops and lower bottoms on the daily charts. We recommend selling Wipro for the downside target of Rs 245, and keeping a stop loss above Rs 280.

Apollo Hospitals: Sell| Target: Rs 890 | Stop-loss: Rs 1,050 | Return 9.5%

The pharma and healthcare sector has been underperforming for the last 3 years and the Nifty Pharma index has reached its new 52-week low recently.

Apollo Hospitals has also been showing weakness on the short to medium term charts. On the weekly charts, the stock has confirmed breakdown from its bearish head and shoulder pattern.

The stock is currently trading below 50, 100 and 200-DMA, indicating a bearish trend on all time frames. Oscillators like RSI, MACD, and DMI have been showing weakness on the charts.

We recommend selling Apollo Hospitals for the downside target of Rs 890, and keeping a stop loss above Rs 1,050.

Bharti Airtel: Sell| Target: Rs335 | Stop-loss: Rs 380 | Return 7%

Telecom sector has been struggling for the last many years and the underperformance is likely to continue in the coming times also.

The stock price has recently breached the crucial support of double bottom placed at Rs 375 on the daily charts. On the weekly charts, the stock has confirmed breakdown from the bearish head and shoulder pattern.

The stock is currently trading below 50, 100 and 200-DMA, indicating a bearish trend on all time frames. Bearish Death crossover setup was witnessed recently on the charts, as 50 and 100 DMA reached below 200-DMA.

Oscillators like RSI, MACD, and DMI have been showing weakness on the charts. We recommend selling Bharti Airtel for the downside target of 335 and keeping a stop loss above Rs 380.

MORE WILL UPDATE SOON!!

SBI likely to report loss in Q4FY18 on rise in provisions, NPAs

Gross NPAs may jump to 11.5 percent (from 10.35 percent in Q3FY18), while net NPAs are likely to rise to 6.1 percent (5.61 percent in Q3FY18) of total loans.

  

country’s biggest bank, is likely to post a loss of Rs 1,270.5 crore for the January to March quarter in FY18, pinched by deterioration in asset quality and surge in provisions towards the same.

The loss is projected by a Reuters’poll in comparison to a net profit of Rs 2,814.82 crore in the same quarter a year ago.

SBI's Q4 financial results for FY18 will be announced post 12 pm on Tuesday and Chairman Rajnish Kumar along with the bank's management will address the media around 2.15 pm.

In the December quarter, SBI had posted a surprise net loss of Rs 2,416 crore after its gross non-performing assets (NPAs) jumped to 10.35 percent of total loans, highest in over 15 years.

For the quarter under review, provisions towards likely losses in its bond portfolio due to rising government bond yields and further additions due to the Reserve Bank of India’s (RBI) revised bad loan framework may hit the lender’s bottomline.

Provisions towards bad loans during the quarter are estimated to rise by 26 percent to Rs 14,834 crore, up from Rs 11,740 crore in the corresponding quarter last year.

SBI's total stressed pool as on December end 2017 stood at Rs 50,482 crore.It remains to be seen if all of this may slip into NPAs.

Stressed assets include its watchlist of potential bad loans, the accounts under SDR, S4A and 5/25 restructuring schemes among others.

Asset quality

Caught by the heavy storm of NPA clean-up by the central bank and the insolvency accounts leading to higher provision requirement, reports suggest that SBI could see more stress in its loans for the last quarter of FY18.

A Motilal Oswal report, pegs its gross NPAs at 11.5 percent of total loans as on March end, as against 10.35 percent in the previous quarter and 9.1 percent in the year-ago quarter.

Net NPAs are also likely to worsen to 6.10 percent as on March end 2018 from 5.61 percent in December quarter and 5.19 percent in the March quarter in FY17.

Motilal Oswal’s projections show SBI is likely to report a net loss of Rs 1,651.8 crore for Q4FY18.

“Even relatively better-managed PSBs such as SBI and BoB are likely to see soft credit growth, but the elevated incremental stress is likely to be hemmed in by seasonally strong recoveries,” said a report by Sharekhan.

Gross NPAs, in absolute terms, may rise by Rs 39,200 crore to Rs 2.17 lakh crore from a year ago period, while net NPAs are set to rise by Rs 18,700 crore.

