Portfolio check: These top stocks could return 21-115% in 1 year

After hitting record highs in late January, followed by sharp sell-off, the market has been consolidating and trying very hard to move towards that all-time high.

 

The Sensex rallied 4 percent in the first half of 2018, but the broader market corrected sharply with the Nifty Midcap index falling 14 percent, especially after the strong 48 percent outperformance in 2017.

Experts said some mid, small and largecaps are trading at attractive valuations. We expect stock-specific movement in largecaps to continue to support the market. But mid and smallcaps are likely to take more time to settle.

Considering the current rangebound trade, they feel the market may be waiting for earnings to pick up from the second half of FY19.

Big reform decisions taken by the government, normal monsoon resulting in a likely increase in consumption and an earnings recovery continue to support the market, but global trade concerns, volatility in crude oil prices, weakening rupee versus the dollar and an increase in the cost of capital are headwinds to the rally.

In the backdrop of higher fuel prices, increase in interest rates and a weakening rupee-dollar scenario, we are of the view that market may trade in a range and is unlikely to witness any strong appreciation in the next 6-8 months.

Invest in quality stocks, which are less vulnerable to macro concerns and have healthy cash flow visibility. Considering the likely pick-up in rural consumption, higher utilisation and recent reforms, he is hopeful that corporate earnings will witness double-digit growth in coming quarters.

Here is the list of top stocks that could return 21-115 percent in a one-year period:

Larsen & Toubro: Buy | Target - Rs 1,540 | Return - 23%

L&T enjoys several levers across its business/geographical segments. It has emerged as the E&C partner of choice in India, which provides a robust foundation to capitalise on the next leg of investment cycle.

Under its new five-year strategic plan to FY21, L&T aims to: (a) grow sales at 12-15 percent CAGR to reach Rs 2 lakh crore by 2021, (b) expand margins to 11.2 percent, up 120bp over FY16, driven by higher profitability in key manufacturing verticals (power, process, forgings and Katupalli yard) and hydrocarbons, (c) unlock value via asset sales to drive RoE to 18 percent from 12 percent in FY16 and (d) reduce working capital to 18 percent of sales from 20 percent currently.

Manufacturing businesses (like Shipyard, Power BTG, and Forgings) also offer interesting possibilities over the longer term. Many of these businesses are difficult to replicate, and L&T is strongly positioned as a dominant player.

We maintain Buy with an SOTP-based target price of Rs 1,540 (E&C business at 22x FY20E EPS, to which we add Rs 520 for subsidiaries). The stock trades at 19x/15x its standalone business (ex. subsidiaries) on FY19/FY20 EPS versus its historical average of 22x. Key risks to the rating include (a) a sharp slowdown in government spending and (b) a sharp fall in oil prices in the Middle East.

Tata Steel: Buy | Target - Rs 700 | Return - 25%

Tata Steel and ThyssenKrupp AG have signed a definitive agreement to combine their European steel businesses in a 50:50 joint venture to be named ThyssenKrupp Tata Steel BV headquartered at Amsterdam, Netherlands.

The formation of the joint venture paves the way to offload significant debt from Tata Steel's consolidated balance sheet to the new joint venture. The deleveraging of balance sheet would aid the management to focus more on the profitable domestic business and pursue organic and inorganic growth prospects.

We continue to remain positive on the domestic steel consumption story driven by increased government expenditure/policies and supportive macros. We like Tata Steel given the integrated nature of domestic operations, which enables it to report higher EBITDA/tonne vis-à-vis its domestic peers.

Going forward, for Indian operations, we maintain our sales volume estimate of 12.5 MT for FY19E and 12.8 MT for FY20E with EBITDA/tonne estimate of Rs 13,250 per tonne for FY19E and Rs 14,000/tonne for FY20E.

For European operations, we model sales volume estimate of 10 MT and EBITDA/tonne estimate of $75/tonne for both FY19E and FY20E, respectively. We value the stock on an SOTP basis and maintain target price of Rs 700. We maintain Buy recommendation on the stock.

Tata Chemicals: Buy | Target - Rs 876 | Return - 27%

Tata Chemicals' specialty chemical (S&C) businesses includes salt, agri inputs, pulses, spices and nutritional solutions. Tata Chemicals has adopted a strategy for the next 3-5 years to focus on its S&C business and consumer business. Post exiting from fertilizer business, Tata Chemicals is planning to increase the contribution from S&C business to around 35 percent by FY20E, considering the current product portfolio.

It is exploring new avenue in FMCG sector, which is a high margin business with low working capital.

Tata Chemicals has reduced its debt through sale of investment in Tata Global Beverage, divestment of the fertilizer business and also through cash generated from its operations. Currently, it has a net cash position of Rs 1,02 crore while net consolidated debt is around around Rs 4,130 crore.

With global leader in soda ash and sodium bicarbonate, exiting from low margin fertiliser business, focus on specialty chemical and consumer business, exploring new avenue in FMCG sector with Tata Sampann and reduction of debt through sale of investment, we value Tata Chemicals at 7.00x FY20E EPS of Rs 125.20 to arrive at target price of Rs 876.

