Dear Team member,
Time for reshuffle! Swings likely on Street
I see a reshuffle as necessary to rejuvenate the cabinet going into another term. - Dennis Woodward
The market has been moving in one direction and nobody seems to be complaining as yet. When the going gets good, sometimes even the worst get going. Price-trap, stretched valuations and frothiness may be terms in the coming days if the run continues unabated. It's time to take a relook at your portfolio and reshuffle some counters. In fact, the Prime Minister is expected to go in for a cabinet expansion. The market will closely watch whether there is any reshuffle in his portfolio of ministers. Historically, July has been a rewarding month for equities for positive returns 8 out of 10 times in the past decade. With FIIs mostly long in index futures, hopes remain high of another winning month. Meanwhile, India's 10-year sovereign bonds saw their best weekly gain since April. The outlook is a flat start again and the Nifty will attempt to brace past the 8400 mark. Profit-booking is very much on the cards for the day in many counters. US markets were closed and Asian markets are mostly lower.
Express Idea
Pharma back in the reckoning! - Is the worst behind?
NSE Pharma index/Nifty index ratio made a peak of 1.65 in October 2015 and kept treading lower, which led to underperformance from the pharma space. However, the ratio line found support around the 187-WMA, which resulted in a reversal and eventually pharma space made a comeback in last week's trade. A rising ratio line on the weekly chart indicates that sentiment is experiencing a rebound in pharma stocks.
Sun Pharma: In June 2016, it entered the previous PRZ (Potential Reversal Zone) area and made a higher low of Rs710 before staging a pullback. In the process, it sustained above the recent low for the last four weeks, reaffirming PRZ of the Gartley pattern. We recommend Buy on Sun Pharma above Rs785 with SL of Rs690 for a target price of Rs950.
Cipla: In the last five weeks, renewed strength suggests that Cipla is on the verge of embarking upon a new journey on the upside. Weekly chart of Cipla has made a bullish butterfly harmonic pattern. It is a reversal pattern composed of four legs. . Bullish butterfly pattern reached its completion point after forming a low of Rs457 i.e., 161.8% retracement of the entire XA leg. The same coincides with 176.8% extension of the AB leg. Confluence of multiple support levels in harmonic pattern could lead to bottom formation. Buy Cipla above Rs513 for a target of Rs640. Maintain SL of Rs440.
Management Meet
MEP Infrastructure Developers Ltd: Strong play on Road OMT segment – Not Rated
CMP: Rs43
MEP is one of the few established players in the road tolling and operations and maintenance (OMT) segment. The asset light business model has allowed MEP to achieve consistent growth over the years despite industry slowdown. MEP has increased its focus on long-term projects with an aim to create a stable revenue stream. MEP has increased the share of long-term projects significantly to 67% of FY16 revenues (36% in FY12). MEP bid for Mumbai entry point OMT project in 2010, for which, it paid Rs.21 bn upfront. While this dented its balance sheet, the project is likely to be a strong revenue generator for MEP in the coming years. MEP has always been focused on toll collection and OMT projects. However, it has now ventured into the newly introduced Hybrid annuity (HAM) projects.
MEP has won six HAM projects in JV during the past nine months and sits on an order book of a whopping Rs.38 bn (including JV share). Backed by its HAM portfolio, the company's business model is likely to see a sea change. MEP expects HAM project execution to drive future revenue growth. Although MEP established itself in tolling and OMT over the years, it remains to be seen how well MEP executes the HAM projects. Further, MEP would require capital for executing relatively asset heavy HAM projects. MEP has started to assess funding options; however, it is crucial to have funding in place at the earliest to ensure timely execution.
Technical Acumen
Nifty failed to sustain above 8389 in Monday's trade (i.e. 8% from all time high of 9119). Going ahead, it is likely to act as an immediate hurdle. Breadth indicators across different time frames and several sectors indicate signs of exhaustion. So risk reward ratio is not favourable for creating longs around current levels. Traders should wait for a decline towards 8200 for making an entry back into markets.
Derivatives Insight
² Nifty made intraday dash above 8400 levels on July futures, momentum sustaining with hint of consolidation seen in range of 8300-8430 range.
² Global cues negative, after strong up-move most global markets in sideways zone, digesting the recent gains.
² Options front, massive build-up seen at OTM puts of 8100/8200/8300 adding ~10lacs each, while mild call unwinding at 8500 strike indicates markets preparing for higher targets.
² No major trading action seen from FII's as index futures long to short ratio now stands at 4.56x vs 4.87x previous day.
² Broader markets outperforms with midcap in focus.