“We expect credit cost to remain elevated, led by continued stress additions and focus on shoring up provision coverage ratio (PCR),” said the Motilal Oswal report.

Credit costs (ratio of provisions set aside to the total loans) for the first nine months of FY18 stood at 3.18 percent, while in Q3 it was 3.64 percent.

Loan, deposits and interest income growth

Total loans or advances growth is likely to remain flat at Rs 18.93 lakh crore while deposits are likely to grow by a marginal four percent to Rs 26.88 lakh crore.

Net interest income (NII), the difference between interest earned on loans and paid on deposits, is likely to increase by 6.7 percent to Rs 19,286 crore as against Rs 18,070 crore a the fourth quarter in FY17, Reuters' poll estimated.

Non-interest income or other income is projected to remain nearly flat or edge lower to Rs 10,228 crore as compared to Rs 10,327 crore.

Full year

For the full year ending March 2018, SBI is expected to report a loss of Rs 405 crore versus a profit of Rs 1,048 crore in FY17.

Provisions for FY18 will substantially rise by 70 percent to Rs 61,146 crore from Rs 35,993 crore.

SBI caters to roughly one out of every three customers in India and accounts for almost 23 percent of total loans in the country.

On Monday, SBI's shares ended higher by 2.45 percent to Rs 245.10 apiece as compared to a 0.67 percent fall in BSE Sensex.

Key things to watch out:

1. Outlook on NPAs and Insolvency accounts and progress


2. Loan and deposit growth guidance


3. Updates on completion of one year since the mega SBI merger


4. SBI Chairman’s views on the ongoing NPA clean-up post the revised framework for the industry


5. Capital raising plans.
6. 
   

MORE WILL UPDATE SOON!!

These five stocks could offer up to 8-14% returns in the short-term

Nifty’s previous support of 10,600 will act as immediate resistance. Any bounce back is likely to be capped at 10,670-10,700 levels.

  

Despite positive global cues market closed in the red for the fifth consecutive session on Monday, with the Nifty closing at 10,517 levels, down 80 points for the day.

The broader markets saw deeper cuts with BSE Midcap and Smallcap indices losing 1.64 percent and 2.2 percent, respectively. Market breadth was in favour of declines with a 1:4 advance-decline ratio on the NSE.

The Nifty has broken below its support level of 10,600 levels on the downside and formed another bearish candlestick for the day. Now, its next support is placed at 10,440-10,460 levels. Here the 50 percent retracement of the entire rise from 9,952 to 10,929 levels and 50-day moving average supports are seen.

In Nifty options, maximum open interest in puts is seen at the strike price of 10,500, suggesting support around 10,500-10,450 from where a bounceback may be expected.

In call options, a significant amount of open interest addition was seen in 10,600, followed by 10,700 and 10,650 levels.

Now the previous support level of 10,600 will act as immediate resistance for the market. Beyond that, any bounceback is likely to be capped at 10,670-10,700 levels.

Here is a list of top five stocks that could return up to 8-14 percent in the short-term:

Berger Paints: Buy | CMP: Rs 285 | Stop loss: Rs 272 | Target: Rs 325 | Return 14%

The stock has been consolidating at higher levels between Rs 285 and Rs 230 odd levels for the past one year. For the past couple of weeks, the stock has witnessed above average volumes and positive price movement indicating buying participation in the stock.

In the last one-month, the stock has formed higher lows indicating buying coming in at higher levels. Currently, the stock is trading around at its all-time high levels and generally post the breakout price continue to rally.

The relative strength index or the RSI has turned up after taking after support from its average. The Daily MACD has given a positive crossover with its average above the neutral level of zero suggesting the stock is likely to see a breakout on the upside.

Thus, traders can buy the stock at current level and on dips towards Rs 280 with a stop loss below Rs 272, and a target of Rs 325 levels.

Dabur India: Buy | CMP: Rs 373 | Stop loss: Rs 360 | Target: Rs 410 | Return 9.9%

The stock is in a long-term uptrend and has been forming higher tops and higher bottoms on the weekly chart. It witnessed a correction in late January to March this year from Rs 369 to Rs 312 levels.

The recovery from the low has been fast and the momentum took the stock to a new all-time high of Rs 383 this month.