Exide Industries: Buy | Target - Rs 320 | Return - 25%

As the company is one of the largest leaders in the battery space, it is likely to get benefit, if the demand scenario improves. Moreover, it is also expected that cost reduction initiative and focus on profitable segment would drive the margins going forward.

Thus it is expected that the stock will see a price target of Rs 320 in 8 to 10 months time frame on a current P/E of 31.56x and FY19 (E) earnings of Rs 10.14.

Persistent Systems: Buy | Target - Rs 971 | Return - 21%

According to the management, the company expects an accelerated demand from enterprises to leverage digital ecosystems for innovation and growth. Its emerging technologies, transformational experience and continued progress with collaborations and acquisitions would give optimism for its growth going forward.

Moreover, a gradual improvement in utilization rate and better revenue growth in the non-linear business would support EBITDA margin. Thus, it is expected that the stock will see a price target of Rs 971 in 8 to 10 months time frame on an expected P/E of 21x and FY19 (E) earnings of Rs 46.23.

Mahindra & Mahindra Financial Services: Buy | Target - Rs 609 | Return - 34%

Mahindra & Mahindra Financial Services (MMFS) is one of India’s non-banking finance companies focused in the rural and semi-urban sector and is one of the largest Indian tractor financier.

The company is primarily in the business of financing purchase of new and pre-owned auto and utility vehicles, tractors, cars, commercial vehicles, construction equipment and SME Financing.

The company’s strength in vehicle financing which is showing good traction across products & geography. Its housing-finance loan growth is expected to expand 18-20 percent CAGR.

The main driver for improvement in RoA would be gradual increased share of SME business going ahead. Normal Monsoon, Higher farm income and Govt. spending will give boost to company’s business.

The company has a strong Rural & Semi-Urban area presence – with 1284 offices covering 27 States & 4 Union Territories. The company has a healthy mix of Both - ( A) Vertical lending across products & (B) Geographic mix which reduces volatility & risk. We have a Buy coverage on M&M Financial with a target price of Rs 609 per share.

Indostar Capital Finance: Buy | Target - Rs 650 | Return - 29%

Indostar Capital Finance (Indostar) is an NBFC promoted by Mauritius-based Indostar Capital (a holding company with a 57.7 percent stake in Indostar and owned by various institutions, including the Everstone Group, which has a 51.2 percent stake in Indostar Capital).

It commenced operations in 2011. In Apr’17, Sridhar (ex-CEO of Shriram Transport) was appointed Indostar's CEO to lead its foray into vehicle and housing finance. The company has demonstrated strong execution capabilities (loan book posted a 25 percent CAGR over FY14-18) by initially building the corporate book (74 percent of loans as of FY18) and subsequently entering SME financing and effectively executing its strategy in the segment (23 percent of loans as of FY18).

Over the past year, the company has tried to balance its loan book by diversifying its exposure into retail segments such as vehicle and housing finance.We forecast a net profit CAGR of 25 percent over FY18-20E, led by strong loan growth (50 percent CAGR over FY18-20E) and steady asset quality.

We forecasts RoA/RoE of 3.1/11.2 percent by FY20E (versus 3.7/11.7 percent in FY17). Indostar trades at 1.3x BV FY20E, which is the cheapest among NBFCs in coverage. We initiate coverage with a Buy rating and a Mar'19 target price of Rs 650, valuing the stock at 1.7x Mar’20 PB (implied FY20 P/E of 16x).

J Kumar Infraprojects: Buy | Target - Rs 321 | Return - 42%

Buttressed by stable order inflows so far this fiscal, JKIL is eying projects over Rs 4,500 crore for the next couple of years, including metro rail orders of Pune, Mumbai Delhi and Bangalore. It recently bagged order for construction of underground shafts and R&R facilities for Pune Metro Rail worth some Rs 222 crore.

Yet large orders of the size of Mumbai Metro Line 3 have not been assayed last fiscal. It missed out on not so thinly discussed projects like Mumbai Trans Harbor Link (MTHL) and Mumbai Nagpur Expressway (where it failed to emerge among 18 successful bidders). It also lost out on Mumbai Metro Line 4 corridor order where consortiums of Reliance Infrastructure and Tata Project emerged as successful bidders.

Earnings fortification over the next few years rest on timely execution of sizeable projects - Mumbai metro line2, line 3, and JNPT road projects.

Execution of newly bagged projects like Pune Metro Rail, improvement of Chheda Nagar Junction, Ghatkopar and construction of South Delhi Municipal Corporation Head Quarter would not gather pace before the start of next fiscal.

On balance, we advise buying the stock with revised target of Rs 321 (previous target: Rs 273) based on 13x FY20e earnings (forward peg: 0.7) over a period of 9-12 months.

Capacit'e Infraprojects: Buy | Target - Rs 397 | Return - 48%

Notwithstanding the recent turmoil in EPC stocks, business fundamentals of Capacit’e Infraprojects continue to strengthen—not only has the company entered the public sector space that widens its catchment area, it continues to bag repeat orders from multiple clients in the private sector.

With its book-to-bill crossing 5x, the company is set for robust growth (Building a reputation for quality; initiating coverage). We believe investors looking for quality companies with a proven track record, strong earnings potential (31 percent EPS CAGR over FY18–20), a lean balance sheet (negative net debt) and attractive valuations (13.3x FY20E EPS) should consider Capacit’e.

