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!!

Nifty likely to consolidate in a 250-point range; buy these 3 stocks for returns up to 21%

Here is a list of top three stocks that could deliver up to 21% return in the next six months.

 

Equity benchmarks last week formed a strong bull candle and almost tested our earmarked target of 10,950, which is the 80 percent retracement level of the major leg of the decline (11,172-9,952).

Going forward, we expect the Nifty to enter into a healthy consolidation phase in a broader range of 10,950–10,700 over the coming sessions to form a higher base. Stock specific activity is likely to continue as we are going through the Q4 earnings season.

Over the past eight weeks, the Nifty has rallied almost 10 percent from its March low of 9,952, leading the weekly stochastic oscillator to trade in the overbought zone. Therefore, at current levels, the Nifty is likely to consolidate in a broader range of 10,950–10,700.

Considering the resilience of the current upmove, we shift the support base upward to 10,700, as it is the confluence of:

* 23.6% retracement (10,699) of the last upmove from 9,952 to 10,929

* Since March the index has not corrected over two percent, which is around 10,710 levels from Tuesday’s high of 10,929.

Structurally, the index remains on a strong footing, amid a robust price structure, as it has been seeing follow-through strength after forming a higher high and a higher low on the monthly chart for the first time since January, indicating resumption of an uptrend.

Thus, any breather from hereon would help the Nifty to form a higher base formation that would set the stage for the next leg of the up move.

Here is a list of top three stocks that could deliver up to 21% return in the next six months:

Apollo Tyres| Buy| CMP: Rs 294| Target: Rs 340| Stop loss: Rs 263| Return 16% | Timeframe 6 months

The share price of Apollo Tyres remains in a strong uptrend forming a higher peak and higher trough representing persistent demand at elevated levels.

The stock has formed an all-time high of Rs 307 during the middle of April 2018. The corrective decline from all-time high saw the stock to rebound and took support at major breakout area indicating resumption of the primary uptrend thereby providing a fresh entry opportunity.

Time-wise, the stock took just nine weeks to retrace its entire previous decline of 26-weeks from Rs 288 to Rs 228. Faster retracement of the major falling segment in less than half the time interval confirms the overall positive price structure and reinstates bullish momentum, which augurs well for the stock.

The stock has major support levels placed around Rs 260-265 as it is the confluence of the following technical parameters:

a) The lower band of the rising channel containing the entire up move since February 2017 around Rs 264

b) The long-term rising 50 weeks EMA, which has acted as strong support for the stock since August 2016

c) 61.8% retracement of the previous major up move (228-307) is placed around | 260 levels

We expect the stock to head higher towards Rs 350 in the medium term as it is the price parity of previous up move from Rs 230 to Rs 307 added to the recent trough of Rs 274 project upside towards Rs 350 levels in the medium-term.

Pfizer: Buy| CMP: Rs 2430| Target: Rs 2960| Stop loss: Rs 2,165| Return 21% | Timeframe 6 months

The share price of Pfizer India is in a strong uptrend forming a rising peak and rising trough and has recently registered a Flag breakout on the monthly chart highlighting the strength in the uptrend.

The stock offers a fresh entry opportunity at current levels from a medium-term perspective. It entered a sideways consolidation mode after hitting a 52-week high of Rs 2,369 in mid-February 2018 and, thereafter, oscillated in a price band of Rs 2,350 to Rs 2,050 in the last three months.

Pictorially, this sideways consolidation has taken the shape of a bullish Flag pattern as highlighted in the adjoining chart. The resolute breakout from the bullish Flag pattern in current months trade signals conclusion of the secondary corrective phase and resumption of the primary uptrend thus provides fresh entry opportunity.

The stock has major support in the range of Rs 2,150-2,200 being the confluence of 80 percent retracement of the previous up move from Rs 2,050 to Rs 2,549 and 12 months EMA.

Time-wise, the stock has seen a faster retracement of the last falling segment as nine weeks decline from Rs 2,369 to 2,080 was completely retraced in just four weeks signaling a robust price structure.

Based on the above technical observation, the stock is likely to continue with a positive bias and head towards Rs 2,978 levels being the measuring implication of the flag breakout.