Above average volumes at the bottom and subsequent bounce back indicates accumulation in the stock at lower levels. The stock has been trading in a range of Rs 383 and Rs 365 levels for the past three weeks consolidating its gains above its previous all-time high levels.

Thus, the stock can be bought at current level and on dips up to Rs 370 with a stop loss below Rs 360 for target of Rs 410 levels.

Persistent Systems: Buy| CMP: Rs 803 | Stop loss: Rs 760 | Target: Rs 910 | Return 13%

The stock touched a high of Rs 878 in the month of February and then declined to hit low of Rs 657 levels. The rally in the month of April has been good volumes indicating buying participation.

The price has retraced 61.8 percent Fibonacci of the whole decline and is now consolidating in a range of Rs 825 to Rs 760 odd levels for the last three weeks.

The stock has been finding support at its 21-day exponential moving average and has been holding above it which is a positive sign.

The weekly MACD has given a positive crossover with its average above neutral level of zero suggesting consolidation phase is over and the stock is likely to start an uptrend.

Thus, the stock can be bought at current levels and on dips up to Rs 790 with a stop loss below Rs 760 and a target of Rs 910 levels.

Ajanta Pharma: Sell | CMP: Rs 987 | Stop loss: Rs 1,030 | Target: Rs 900 | Return: 8.8%

The stock has formed a major bearish head and shoulders reversal pattern on its monthly chart. The price has witnessed a breakout on the downside from pattern. The volumes have been above average and price erosion in last three weeks indicating selling pressure in the stock.

Weekly ADX line has turned up after being flat for the last four months indicating strength in a downtrend. The weekly MACD too has moved below neutral level of zero indicating a resumption of the downtrend. Any bounce back is a shorting opportunity in the stock.

Thus, the stock can be sold at current levels and on the rise up to Rs 1,000 with a stop loss above Rs 1,030 for a target of Rs 900 levels.

Indiabulls Housing Finance: Sell | CMP: Rs 1,108 | Stop loss: Rs 1,150 | Target: Rs 1,010 | Return: 8.8%

The stock has formed a bearish head and shoulder reversal pattern on its weekly chart. Last week, the price witnessed a breakout from the pattern on the downside.

The price has also given a breakout from the Bollinger bands with the expansion of bands on the weekly chart suggesting the trend likely to continue on the downside.

The weekly MACD line has moved below the neutral level of zero suggesting further downtrend. Thus, the stock can be sold at current levels and on the rise up to Rs 1,120 with a stop loss above Rs 1,150 for a target of Rs 1,010 levels.

MORE WILL UPDATE SOON!!

Rupee heading towards the elusive 70-mark? Macros and technicals suggest it could

US President’s decision to re-impose sanctions on Iran will not only hit the dynamics of the global oil trade, it will also force India to revisit at its ties with the Middle Eastern oil nations.

   

USD-INR at 70 — a new normal can be seen in early 2019. This could sound a little far-fetched at this point, but in continuation of our previous report dated April 24, 2018 — where we had underscored the possibility of steep depreciation towards 67.50 & 68.00 levels, we now highlight the key fundamental & technical factors in this report that could trigger the next leg of up move.

After a protracted period of carry dominated by low volatility, USD/INR sprang to life in the last fortnight, breaking through the crucial resistance of 65.35. The depreciation has been steep since then, making rupee one of the worst performing currencies among EMs. Much of this upmove was on the back of domestic factors.

With broad-based USD turnaround also looking likely, macros and technicals are stacked against the rupee. Now is the right time for treasuries to restratagise and reconsider their hedging options. It is important to be agile to the regime change due to changing macros and avoid getting into the trap of anchoring bias.

US President Donald Trump’s decision to re-impose sanctions on Iran will not only hit the dynamics of the global oil trade, it will also force India to revisit at its ties with the Middle Eastern oil nations. The only option as a solution for this is to switch to rupee trade.

In reaction to this, Crude oil (WTI) jumped sharply above USD 72 mark. Uncertainty as to who will form the government in Karnataka is also weighing on the Rupee.

Our exports have not picked up in line with the strength in the global economy. The recent trade deficit on a seasonally adjusted basis was higher than USD 15Bn. At this rate, the current account deficit for FY19 is likely to be around USD 80-90 billion.

While this is significantly higher than USD 20-30 billion seen in recent years, there are concerns over whether the capital inflows would continue that could fund this CAD. FDI inflows, too, seem to be waning.