We expect steady topline growth, a stable margin trajectory and declining debt to drive 23 percent revenue CAGR and 31 percent EPS CAGR over FY18–20E (excluding BDD Chawls).

Additionally, rising scale and better cash flow will lend impetus to return ratios. We maintain Buy with a target price of Rs 397 assigning P/E of 20x to FY20E earnings.

MORE WILL UPDATE SOON!!

5 stocks that could offer 8-13% by August-end

Nifty trades below 10,640 levels, we expect the market to retest 10,550 levels which is an important support level for the market.

 

Trade war and political uncertainty in Europe’s biggest economy - Germany - kept equity markets under pressure for most part of Monday's session. Recovery in the last hour of trade in frontline stocks saw the Nifty erasing partial losses to close at 10,657 levels, down 0.53 percent for the day.

After Friday’s bounceback, the index has failed to show follow-through action on the upside. The index faced a hurdle at the rising support trend line, connecting lows of 9,952 and 10,418, which is now acting as resistance for the market. As long as the Nifty trades below 10,640 levels, we expect the market to retest 10,550 levels which is an important support level for the market.

On the upside, if Nifty trades above 10,705 levels, it can rally towards 10,810 levels where the falling resistance connects the highs of 11,172 and 10,929.

In Nifty options, 10,600 put is seeing the highest open interest suggesting the market has support between 10,550-10,600 levels.

Here is a list of top 5 stocks that could return 8-13 percent in the next 1-2 months:

Asian Paints Limited: Buy| CMP: Rs 1,293| Stop loss: Rs 1,250| Target: Rs 1,400| Return 8%

The stock has seen a base formation between the levels of Rs 1,260 and Rs 1,100 over a period of nine months and witnessed a breakout from the same to hit an all-time high of Rs 1,332 in the month of May.

The price then corrected down to the previous high of Rs 1,260 which has acted as a strong support for the stock and then bounced back. The stock has taken a support at its 50-days moving average and crossed 20-DMA.

In Monday’s session, the stock has shown price momentum with a long bullish candle and good volumes which suggests resumption of the uptrend.

The Relative Strength Index or the RSI on the daily chart has given a positive crossover with its average. The daily MACD has given a positive crossover with its average and moved above the neutral level of zero indicating corrective phase is over.

Thus, the stock can be bought at current levels and on dips towards Rs 1,280 with a stop loss below Rs 1,250 and a target of Rs 1,400 levels.

Infosys Limited: Buy| CMP: Rs 1,335| Stop loss: Rs 1,290| Target: Rs 1,450| Return 8.6%

The stock has seen a base formation between the levels of Rs 1,280 and Rs 900 over a period of two years. Last week, the price saw a breakout from this consolidation and hit a new high of Rs 1,340 in Monday’s session.

Typically, the stock breaking out at all-time highs continue to see new highs in the near future as well. The stock is taking support at its 21-days moving average and then started trending higher.

The price has also given a breakout from Bollinger band with the expansion of band and closed above the upper band. Thus, the stock can be bought at current levels and on dips towards Rs 1,320 with a stop loss below Rs 1,290 and a target of Rs 1,450 levels.

Godrej Industries Limited: Buy| CMP: Rs 618| Stop loss: Rs 585| Target: Rs 700| Return 13%

The stock has been in an uptrend on the long-term charts forming higher tops and higher bottoms on the long-term chart. For the last eleven months, the stock has been in a corrective phase and was trading sideways to negative in a narrow range of Rs 699 to Rs 512 levels.

The stock has seen a bounce back from Rs 550-512 zone on multiple occasions indicating a strong support zone for the stock. The daily MACD line has given positive crossover with its average suggesting stock is likely to see the start of a fresh uptrend.

The stock has moved above the falling resistance trend line connecting highs of Rs 699 and Rs 646 on the weekly chart and was consolidating above it for the last few weeks.

Thus, the stock can be bought at current levels and on dips to Rs 607 with a stop loss below Rs 585 for a target of Rs 700 levels.

Sundram Fasteners Limited: Buy| CMP: Rs 643| Stop loss: Rs 615| Target: Rs 720| Return 12%

The stock is in a long-term uptrend forming higher tops and higher bottoms on the daily chart and weekly chart. The stock has seen in a consolidation zone between the levels of Rs 645 and 545 odd levels over the last four months with a positive bias.

The price has been taking support at its 100-day moving average. The Relative Strength Index on the daily chart has given a positive crossover with its average suggesting that the stock is likely to see a breakout on the upside.

Thus, the stock can be bought at current levels and on dips towards Rs 635 with a stop loss below Rs 615 and a target of Rs 720 levels.

Indiabulls Housing Finance Limited: Sell| CMP: Rs 1,115| Stop loss: Rs 1,160| Target: Rs 1,020| Return 8.5%

The stock has formed a bearish head and shoulders pattern on the weekly chart. It witnessed a breakdown from the pattern in the month of May and then saw a bounce back towards Rs1,270 odd levels.

Here it faced some resistance at its 200-day moving average and then saw a resumption of the downtrend. Also, on the daily chart, the price has given a breakout from the Bollinger band with the expansion of band and closed outside lower band suggesting the start of a fresh trend in the direction of the breakout.