The height of the pole of the flag 688 points (2369-1681=688) added to the breakout area of Rs 2300 which projects an upside towards Rs 2978 (2300+ 688=2978)

Berger Paints: Buy| CMP: Rs 281| Target: Rs 313| Stop loss: Rs 264| Return 11% | Timeframe 1 month

The share price of Berger Paints remains in an uptrend forming a higher peak and higher troughs. It has witnessed a strong rebounded on last Friday as it took support at the 38.2% retracement of previous up move (232- 287) placed at Rs 267 levels signalling positive bias.

The up move was accompanied by a strong volume of more than 7x the 200 days average volume of 7 lakh share per day highlighting larger participation at support level thus offering a fresh entry opportunity to ride the next up move in the stock.

Among oscillators, the daily 14 periods RSI has recently generated a bullish crossover indicating positive bias in short-term.

We expect the stock to maintain positive bias and head towards Rs 314 levels being price equality to the previous rally from Rs 238 to Rs 287 added to the recent trough of Rs 265 project upside towards Rs 314 levels.

MORE WILL UPDATE SOON!!

These top 10 stocks can return up to 55% in 1 year

Analysts feel India, which imports more than 80 percent of its oil requirements, can manage to absorb up to $80 per barrel but beyond that it could be a major risk.

   

After a recent run-up, the market has been consolidating as investors digest outcome of the Karnataka election. It has started monitoring corporate earnings and the movement of the rupee and crude oil prices.

The rupee stabilised after hitting a fresh 16-month low of 68.15 against the dollar while the crude oil prices inched towards the $80 per barrel.

Analysts feel India, which imports more than 80 percent of its oil requirements, can manage to absorb up to $80 per barrel but beyond that it could be a major risk. “Along with geopolitical tensions, crude, rupee-dollar and rising US bond yields are some major risk to India.”

However, they are betting on an earnings recovery in FY19.

Nomura too is betting on an earnings recovery to take markets higher.

The global investment bank sees Nifty hitting fresh record highs in 2018. It expects the index to surpass its earlier record high of 11,171 recorded in January. “We see the Nifty scaling levels of around 11,380 by December,” it said in a strategy note.

Here is the list of 10 stocks that can return up to 55 percent over the next 12 months:

Lupin: Buy | Target - Rs 1,190 | Return - 55%

After taking Gavis acquisition related impairment of Rs 1,400 crore, Lupin reported loss of Rs 780 crore in Q4FY18. Adjusted for Gavis write off, PAT stood at Rs 350 crore, in line with estimates.

Lupin's US business performance was encouraging as revenues grew 5 percent QoQ to USD 224 million in Q4FY18. It was largely led by new product approvals during last two quarters and strong flu season. Although gSynthroid approval has been delayed to second half of FY19, we expect Lupin's US revenues to grow at least in mid-single digit in FY19, along with strong double digit growth in emerging market segments (including India).

With moderated R&D spend (10 percent of sales) and lucrative opportunities like gRanexa and gSythroid, we expect Lupin to largely maintain EBITDA margin in FY19. Lending strong support from valuations (20x P/E on FY18 EPS, 19x FY19E and 13x FY20E) which is at significant discount to peers, we maintain Buy rating on the stock with a target price of Rs 1,190 (20x FY20E).

RPP Infra Projects: Buy | Target - Rs 379 | Return - 50%

RPP reported strong result in Q4FY18 led by better execution and improved margins. The company achieved its guidance of Rs5bn sales and Rs 1,200 crore order book for FY18. It is guiding for Rs 700 crore sales and Rs 1,600 crore order book for FY19.

Positives also included improvement in working capital by 26 days led by significant reduction in debtor’s days. It further expects to reduce working capital by 10-15 days in FY19.

We believe the company is a good play on government’s increasing focus on improving rural infrastructure. We expect RPP to deliver sales and PAT CAGR of 31/35 percent, respectively, over FY17-20E. We maintain Buy at a target price of Rs 379.

Magma Fincorp: Buy | Target - Rs 230 | Return - 26%

Magma Fincorp was trading at subdued valuations due to its slippages from FY14 and peaking in FY16. The stock is currently trading close to 1.9x trailing book value and 1.5x FY20E book value. Considering the strong retail portfolio with 60-65 percent book classified for PSL category offering securitisation benefits, these valuations look reasonable.