Lack of confidence in the RBI policy due to recent flip-flops has seen FPIs withdraw USD 2.2 Bn from the debt markets in just a few sessions.

With US rates heading higher, the capital account flows in FY19 are not expected to be anywhere close to what we have seen in recent times. The last time we saw our BoP in this situation, was in 2013 when Rupee had depreciated from 58 to 68 levels within a very short span of time.

Though the RBI has accumulated significant reserves since then, in terms of coverage of our external debt, the ratio continues to remain the same, which is why any escalation in capital flight from EMs can spook the Rupee. There is no reason why we cannot see a repeat of 2008, 2013 kind of a situation. In early of this month, NDF market was seen trading as high as 66.25 after RBI’s move to relax ECB norms and restrictions on FPIs to hold shorter-term government papers.

But after revision in corporate investment holding limit (Capped at 20%) and a stronger dollar, rupee erased all its gains. RBI announced that they will purchase government bonds worth 10,000 crores on 17th May under open market operations (OMO). This will likely soothe the nerves of the G-sec yield as their auction got partly devolved. By doing so it would sterilize the liquidity it would suck out as a result of intervening in FX market to halt rupee depreciation.

In a scenario of rising US rates and rising domestic inflation, the RBI is expected to hike rates later this year. Current OIS prices are factoring in 2 hikes by end of FY19. Domestic core inflation has been sticky and if inflation surprises further on the upside, the real rate differential between US and India could narrow, resulting in capital flight. The RBI may have to hike rates in order to combat this.

Technically, the DXY has broken through the key resistance at 90.60 and has broken a weekly trend line. This is pointing towards a reversal in the USD Dollar against majors. On the Rupee, break of 65.35 was a significant breakout.

The first major resistance that the market was seeing was 66.65-70 (from where the rupee had gapped down post the UP election results). With that break, there is almost no technical level in sight till the previous high of 68.90. Further higher degree wave will finish its final leg around 70.00 mark.

The spread between offshore and onshore forward points was at its widest in recent times (8-9 paise) indicating massive unwinding of offshore carry positions. Three-month carry to vol ratio has declined significantly but not as much as is usually seen in times of panic which indicates there could be a further strain on the Rupee.

The difference between one month and three-month At-the-money forward or ATMF vols has also declined. Flattening of the vol curve has resulted in steep depreciation in the Rupee in the past of the order of 5-6 percent.

Seasonality chart of Rupee also validates the quote: “Sell in May and Go Away”. Out of past 10 years, Rupee was seen depreciating for 8 times at an average rate of 1.73%. June too has historically been a weak month for Rupee and a rewarding month for USD bulls.

It is important to note the above macroeconomic shifts and recalibrate hedging strategy accordingly. Exporters are advised to tread cautiously while availing USD funding as large MTM (in case of steep Rupee depreciation) can result in LER limits being blocked.

In a situation where US interest rates are heading higher and USD/INR too, it is important to manage the risks associated with long-term USD borrowings as well. For receivables/payables, hedging through options can give better flexibility and an opportunity to participate in case Rupee depreciates steeply.

Exporters can consider buying plain vanilla ATMS puts. Though expensive, it can be richly rewarding if Rupee depreciates steeply from here on. Importers are advised to buy Risk reversals i.e. buy ATMS calls and sell OTMS puts or can even consider hedging outright through forwards with a trailing stop loss strategy.

The threat of known unknowns in the form of trade wars and geopolitical risks cannot be overlooked. The imposition of sanctions on Iran by the US could result in a further rally in crude prices.

Escalation of trade tensions between US and China could possibly be a big negative for the global economy. On the domestic front, political drama in Karnataka will be closely tracked. Therefore, the triggers are in place for an extended move up in USD/INR from current levels and it is important to position appropriately to get the most out of this up move.

Conclusion:

In a nutshell, fundamental factors described exclusively in above report suggest that there is further room for the rupee to depreciate against the US dollar. After breakout above 65.35 levels, we have seen that the USDINR pair is convincingly trading above 2 std. deviation on a weekly basis. There are triggers for the volatility to remain elevated for an extended period of time.

The pair can be seen moving further towards its all-time high of 68.90 by the end of this year and extension of the bullish leg beyond this level could take the pair higher towards 70 mark by a 1st quarter of 2019.