The price has been trading below its long-term as well as short-term moving averages. MACD line has given negative crossover with its average below neutral level of zero on the daily chart.

Thus, the stock can be sold at current levels and on the rise towards Rs 1,125 with a stop loss above Rs 1,160 and a target of Rs 1,020 levels.

MORE WILL UPDATE SOON!!

Kotak Institutional Equities introduces midcap portfolio: 10 stocks that could return 20-60%

Most companies on the list have either a buy or an add rating.

Warren Buffett once said be fearful when others are greedy and be greedy when others are fearful. Well something similar is happening in the small and midcaps space that has suffered some big cuts so far in 2018.

The Sensex is up 4 percent in 2018 compared to a 13 percent and about 17 percent fall in the BSE Midcap and Smallcap indices, respectively.

After the recent correction, Kotak Institutional Equities re-introduced its midcap portfolio focussing on 10 stocks. These include: Balkrishna Industries, CESC, Escorts, Federal Bank, Kalpataru Power Transmission, Laurus Labs, Max Financial Services, Prestige Estates Projects, Sadbhav Engineering and Shriram City Union Finance.

Most companies on the list have either a buy or an add rating by the brokerage. It set the most aggressive target price on Sadbhav Engineering, which has the potential to offer up to 60 percent return in the next 12 months.

We continue to follow a ‘barbell’ approach which is a mix of expensive ‘growth’ and inexpensive ‘value’ stocks noting extreme valuations across and within sectors. We introduce our midcap portfolio after the recent steep correction in valuations of midcap stocks. We still find valuations of midcap consumer stocks to be quite expensive and are avoiding the same despite their relatively better longer-term growth prospects," the brokerage said.

Valuations of the broader market are still expensive versus historical levels and bond yields despite projected strong growth in net profits over FY18-20 led by normalisation of profits in a few sectors and economic recovery.

The market’s valuations are largely supported by ‘growth’ stocks in consumption sectors while the valuations of remaining sectors are fairly reasonable and even attractive in a few cases.

There is deep value in several cases based on our fair valuations after the severe correction in those names in the past six months, it added.

It said global issues (trade, sanctions) still pose meaningful risks to India’s macros in case trade tensions were to escalate.

MORE WILL UPDATE SOON!!

June expiry may keep markets volatile this week; book profit on rallies

Given the small premium of 46-50, that the 10,850-CE governs, it would be worthwhile to buy it with possible targets around Rs 150-200 ahead of expiry.

  

Given the small premium of 46-50, that the 10,850-CE governs, it would be worthwhile to buy it with possible targets around Rs 150-200 ahead of expiry.

The last hour has seen market claw back the lost ground, in fact by closing up by around 5 point.

The major momentum that the Nifty is deriving is coming out of strength in certain heavyweights. While earlier it was banks, and now the momentum has shifted to IT pack and Reliance Industries which have come to the rescue.

We had categorically stated in our earlier outlook as well, that the midcap-smallcap are a strict no-no, given the intrinsic weakness in individual stocks and in indices as a whole.

We still stand by our hypothesis that the broader indices may further correct by around 5-7 percent. Hence, one could be looking at opportunities for exiting these scrips on any fruitful rise.

While in the last week, the Nifty50 candle showed upper shadow (Corrected from 10,893 to 10,817), the current week is showing a lower shadow (bounced from 10,701 to 10,821).

These shadows in a way define the immediate barriers placed between levels of 10,701-10,893. The monthly candle too is currently seen forming an “Inside Month”, which would mean that one needs to wait for the market to move past the extremities for a clear direction.

The market has remained in a sideways tranche for almost 3-4 weeks now, which indicates to a compression of the spring. The fact that Nifty is seeing support at lower levels and the strength amongst the heavyweights brings us to believe that market might make an attempt to take on lifetime highs over the next week or 10 days.

Given the small premium of Rs 46-50, that the 10,850-CE governs, it would be worthwhile to buy it with possible targets around Rs 150-200 (Around 11,000 on the Nifty).

As mentioned earlier we would prefer going with the frontliners and our picks are:

Cipla: Buy| CMP: Rs 615| Target: Rs 660| Stop loss: Rs 595| Return 7%

Kotak Mahindra Bank: Buy| CMP: Rs 1,320| Target: Rs 1,420| Stop loss: Rs 1,290| Return 8%

Asian Paints: Buy| CMP: Rs 1,268| Target: Rs 1,330| Stop loss: Rs 1,221| Return 6%

MORE WILL UPDATE SOON!!

Dollar woes! Rupee may hit all-time low if it breaks 68.10/$

Technically, 66.70 is an important support. Break of 68.10 would be essential for momentum to build upon the upside and this time around that could possibly lead to a new all-time low for the rupee against the US dollar.

  

Several recent global and domestic developments have led investors to take some risk off the table but they have not hit the panic button yet.

The flight of interest-rate sensitive flows has spooked debt and currency markets but equities have been fairly resilient so far, especially the benchmark indices.

Gradual withdrawal of USD liquidity and rate hikes by the US Federal Reserve has caused cracks in several EM economies, especially those with weak current account positions and looming political concerns.