We believe that for return on equity of 11-12 percent and return on assets of more than 2 percent by FY20, the stock can trade at 2.3x FY20 P/ABV. Exposure to general insurance business through Magma HDI remains an added positive.

Factoring in the new focused management and improving margins and return ratios we value Magma at Rs 230 per share, i.e. 2.3x ABV and 16x P/E on an FY20E basis. We have a Buy recommendation from a 12-15 month’s perspective.

Magma Fincorp was incorporated in 1988 and began by offering vehicle and equipment financing solutions to individuals and small businesses in India. It later included commercial vehicle, tractor finance, SME loans as well as insurance.

Karnataka Bank: Buy | Target - Rs 163 | Return - 39%

Karnataka Bank (KBL) reported Q4FY18 PAT of Rs 11.8 crore, lower than estimate on higher credit cost, even while core profitability surpassed estimate. Slippages rose to more than 9 percent given RBI's recent asset reclassification norm and divergence impact.

Operationally, Q4FY18 clocked improving performance and was characterised by better revenue traction and controlled opex (up less than 8 percent YoY). Key monitorables: a) soft CASA accretion

(less than 7 percent YoY) at sub-28 percent; and b) around 40 percent coverage ratio, which will keep credit cost high.

While better revenue traction and controlled opex are likely to aid operating profit growth, elevated credit cost could cap earnings growth. However, higher share of retail (around 45 percent) and current valuation of 0.7x FY20E P/ABV lend comfort. Maintain Buy.

JSW Steel: Buy | Target - Rs 390 | Return - 16%

JSW Steel’s (JSTL) Q4FY18 EBITDA (adjusted for VAT incentives for prior years) came 11 percent ahead of consensus driven by better spreads.

Going ahead, we are upbeat on the company’s hunger for growth led by: 1) capacity addition of 6.7mt via INR444bn capex commitment through to FY21E; 2) USD 500 million investment in a US pipe & plate mill through to FY21E; 3) acquisition of 3mtpa Acero Junction Holdings in the US; and 4) potential acquisition of Lucchini Rail mill in Italy.

Taking cognizance of Q4FY18 numbers, we revise up FY19/FY20E EBITDA 5/14 percent. Maintain Buy with revised target price of Rs 390 (earlier Rs 340), implying exit multiple of 7x FY20E EBITDA. At CMP, the stock is trading at 6.5x FY20E EBITDA.

ACC: Buy | Target - Rs 1,817 | Return - 29%

ACC, a leading brand with pan India presence (8 percent market share), is set to benefit from the expected rise in industry clinker utilisation. While ramp up of its new Jamul unit led to 14 percent volume growth in CY17 (fastest in past six years), in the absence of fresh capacity addition, volume growth is expected to moderate to around 5 percent CAGR over CY18-19.

However, on upcoming cement price hikes (mirroring rise in industry clinker utilisations), EBITDA is estimated to increase at 16 percent CAGR over the mentioned period. With plans to merge ACC with parent company, Ambuja Cement (ACEM) shelved, both companies have agreed to enter into a master supply agreement (MSA) to trade goods and services.

While initial synergy benefit estimates (around 3-5 percent of PBT) appear insipid, calling off the merger will see both players pursuing expansions independently – a medium to long term positive. Factoring in strong balance sheet (around Rs 2,600 crore net cash) and return on equity (RoE) improvement, we value ACC at 12x CY19E EV/EBITDA. Maintain Buy with a target price of Rs 1,817.

JK Cement: Buy | Target - Rs 1,209 | Return - 26%

JK Cement (JKCE) is favoured mid-cap play owing to: 1) superior RoEs (around 16 percent) despite sub-optimal profitability in grey cement (around 50 percent of EBITDA) at less than Rs 500 per tonne; and 2) undemanding grey cement valuation of USD 78 FY19E EV/t (assuming 10x FY19E EV/EBITDA for white segment) turning further attractive to around USD 47 post completion of 4.2mtpa capex by FY20E end.

While JKCE has yet to finalise its capex funding mix, we see little cause for concern over potential equity dilution (if any).

Our scenario analysis, assuming around 7-10 percent equity dilution (around Rs 500-700 crore fund raising), suggests no major change to target price. While increase in net debt levels is inevitable (irrespective of funding mix), we believe the rocksteady white segment entails potential to cushion against any volatility in grey cement.