Fixed Income Market Overview
The bond market traded in a narrow range over the absence of any fresh triggers. Investors booked profit, post the previous week's rally, though sentiments still remained positive for bond market. Bond yield opened at 7.42%, making an intraday high of 7.43% and ended the day at 7.42%. Gsec volume for the day stood at ~ Rs. 559Bn.
The demand at the fixed Repo window was Rs.24Bn, whereas supply from fixed Reverse Repo stood at Rs.606Bn. Call WAR slided lower to close at 6.22% Vs. 6.25% .
The benchmark five-year OIS and one-year OIS inched higher, with the five-year OIS closing at 6.63% vs. previous day's close of 6.61%; the one-year OIS closed at 6.55% vs. previous day's close of 6.55%
Commodity & Currency Cues
Gold prices hovered around US$1,250/oz, while Silver prices skyrocketed above US$21/oz in yesterday's trade. Although silver has pared some portion of its recent gains, the metal is well poised to stabilise around a two year high. The outcome of Brexit referendum has changed the complete equation, wherein central banks across the globe are contemplating at another round of helicopter money in order to combat slowdown and deflationary trends. BOE has already hinted about the possibility of some stimulus in the coming months. ECB & BOJ can follow suit. In US, interest rate futures convey a growing chance of Fed doing a volte face on the process of rate hikes. The prevalent environment is simply conducive for the precious pack to extend the northward journey.
Crude oil prices have failed to benefit from the expectations of more stimulus from the central banks, as focus remains accentuated on the structural global oil supply/demand balance. Short term supply side issues, which provided substantial support to oil prices during the past two months are restoring to normalcy.
Sterling continues to remain under pressure, as uncertainty looms over UK's relationship with EU. PM David Cameron's resignation has created a big political vacuum and the country seems to be kicking the can down the road as far as invoking Article 50 or termination of EU membership is concerned.
Corporate snippets
² Jindal Stainless has alloted 168.2mn equity shares for about Rs3.66bn on preferential basis to Jindal Stainless to pay off its dues to the latter. (BS)
² Indian Oil Corp's Gujarat refinery will supply Bharat Stage (BS)-IV compliant diesel from January. (BS)
² FDC Ltd has received two observations from the US health regulator related to current good manufacturing practice (cGMP) norms for its manufacturing facility situated at Waluj in Maharashtra. (BS)
² TeamLease Services will acquire ASAP Info Systems for an enterprise value of Rs670mn. (BS)
² Bauxite starved Vedanta sought quick steps for raw material supply from within the state. (ET)
² ITC plans to add 6-7 boutiques of luxury chocolate brand Fabelle at its hotels over the next 15 months. (ET)
² Sangam (India) plans to open 10-15 stores in tier I and tier II metro towns by March 2017 and has floated a 100 per subsidiary for the purpose. (ET)
² NMDC has cut down prices for high-grade ore by 5.5% to Rs1,700/t as compared to the previous month. (BL)
² Reliance Industries has received green nod for drilling eight additional exploratory wells to ascertain the reservoir capacity and commercial viability of hydrocarbons off the coast of Tamil Nadu at a project cost of Rs8bn. (BL)
² Hero MotoCorp (HMCL) has inked a wage settlement pact with its permanent workers at Gurgaon plant, entailing an hike of Rs12,500 spread over three years. (BL)
² The Madras High Court has issued an interim order, restraining Bajaj Auto and others from an advertisement which allegedly disparages the TVS Motors' product TVS XL 100 by comparing the fuel efficiency on the basis of false figures. (BS)
² The Centre has given environment clearance to the Ramco Cements for expansion of its captive power plant at Alathiyur in Tamil Nadu at a cost of about Rs214.2mn. (BL)
² Adani Power said five units of 660mw capacity each at the Tiroda plant in Maharashtra have resumed normal operations with availability of water on July 1. (ET)
² UltraTech Cement, agreed to buy Jaiprakash Associates' 17.2mtpa cement capacity for Rs161.89bn. (BS)
Economy snippets
² Power distribution companies, mainly in Jharkhand and Jammu & Kashmir, settled dues of about Rs100bn to central generation companies in April, bringing down total outstanding amount by 45% from Rs220bn in March. (ET)
² India Post, is carving out a separate vertical to manage banking services, a move that will help it win RBI nod for interoperability of its ATMs with those of PSU banks. (ET)
² Power generation growth has risen to 9.5% this year so far, as against 5.65% during the ten-year period from 2004 to 2014. (ET)
Happy Investing!
Amar Ambani
Head of Research
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