The Argentine Peso, Brazilian Real, Mexican Peso, Turkish Lira, Russian Ruble and more recently the South African Rand have all depreciated significantly.

Many central banks have responded by hiking rates to combat the outflows and some are considering and in fact, would be compelled to do so.

The Rupee too has seen significant depreciation pressure. In April and May put together, FPIs have pulled out net USD 3 billion and USD 1.5 billion out of debt and equity markets, respectively. FPI limits in debt that were close to full utilisation now stand at 70 percent.

The RBI has used its FX Reserves well so far to ensure that a runaway move does not happen in the Rupee. It has intervened with intent in OTC as well as exchange-traded futures to crush speculative longs.

This explains why the volumes have not spiked up to the extent they usually do and as has been seen on instances when Rupee has depreciated in the past. The RBI in its June monetary policy managed to restore the confidence of market participants as it hiked the repo rate by 25 bps while keeping the policy stance neutral.

The hike is preemptive in nature considering inflationary pressures mainly on account of higher crude prices and hikes in MSPs and is consistent with the RBI’s inflation targeting framework.

Funding the twin deficits at this point is the major challenge on the domestic front. The CAD for FY19 is likely to be around USD 70 billion.

FPI outflows and the slowdown in FDI and foreign currency borrowing is likely to leave a hole of around USD 15-20 billion in BOP (unless the tide turns and capital again starts flowing back into EM economies). This is the major risk for the rupee.

On the fiscal front, as we head into an election year, the government can ill afford to cut down on spending. Government spending was the major contributor to the Q4 GDP growth that came in at 7.7 percent.

With GST revenues not yet stabilised and Air India divestment not likely to go through, there are risks of fiscal slippage. Nationalized banks have not been buying duration as they would not want to squander away the precious resolution capital in MTM losses.

Private banks’ demand for duration could also reduce as the RBI has increased the FALLCR carve out from SLR. FPIs too are not utilising their debt limits to full capacity.

The concern, therefore, is how will the supply be absorbed. (The yield on the 10-years benchmark touched 8 percent briefly on Friday and is 175 bps above the repo rate).

The RBI would have to do so through OMO purchases to the tune of Rs 1,20,000 crore. Until the announcement of further OMOs, domestic bonds could continue to remain under pressure.

RBIs decision to change the valuation of SDLs to market linked rates from flat 25bps over corresponding tenor G-sec could reduce demand for SDLs as well, further widening the supply-demand gap.

Whether the concerns on both the above deficits exacerbate or recede would depend to a large extent on where crude prices head from the current level.

On a positive note, with the output gap closing and supply chains getting repaired post the shocks of demonetisation and GST, we can see a pick up in private CAPEX and exports. Quick resolution of NPAs is vital to ensure that capital is available for banks to be able to lend to fund this CAPEX.

On the global front, trade-related tensions, developments in Spain and Italy, and Brexit related headlines would continue to set the tone for risk sentiment. The US has extended tariffs to its allies Mexico, Canada, and EU as well. Any retaliatory tariffs imposed by EU could further escalate trade tensions.

On the Brexit front, EU chief negotiator Barnier had commented recently that the backstop would be applicable only to Northern Ireland and not the whole of UK. This would be unacceptable to the UK government, as it would imply having a border within the UK.

The House of Commons is scheduled to vote on amendments suggested by the Lords on Tuesday, which were intended to give the parliament more control over the Brexit negotiation process rather than the cabinet.

Theresa May does not have a majority in the Commons and a few pro-EU conservatives could even side with labor in the vote to keep the amendments in place. With all the uncertainty around, Sterling is likely to remain extremely volatile and headline driven.

The right-wing parties Northern League and M5S together formed a government in Italy. The pickup in expenditure and tax cuts due to populist policies of this government would risk destabilizing the EU.

The Spanish parliament toppled Prime Minister Rajoy through a no-confidence vote and the new PM Pedro Sanchez is a socialist. Any departure from fiscal prudence in peripheral economies would not go down well with Germany or Brussels.

It would be important to track the yield spread between Italy and other peripheral nations against the yield on corresponding maturity German Bunds. Any unusual spike in yields spreads would be negative for the Euro.

To summarize, on the domestic front, The RBI has been preemptive and has ensured that Rupee depreciation does not hit headlines and create panic. It intervened aggressively even before Rupee could hit an all-time low.

Whenever Rupee depreciation has been out of whack with other Asian/EM currencies, the RBI has intervened to align the rupee with its peers.

The RBI may endeavor to keep the rupee somewhere in the middle of the EM pack and may allow gradual depreciation of the Rupee if global USD strength continues.

Technically, 66.70 is an important support. Break of 68.10 would be essential for momentum to build upon the upside and this time around that could possibly lead to a new all-time low for the rupee against the US dollar.

MORE WILL UPDATE SOON!!

F&O expiry due in this week! Options Pain is an add-on indicator for expiry trading,

If a trader is able to successfully forecast the level; or a narrow range of expiry, there exists several strategies which can be of high yield namely: Short Straddle, Short Strangle or a hedged strategy with a high reward to risk ratio along-with limited risk i.e. Butterflies.