Calibrating for FY18 performance, recent trends in cement prices and fuel costs, while we prune FY19E EBITDA by 6 percent, we keep it largely unchanged for FY20E. Maintain Buy with target price of Rs 1,209.

Shree Cement: Buy | Target - Rs 20,544 | Return - 25%

Shree Cement (SRCM) is an investors' delight given positives like: 1) continuous gain in market share; 2) sharp focus on cost driving margins superior to peers; and 3) sustainable high RoEs (more than 17 percent). SRCM will also benefit from ~70% capacity exposure to North region where industry clinker utilisations are turning lucrative.

SRCM recently announced an acquisition of UAE-based Union Cement Company (UCC) at enterprise value (EV) of USD 305 million (EV/t of USD 76). Given strong balance sheet (net cash of around Rs 2,900 crore in FY17) and robust cash flows, there could be concerns of future global acquisitions.

However, these are overplayed as: a) management is focused to generate RoEs (for acquired companies) at least at par with the investment yield; and b) there’s no compromise on capex for targeted volume growth in India.

With multiple positives, we value SRCM’s robust India business at 16x FY20E EV/EBITDA and UCC at 8x. Maintain Buy with target price of Rs 20,544.

Muthoot Finance: Buy | Target - Rs 568 | Return - 35%

Muthoot Finance reported in-line PAT of Rs 450 crore (flat QoQ) in Q4FY18. Key highlights: a) modest gold loan AUM growth due to weak underlying demand; b) revenue momentum sustained benefiting from lower borrowing cost & higher recoveries from six-months’ overdue loans; c) borrower-wise classification norms led to further rise in GNPLs to 7.0 percent (5.6 percent in Q3FY18); and d) Cenvat credit (Rs 16 crore) & redemption of ULIP (keyman insurance of Rs 30 crore) supported earnings.

Muthoot’s other businesses—home finance, Belstar, insurance broking—scaling up well (10 percent of AUM). Given stability in the business along with RoA/RoE profile of more than 5/20 percent, we maintain Buy.

Tata Steel: Buy | Target - Rs 903 | Return - 45%

Tata Steel’s (TSL) Q4FY18 EBITDA at around Rs 6,500 crore surpassed consensus estimate, despite certain operating challenges, due to highest-ever standalone EBITDA of Rs 4,800 crore and domestic EBITDA per tonne of Rs 15,872—highest in 25 quarters.

Going ahead, we envisage the performance to improve as: 1) Kalinganagar (KPO) is back on track post an unscheduled shutdown in February; 2) Tata Steel Europe’s (TSE) downstream units are back on track; and 3) stable spreads in domestic & overseas operations.

In the medium term, we see following drivers: a) value realisation from the Bhushan Steel transaction; and b) definitive agreement with ThyssenKrupp (TK) on JV for European assets. Maintain Buy with target price of Rs 903, implying an exit multiple of 7.0x FY20E EBITDA.

MORE WILL UPDATE SOON!!

Technical View: Nifty forms Bearish Belt Hold kind of pattern; MACD gives a sell signal

A ‘Bearish Belt Hold’ pattern is formed when the opening price becomes the highest point of the trading day (intraday high) and the index declines throughout the trading day making up for the large body.

 

The Nifty50 which started with a small gap on the higher side in morning trade on Thursday failed to garnet momentum as bears took control of D-Street in the first 15-minutes of trade. The index witnessed strong selling pressure throughout the session which made a ‘Bearish Belt Hold’ kind of pattern on the daily candlestick charts.

A ‘Bearish Belt Hold’ pattern is formed when the opening price becomes the highest point of the trading day (intraday high) and the index declines throughout the trading day making up for the large body. The candle will either have a small or no upper shadow and small lower shadow.

In Thursday’s price action, Nifty50 opened at 10,775.60 and rose marginally to 10,777.25 which made a small or non-existent upper shadow. The bears took control of D-Street in morning trade and pushed the index below its crucial support placed at 5-double exponential moving average (DEMA) placed at 10,737, and 13-DEMA at 10,712.

The index bounced back from its 20-DEMA placed at 10,670 to close 58 points lower at 10,682.70. The positive takeaway is that it managed to close above its support placed at 10,680.