MORE WILL UPDATE SOON!!

See Nifty in 10,500-10,800 range till May-end

We believe the 10,500-10,800 range is likely to continue till the month-end, which coincides with the May settlement.

The Nifty has remained under pressure after testing the 10,900 mark. Call writing was seen at 10,800 which should keep the index below this level for some more time.

The major problem seems to be stock-specific selling pressure, which has been increasing whenever the index slips from higher levels.

Historically, sharp rupee depreciation within a short period has led to a decline in stock markets. However, this time stocks are seeing more selling in comparison to the index. Only certain Nifty heavyweights were able to support the index.

10,500-10,800 range on the Nifty is likely to continue till the month-end, which coincides with the May settlement.

The ongoing result season is also impacting stock moves. Stocks which posts better-than-expected earnings are getting rewarded with strong price performance, a sign that the market is not totally in a bear grip yet.

FII outflows have continued though DII inflows have been supportive. Major outflow is seen in the debt market where outflows have been more than double that of equity markets. This is also leading to higher bond yields and rupee depreciation.

Bank Nifty likely to slide towards 25,500 levels

After outperforming in the past few weeks, the rally in the Bank Nifty finally paused after gaining nearly 1,500 points in just two weeks. The index found it difficult to sustain and move above 26,900, which resulted in a sharp reversal in the index.

Karnataka election cliff-hanger, rising dollar against the rupee and higher global crude oil prices raised concerns about macros, which piled on pressure on the index.

Apart from HDFC and Kotak Mahindra Bank, all major public sector (PSB) and private sector banks witnessed selling. A fresh round of shorts has been seen forming in the PSB pack, indicating limited upside for the index.

Any major bounce should be used to create fresh short positions. As the index has slipped below the crucial support of 26,000, call writers have shifted their positions lower to 26,000 and 26,200 strikes from 26,500 strikes. The only strike where sizeable additions were seen was 25,500 Put, indicating further downside in the coming days if the index continues to hold below 26,200.

The current price ratio (Nifty/Bank Nifty) has been hovering near 2.43 levels. As the Bank Nifty has been outperforming the broader indices since the past few weeks, we feel the index is likely to extend its profit booking trend, which may pull the ratio lower towards its previous support levels of 2.39.

Higher benchmark bond yields in the US weigh on EMs

The risk environment remained adverse for most emerging markets as US yields and crude oil continue to remain at elevated levels. MSCI Emerging Market index is down almost two percent last week.

Weaker currencies, as well as risks over rising debt, led to profit-booking in EMs. US treasury yields tested the 3.11 percent mark, the highest since 2011, on the back of rate hike prospects.

Sharp equity outflows were witnessed in EMs - South Korea ($572 million), Malaysia ($375 million) and Indonesia ($193 million) - last week. Taiwan was the outlier with inflows of over $188 million.

Korean peninsula concerns linger as North Korea has threatened to pull out of scheduled historic meet between US President Donald Trump and North Korean leader Kim Jong-un over a US-South Korea’s joint military drill.

In futures and options, some short closure was seen in options segment, in the run-up to Karnataka state elections. Domestic inflows to the tune of $450 million, however, remained intact, helping to limit sharp declines in equities.

Domestic yields have retraced from about 7.92 percent levels to 7.81 percent at present. Higher yields have also led to sharp outflow redemptions from domestic debt segment.

Venezuela election outcome, as well as move in crude oil prices, remain factors to be watched out in the near-term. Any decline in crude oil prices could weigh on the dollar as well as provide support to emerging market debt.

Rupee roils over Karnataka political turmoil

The Dollar index tested its highest levels in 2018 as rising US 10-year bond yields and relatively less hawkish major central banks supported the dollar versus other major currencies. The US 10-year benchmark treasury yields tested 3.11 percent last week, its highest since 2011.

The euro lost sharply against the dollar losing almost 1.17 percent while the Japanese yen lost almost 1.42 percent. EUR:USD is at the supports of 1.18 level while JPY:USD could decline till 112 as the Bank of Japan remains one of the last major central banks continuing its accommodative monetary policy stance.