 

Expiry trading is highly attractive to a majority of Options Traders where buyers are hunting for last moment large surges for a high return on investment whereas on the other side Option Writers are busy analysing levels beyond which the index or the stock might not expire to earn small absolute premiums of the OTM options.

But, the base of all is at which point expiry will happen?

Well, there isn’t a way to exactly forecast the level precisely to my knowledge but there are several add-on indicators traders used to gauge the possible level of expiry two of them being recent Value Weighted Average Price (VWAP) of the underlying and Option Pain level derived from Open Interest and Intrinsic value of options for possible expiry levels.

f a trader is able to successfully forecast the level; or a narrow range of expiry, there exists several strategies which can be of high yield namely: Short Straddle, Short Strangle or a hedged strategy with a high reward to risk ratio along-with limited risk i.e. Butterflies.

Let’s learn both the methods for creating a forecast for expiry.

VWAP:

Value Weighted Average Price of the recent past for the underlying instrument can suggest an average price where buyers and sellers form equilibrium and hence, the level is expected to form an approximation for expiry.

However, there is no thumb rule of what time period should be considered as an input to this calculation. But, a more sensible way out would be to calculate VWAP’s from significant recent swing movements of peaks and troughs.

Option Pain:

Calculation

Option pain is a calculation to find a level at which Option buyers will have a maximum loss and as derivative is a Zero-sum game, it means Options Sellers will make maximum profits or least losses at this point.

The pain level is calculated by multiplying the Open Interest with the intrinsic value of options for different levels of expiries for each strike. The pain line is derived by adding the Call P&L along-with the Put P&L at each strike.

The level which comes as the maximum profit or lowest loss is the level of Option Pain.

Concept:

The reasoning behind tracking the pain level is first, Option writers are expected to be the smart money around as they take the unlimited risk for a very little profit so they tend to have a well-researched approach.

Secondly, option writers adjust positions with their revised forecasts of the market and the market as a whole tends to that equilibrium.

The Flaw:

Option Pain is not a complete calculation as the formula doesn’t account for the premium inflow that the Option writers already received and even though some strikes might show losses where the Option writers may have made significant returns from premium erosion.

Similarly, few strikes may have been under-estimated too. A better approach would be to adjust for the premium received but is certainly a difficult task to perform as trades takes place on a continuous basis and the price is certainly not constant.

High Probability Areas:

Option Pain in our study has been mildly accurate if used raw but a filtration from other technical analysis or derivative analysis tools to decode if the underlying is in a trend or oscillation can help raise the odds of the forecast being right.

Pain level will be respected more in an oscillating market rather than in a market which has a very sharp trend. Lastly, Indices are much more stable for this tool over stocks.

MORE WILL UPDATE SOON!!

Morgan Stanley sees Sensex at 44,000 by June 2019 in a bull case, focuses on these 20 stocks

In a bear case scenario, Morgan Stanley sees a 20 percent probability of the Sensex heading lower to 26,500 levels.

Global investment bank Morgan Stanley has a June 2019 Sensex target of 36,000 under its base case scenario. This means the index would trade below its historical average at just under 16 times one-year forward price-to-earnings. It said factors like improving growth, reasonable largecap valuations and low beta are up against an election year, rising oil prices and higher yields.

In a bull case scenario, it sees a 30 percent probability of the Sensex rallying towards 44,000. “Better-than-expected outcomes, most notably on the policy and global front will result in such an upmove. The market starts believing in a strong election result and earnings growth accelerates to 29 percent and 26 percent in FY19 and FY20, respectively.”

In a bear case scenario, it sees a 20 percent probability of the index heading lower to 26,500 levels “if global conditions deteriorate and the market starts pricing in a poor election outcome and Sensex earnings grow at 21 percent and 22 percent in FY19 and FY20, respectively.”

The global investment bank prefers largecaps over midcaps. The brokerage is positive on banks (private corporate and retail), discretionary consumption, industrials, and domestic materials, while avoiding healthcare, staples, utilities, global materials and energy.

India's low beta and its implications

The global investment bank said in its India Equity Strategy note that India is a likely outperformer even as absolute returns are capped by a tepid global equity market outlook. “The market is now recognising India macro's growing stability compared to emerging markets as is evidenced by the 37 percent fall since December 2014 in the country's beta to a 13-year low. The implications include case for a positive surprise in equity returns for India (as expectations are now low going by the beta level), with likely outperformance for India versus EM in a low return world.”

In addition, India's relative falling short rates, rising relative growth rates and a dip in positioning by foreign portfolio investors to 2011 levels add to the outperformance case, Morgan Stanley added.

Valuations

Morgan Stanley does not feel the Sensex or Nifty are pricing in a multi-year growth cycle, implying meaningful upside potential to stocks over the next three to five years. “For long-term investors, valuations are still in the comfort zone. Relative valuations are attractive and around average, but midcap valuations are still looking stretched despite the recent drawdown,” it stated.

Stocks in focus list:

  

MORE WILL UPDATE SOON!!

Portfolio picks: These 5 stocks can be multibaggers in the next 2-3 years

His favoured picks in the IT space are Tata Consultancy Services, Infosys and Hexaware Technologies.

  

If the monsoon remains normal as predicted by the India Meteorological Department, we will see a dovish stance from the Monetary Policy Committee accompanied by a 25 bps rate hike later in the year.