But, bears are slowly tightening their grip on D-Street. The Moving Average Convergence and Divergence, popularly known as MACD, gave a 'sell' signal on the daily charts for the first time since March 2018.

MACD is one of the most effective trend-following momentum indicators, which can be used to spot a change in the short-term trend of the market.

The outlook has become slightly bearish as the index registers a 'sell' signal on the MACD; however, a confirmation will come if the index consistently trades below 10,700 levels.

In line with our projections, Nifty 50 continued its slide before signing off the session with a Bearish Belt Hold kind of formation. Hence, it appears that to culminate the corrective structure it will continue its downward swing below 10601 and may test its 50-day moving average, whose value is placed around 10550 levels, before bottoming out.

Hence, in the zone of 10,601 – 10,550 one can expect the correction to end and selectively look for stock specific opportunities. Meanwhile, daily MACD also generated a ‘sell’ signal confirming downward pressure on the markets,

Throughout the session the advanced decline ratio was skewed in favor of bulls suggesting that perhaps broader markets might have reached a value zone as many beaten down names from mid and small cap space clocked in decent gains. Strength on the upside can be resumed if the indices manage a close above 10,780 levels.

MORE WILL UPDATE SOON!!

Split exit poll result verdict to keep traders on edge on D-Street

Ahead of the results, the Nifty managed to close above 10,800 levels for the fourth consecutive day in a row and any disappointment at current levels could result in a kneejerk reaction on D-Street which could take Nifty 50 towards 10,600 and lower.

   

The D-Street is factoring a favourable Karnataka poll outcome on Tuesday, by a split exit poll result could cause a kneejerk reaction. Yet, the overall positive trend is likely to continue, suggest experts.

The Indian market is likely to open flat based on SGX Nifty trend which suggests a downtick of 15 points as on Sunday and is likely to consolidate until a clear trend emerges on Tuesday when results are scheduled to be declared.

Based on the exit polls, the un-decisiveness in the market should remain till the results and this should be reflected with a VIX in the range of 13%-15%. The market should open marginally positive on Monday and the overall positive trend is still expected to stay intact.

However, change in options data on Monday morning will indicate the true market expectations. Important support in Nifty is placed at 10,500-10,600 and with this as a stop loss, upside potential is open for 11,200.

For instance, one poll gives the Congress 87 to 99 seats while another predicts 106 to 118, indicating the possibility of securing a simple majority.

Similarly, with BJP, one agency forecasts 79 to 90 seats while another offers it 90 to 114, which means the party has a chance of crossing the halfway mark. In the case of JD (S), the numbers swing between 22 and 40.

Of the six polls available, four gave BJP the lead while two put Congress ahead. One of the four polls saw the saffron party likely to be the largest in the assembly, the Times Now-Today's Chanakya poll, had a median forecast of 120 seats for BJP, out of the 222 for which counting will be held on Tuesday.

Another, poll by CVoter for ABP News, predicted the BJP squeezing through to a majority with 112 seats. The India Today-Axis My India poll had a median forecast of 112 for Congress, just enough to cross the halfway mark in the truncated house.

Ahead of the results, Nifty managed to close above 10,800 levels for the fourth consecutive day in a row and any disappointment at current levels could result in a kneejerk reaction on D-Street which could take Nifty50 towards 10,600 and lower.

The Nifty50 witnessed a breakout above 10,785 on Friday which has now opened room for further upside until 10,900. However, if the BJP fails to attain a clear majority in the Karnataka election, a slip to 10,680 is possible.

"Karnataka election outcome would be the major trigger for the market in the next week. The market has already discounted the positive side of the election outcome in prices. In case of any negative surprise, we may see corrective action taking Nifty to the levels of 10550-10400 over coming weeks.

As many as 78 percent of the poll participants feel that if BJP fails to get a majority in Karnataka, it could result in a kneejerk reaction on D-Street which may pull the index below 10,680 and further towards 10,600 is possible.

For the Modi brigade, a victory here will help get BJP a pan-India presence. Karnataka is also BJP’s best bet to gain a foothold in the south.

And, if Congress manages to gain a foothold in Karnataka, it will not only be disappointing for the Street but have wider repercussions for national elections.