The rupee extended its losses for the sixth straight week against the dollar, falling below 68.10 levels, its lowest since January last year. USD:INR has supports near 67.70, while 68.50 is a crucial near-term resistance. Any decline in crude oil prices could see some recovery in rupee losses.

MORE WILL UPDATE SOON!!

BSY's exit, crude may take Nifty to 10,400; here’s where you should park your funds

Investors are advised to stick to companies with stable, steady and visible earnings growth.

  

Political drama emerging out of Karnataka as well as boiling crude oil prices, which are hovering near the $80 a barrel, are enough to take the Indian market lower. The latter has already plunged over 300 points from the recent highs of 10,930 recorded on May 15.

The market might have factored in a non-BJP government in Karnataka to some extent but worsening macros is something which might have larger ramification for markets, experts suggest.

The incumbent Chief Minister for two days, BS Yeddyurappa resigned from his post on Saturday and the governor invited Congress-Janata Dal (Secular) alliance to form the government. HD Kumaraswamy will be sworn in as Chief Minister of Karnataka on May 23.

Expects markets to open negative on Monday. Worsening macros as well as opposition unity can have an impact on markets. The Nifty which has already broken key support levels last week could well head towards 10,400 levels in the next two weeks.

A slip towards 10,400 from current levels translates in a fall of nearly two percent, or about 200 points, from current levels. “Mid and smallcap stocks are already facing the heat and over 250 stocks hit a fresh 52-week low on Wednesday. Hence, the market could remain under pressure for some more time.

Commenting on the ongoing fall in the markets which resulted in the Nifty breaching 10,600 levels, Ajay Bodke, CEO and Chief Portfolio Manager PMS at Prabhudas Lilladher, said as the Bharatiya Janata Party (BJP) failed to prove its majority in Karnataka, the sharp correction that is underway is likely to gather momentum.

Investors are advised to stick to companies with stable, steady and visible earnings growth in sectors such as retail-focussed private banks, fast moving consumer goods (FMCG), retail, and automobiles. Investors need to tread with caution in sectors such as aviation, logistics, oil marketing companies (OMCs) and tyres.

Oil prices fell on Friday, but Brent crude marked its sixth straight week of gains, boosted by plummeting Venezuelan production, strong global demand and looming US sanctions on Iran, a Reuters report stated. Brent crude futures fell 79 cents, or one percent, to settle at $78.51 a barrel. The global benchmark on Thursday broke through $80 a barrel for the first time since November 2014.

Impact of the Karnataka political outcome will be short-lived. This is unlikely to impact the prospects of the National Democratic Alliance (NDA) in the 2019 general elections. Of immediate concern to the market will be the impact of crude at $80/bbl on inflation, interest rates, exchange rate and the GDP growth rate.

The market upside capped with the macros turning unfavourable on account of the crude spike. “If crude continues to rise and crosses $85, there will be a sell-off in the market. Otherwise, the market will remain rangebound.

The recent sell-off in small and midcaps will continue for a few more days due to the mutual fund restructuring. This will also provide opportunities to buy some quality small and midcaps.

As many as 168 stocks on the NSE hit a fresh 52-week low on Friday. These include: Crisil, Ceat, ACC, ABB India, Jet Airways, Bharti Airtel and DB Corp. On the BSE, as many as over 250 stocks hit a fresh 52-week low including: Ajanta Pharma, KPR Mills, Strides Shasun, Cadila Healthcare, LIC Housing Finance, and Tata Motors.

Technical view

The Indian equity market fell for the fourth consecutive session on the backdrop of political uncertainty, and deteriorating geopolitical climate, and rising crude prices.

The Nifty took a breather despite a positive opening on Friday and fell below its crucial support of 10,650-10,600. It closed at 10,596, down about two percent on a weekly basis.

With a negative breakout from its short-term moving average, the index formed a long bearish candlestick pattern on the daily price chart, indicating sustained pressure for the index. It signalled negative strength from the secondary indicator, with its weekly RSI slipping to 55 levels.

The market breath is in a negative trajectory. “Rising crude oil prices may lead to inflationary pressures for the domestic economy. Coupled with the weakening of rupee against the dollar and the political scenario in Karnataka, overall market breadth is currently in favour of a negative trajectory.

The index remaining range bound with a negative bias on a weekly basis at 10,670 levels on the upside and at 10,510 on the downside.

MORE WILL UPDATE SOON!!