He is bullish on the IT and pharmaceutical space. His favoured picks in the IT space are Tata Consultancy Services, Infosys and Hexaware Technologies. From the pharma space, he advises long term investors to stagger buying in stocks like Cipla, Natco Pharma and Caplin Point.

We expect the market to remain rangebound with a positive bias, given we don’t see any major global fallout due to escalating trade tensions between the US and China. Despite relentless selling by foreign institutional investors (FIIs), markets are well supported by domestic inflows. We believe the tug of war between FIIs and domestic institutional investors (DIIs) will keep broader indices in a range with high short term volatility due to headwinds like rising crude oil prices, political uncertainty, reversal in the rate cycle and looming trade war between the US and China.

Unlike 2017, 2018 is a year where we are getting closer to an election cycle. Elections bring uncertainty: a factor which makes markets jittery and volatile. We are going to have a balancing year between opportunities like robust corporate earnings, strong rural consumption and bountiful monsoons along with challenges like rising crude prices, burgeoning current and fiscal account deficit and political uncertainty. The above factors will keep markets largely rangebound with sharp interim volatility.

We certainly expect one more rate hike in the latter half of the year given the surge in oil prices due to fresh sanctions on Iran.

If the monsoon spell remains normal as predicted by the India Meteorological Department, we will see a dovish stance from the Monetary Policy Committee accompanied by a 25 bps rate hike later in the year.

The recent directive is hawkish. Any further rise in US bond yields will lead to weaker emerging market currencies and outflow of funds from both debt and equity markets as returns will be depressed for foreign investors. India will not remain an exception.

However, inflows from domestic institutions remained robust. If we have a normal monsoon as predicted by IMD, we may see downward pressure on inflation in the second half of the year, which in turn will cool off rising bond yields at home.

In nutshell, if the FOMC increases rates gradually, it may not be a huge disruption for emerging markets including India.

We expect our domestic currency to remain relatively stronger than other emerging markets currencies, around 68/$ levels, due to comparatively better macros like strong domestic inflows and a hopes of a normal monsoon.

At present, rising crude oil prices is the biggest risk to our economy as it can potentially hurt our fiscal math leading to further weakening of the rupee. But recent developments like talks of hiking production at Friday’s OPEC meet has triggered a sharp fall in WTI crude oil prices from $72.5 a barrel to almost $65 a barrel.

A fall in crude oil prices will ease concerns about India’s swelling current and fiscal deficit and take pressure off from a weakening rupee.

 The outcome of the recently concluded elections in Gujarat, Karnataka and few key Lok Sabha by-polls has given fresh impetus to opposition parties who prepare to come together to fight the 2019 general elections, which can potentially change the caste and religious arithmetic against the NDA.

We believe the popularity of Prime Minister Narendra Modi is unmatched till date and his personal charisma will help NDA steer clear through any alliance strategy by opposition parties.

The market is also discounting the same. But there may be a possibility that its number of seats may reduce from last time and NDA may have to take support of other like-minded parties.

 Despite the steep fall from recent peaks, valuations of midcap and smallcap stocks are not attractive enough. A lot of corporate governance issues with mid-sized companies have surfaced in recent times in relation to the pre-termination of contracts by auditors.

Earlier, we expected margin expansion, but now see the same remaining under pressure due to high base and rising raw material prices, which will ultimately impact earnings.

The risk-reward ratio for small and midcaps seems unfavourable. However, there will be exceptional cases. Small companies with healthier balance sheets and strong execution record can emerge winners in medium to long term.

The Q4 FY18 earnings season has been relatively positive. Almost 50-60 percent of top 100 companies have reported in line or better-than-expected numbers. For the June quarter, we expect the positive momentum to continue mainly in metals, private banking, IT and selective mid and small sized companies. We haven’t revised our FY19 earnings estimates yet and will rather wait for June quarter earnings and management guidance to take any call.

 The Indian IT sector has undergone a massive structural change. Going by earnings of the last two quarters, it is quite evident that Indian IT companies are successfully weathering the H-IB visa issue by re-inventing their business model by shifting towards onshore, leaving behind the old offshore legacy model.

IT is a space where there are no balance sheet issues and last quarter’s numbers indicate early signs of an improving trend in client spending, particularly in some key pockets like banking, financial service and insurance (BFSI). Moreover, investors are raising their bets on the sector, amid weakening of the rupee-dollar and market volatility.

Though valuations are on the higher side now, the short term prognosis for the global economy is positive. The US economy is doing well, which usually translate into greater IT spending even though it may not be visible now. Our favoured picks in the IT space are Tata Consultancy Services, Infosys and Hexaware Technologies.

The ongoing pain in the pharma space due to customer consolidation and pricing pressure in the US may start gradually easing out in the second half of FY19 due to low base early signs that the US business getting stabilising.

We expect growth in the US to revive in the later part of this year with fresh approvals and product launches. Lately, we have seen a lot of resolutions from the US Food & Drug Administration, but in no way can we conclude that the USFDA is going easy on Indian pharma companies. Recently, whatever relaxation companies are seeing from the USFDA will actually take time to translate into positive financials. Long term investors can stagger buying in stocks like Cipla, Natco Pharma and Caplin Point.