A close call, as many as 40 percent of the poll participants feel that if Congress takes lead in Karnataka elections would clearly mean that the popularity of the Modi govt. has come down and chances of Modi 2.0 becomes less likely.

However, 30 percent feel that it just means that popularity of the Modi government has come down and would not have any bearing on 2019 general elections.

MORE WILL UPDATE SOON!!

Ahead of Karnataka verdict, FIIs withdrew over $400 million from India

The midcap space is under some selling pressure as the market breadth has remained negative almost every day in the last week. If the Nifty is able to retain 10,800 this week, we can start witnessing buying in midcap stocks.

 

Volatility in the Indian market has not seen any major surge before the Karnataka elections compared to the 20 percent witnessed in February.

This means market participants are not factoring in any major negativity post the event and the current consolidated positive bias may continue

The midcap space is under some selling pressure as the market breadth has remained negative almost every day in the last week. If the Nifty is able to retain 10,800 this week, we can start witnessing buying in midcap stocks.

Nifty PCR-OI has increased from 1.50 to 1.55, which means Put writers are more active leading to the base formation at higher levels in the market.

The highest Put base is placed at 10,500 and Put writing positions have also increased at 10,600 strikes. On the higher side, the highest Call base remains at 11,000, the level towards which the Nifty is likely to approach in coming sessions.

Support of domestic institutions is helping to withstand the selling seen from FIIs. This trend is expected to continue in the event of rupee depreciation.

The stock-specific scenario may continue amid the earnings season. So far, non-banking midcaps have fared relatively better.

 

Bank Nifty: Upside likely to continue

The index continued its outperformance compared to the broader market and the follow-up rally seen for the second straight week.

However, on the weekly expiry day, marginal profit booking was seen but the index made up its losses on Friday and ended at the highest levels since February 2018.

The index has turned into a discount on the back of short additions as the open interest in the index rose nearly 33 percent for the week.

However, we feel short positions are stuck. Unless we see any major closures in open interest, these upsides are likely to continue

In the options segment, 26,000 Put has seen sizeable additions whereas on the Call side 26,500 and 26,700 are active strikes.

We feel these short positions will look for an exit near the sizeable Put base of 26,000, which is likely to act as a cushion to the index whereas on the upside, 26,500 is the immediate target and a close above these would open more upside.

The current price ratio (Nifty/Bank Nifty) has been hovering near 2.42. We feel the index is likely to remain volatile ahead of the Karnataka elections. However, looking at the outperformance in banking stocks, we feel the ratio is likely to approach 2.47 levels in coming days with support near 2.40 levels

Cool-off in dollar, bond yield surge may set risk-on tone for EMs

The risk environment for equities improved in the second half of the week as the magnitude of dollar and bond yield surge tapered off. During the week, MSCI EM Index was up over 2 percent outperforming developed market equities that moved up 1 percent.

Weakness trend of EM currencies abated somewhat (after falling sharply in previous five consecutive weeks) and was the main trigger for up move in EM equities.

On a YTD basis, MSCI EM Index is flat but from its highs in January 2018, it is still 9 percent lower, leaving room for upsides.

The initial up move in equity of EM space seems due to short covering/domestic buying driven as FII selling continued in most of the EMs. While the quantum is still not very high, outflows are seen from most key EMs during the week.

From India, FIIs withdrew over USD 400 million. In other EMs, outflows of over USD 895 million were seen from Taiwan. Outflows were also seen from South Korea (USD 190 million), Indonesia (USD 84 million) and Thailand (USD 208 million)

Back in the F&O set up for the Nifty & stocks, FIIs reduced their cautious undertone. There was short closure in index future to the tune of USD 23 million. However, the index option buying increased to USD 933 million.

In the last couple of sessions, the dollar and bond yields have cooled off post softer US inflation (CPI) and a strong 30-year auction.

Bank of England also adopted a less hawkish tone by not hiking rates. As a result, risk appetite rose overnight with US core inflation and unchanged Bank of England both signalling only a gradual normalisation in interest rates.

This backdrop is particularly good for equities as they like contained inflation/rates environment. The traces of the same were visible on US VIX level, which came in below key support level of 14 to close at 13.2.

Hence, a recovery in EMs and FIIs stance towards EMs is not ruled out in the coming week. Crude & dollar will continue to remain on the watchlist.

 

MORE WILL UPDATE SOON!!