Jamna Auto (CMP - Rs 90)

The stock is trading at 28.5 times its trailing earnings (down from almost 35 times few weeks back). The company maintains its industry leading return on equity of 30 percent and modest debt/EBITDA of 0.3 times. Strong Q4 numbers; safe play to ride the revival in the commercial vehicle sales cycle, with facilities located in close proximity to the plants of original equipment manufacturers; and benefits from lower logistic costs makes it difficult for new entrants to garner market share from OEMs.

JSW Steel (CMP Rs 326)

The stock is trading at 12.5 times its trailing earnings (down from 15-16 times a few months back) with robust RoE of 22 percent. The management expects steel demand to grow at 7-7.5 percent in FY19. We expect margins to improve in FY19, if steel prices remain rangebound. We maintain our accumulate rating with a target price of Rs 435 per share (discounting the stock to trade at 15 times FY19e earnings of Rs 29 per share).

Ashok Leyland (CMP Rs 136)

The stock is trading at 25.8 times its trailing earnings (down from 33-34 times a few months back) with a robust RoE of 22 percent. Uptick in economic growth and pick up in infrastructure activity is seen. Stricter enforcement of overloading norms is a positive development but competitive pressure is likely to remain high. We maintain our accumulate rating with a price target of Rs 183 per share (discounting the stock to trade at 24 times its FY19e earnings of Rs 7.64 per share)

NOCIL (CMP Rs  172)

The company is the largest rubber chemicals manufacturer in India and one of the few players in this business to offer a wide range of rubber chemicals to meet its customer needs. Tightening environment norms by the Chinese government has increased compliance cost and led to closure of unorganised/small players in China, which helped Indian players like NOCIL improve its competitive positioning. NOCIL has a healthy balance sheet with a debt-to-equity ratio of around 0.20 times. It is trading around 16 times its trailing earnings. Our target price on the stock is Rs 240 per share.

Insecticides India (CMP Rs -725)The stock is trading at a trailing P/E 17.8 times. Earnings of the next two quarters will play a major catalyst as: 1. A normal monsoon has been predicted by IMD till June 18; and 2. Minimum support price at 1.5 times cost of production will encourage farmers to strive for higher agricultural output.

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Stay cautious on short build-up by FIIs; 3 stocks that may return up to 13%

If the Nifty falls below the 10,680 mark, it could correct to 10,500 levels on the back of further selling.

  

A sharp sell-off was seen in the Nifty due to liquidation of long positions as traders turned cautious amid US-China trade tensions.

The recent market data has turned slightly negative and is indicating probability of further profit booking. Call writers are active in 10,700, 10,800 and 10,900 strikes, which indicate limited upside.

The continuous build-up of shorts by foreign institutional investors (FIIs) indicates cautiousness. The levels of 10,700-10,680 will remain crucial this week as indicated by option open interest concentration.

If the Nifty falls below the 10,680 mark, it could correct to 10,500 levels on the back of further selling. On a bounce, the index will face strong resistance around 10,800-10,850 levels.

If we look at the option open interest concentration, 10,700 put strike still holds the highest OI with more than 52 lakh shares, followed by 10,600 strikes with nearly 46 lakh shares.

On the call option side, the maximum OI is seen at 11,000 strikes, followed by 10,800 strikes with nearly 54 lakh and 45 lakh shares, respectively.

Here is a list of top 3 stocks that could return 11-13% percent in the short term:

Torrent Pharmaceuticals: Buy| Target: Rs 1,670| Stop loss: Rs 1,360| Return 13%

On daily charts, the stock had been consolidating in a broader range of Rs 1,230-1,430 since the beginning of the year which has led to a formation of an inverted head and shoulder pattern.

This week a fresh breakout was witnessed above the neckline of the pattern formation after prolonged consolidation which indicates more upside in prices moving forward. Traders can accumulate the stock in a range of Rs 1,470-1,490 for the target of Rs 1,670 and a stop loss below Rs 1,360.

Bata India: Buy| Target: Rs 900| Stop loss: Rs 760| Return 11%

After three months of prolonged consolidation, the stock witnessed a fresh breakout above the key resistance level of Rs 825 along with hefty volumes.

Additionally, the stock has also given a breakout above the neckline of the inverted head and shoulder pattern visible on the weekly charts.

The follow-up buying after the breakout can be seen in the stock as secondary indicators like the RSI and stochastic are also supporting the up move. Traders can accumulate the stock in a range of Rs 810-825 for the upside target of Rs 900 and a stop loss below Rs 760.

Natco Pharma Limited: Buy| Target: Rs 955| Stop loss: Rs 780| Return 13%

The stock has given a fresh breakdown below Rs 900 levels and its 200-days exponential moving average in the early 2018 and tested Rs 700 levels in the short span.

The price has been consolidating since then as the stock is fluctuating in the range of Rs 700-830. Last week, we have observed a V-shape recovery in prices from the lower band along with higher volumes which suggest for lower levels buying in the stock.

Now, a breakout above the resistance level of Rs 845 can further trigger follow-up buying in the stock to once again reclaim above 200-days EMA. Traders can buy the stock above Rs 845 levels for the upside target of Rs 955 levels and a stop loss below Rs 780.

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