Money Times - - Stock Analysis | Correction Cannot Be Ruled Out - By Laxmikant Bhole

On 10 Septem­ber 2018, I had ad­vised in­vestors to re­main cau­tious when the Nifty was trad­ing high at the 11589 level. Af­ter the Nifty touched its ear­lier bot­tom of 10316 on 5 Oc­to­ber 2018, most an­a­lysts turned bullish when a pull­back rally up to 10460 was wit­nessed. How­ever, I main­tained my stance in my next ar­ti­cle ti­tled ‘More pain ahead’ on 8 Oc­to­ber 2018. The mar­kets had fallen sharply to 10030 since then be­fore pulling back to close at 10553 on Fri­day, 2 No­vem­ber 2018.

This makes one thing cer­tain – Stock mar­ket is a val­u­a­tion game. When val­u­a­tions get un­re­al­is­tic, neg­a­tively or pos­i­tively, macros and mi­cros act as a trig­ger to bring them to ra­tio­nal lev­els. This is what is hap­pen­ing right now. The earn­ings sea­son has been a mixed bag so far. While Reliance In­dus­tries, Hin­dus­tan Unilever, Maruti Suzuki In­dia, HDFC Bank, Ba­jaj Fi­nance and ITC posted en­cour­ag­ing re­sults, Yes Bank, Asian Paints, ACC and Ba­jaj Fin­serv dis­ap­pointed the street. Many mid-caps such as Lak­shmi Ma­chine Works, Lak­shmi Vi­las Bank, Mahin­dra & Mahin­dra Fi­nan­cial Ser­vices, Larsen & Toubro Fi­nance Hold­ing, HDFC As­set Man­age­ment Com­pany, Mon­santo In­dia, Union Bank of In­dia, Tata Power Com­pany, Vijaya Bank, 3M In­dia, Pres­tige Es­tates Projects, Ramco Ce­ments, Premier Ex­plo­sives, Tor­rent Power, etc. have al­ready an­nounced their re­sults while many are slated to an­nounce them next week. The mar­ket trend for mid-caps de­pends on the rest of the earn­ings sea­son. A pos­i­tive out­look/ guid­ance from some mid-caps could boost the mar­ket sen­ti­ment. If that hap­pens, mid-caps may out­per­form the broader mar­kets in the next few days.

The NBFC saga due to the IL&FS fi­asco is not over but the mar­kets have pun­ished the en­tire sec­tor badly. Liq­uid­ity tight­en­ing in the sys­tem will push the bor­row­ing cost for NBFCs. The liq­uid­ity crunch fear hov­ers over the mar­ket and any neg­a­tive news on this front will lead to an­other beat­ing of NBFC stocks. Ac­cord­ing to Bloomberg Eco­nom­ics In­dia Bank­ing Liq­uid­ity In­dex, last month’s liq­uid­ity crunch is es­ti­mated at ~Rs.1.4 lakh crore as op­posed to a sur­plus of Rs.58000 crore in Septem­ber 2018. The Nikkei PMI Com­pos­ite Out­put in­dex fell to 51.9 in Au­gust from a 21-month high of 54.1 in July, ow­ing to weaker growth in both the man­u­fac­tur­ing and ser­vice sec­tors. This is a vi­cious cir­cle where NBFCs will have is­sues in lend­ing to re­tail con­sumers be­cause of which con­sumer de­mand will slow down. In turn, NBFCs will not be able to lend more and can­not earn from de­mand growth. The RBI was quick to take the fol­low­ing steps to ease liq­uid­ity: 1. Banks can use gov­ern­ment se­cu­ri­ties as Level-1 high qual­ity liq­uid­ity as­sets (HQLA) equiv­a­lent to their re­spec­tive in­cre­men­tal lend­ing to NBFCs and HFCs af­ter 19 Oc­to­ber 2018. This will ease the manda­tory liq­uid­ity cov­er­age ra­tio (LCR) re­quire­ments for banks, which in turn will in­fuse more liq­uid­ity in the mar­kets. 2. The cap­i­tal fund lend­ing limit for banks to a sin­gle non-in­fra NBFC has been hiked to 15% from 10% ear­lier. This will re­solve is­sues mainly for HFCs or NBFCs that don’t lend to in­fra projects to a large ex­tent. Th­ese in­cen­tives for banks are valid only till De­cem­ber 2018 as the cen­tral bank ex­pects the liq­uid­ity is­sue to set­tle by then. While th­ese steps are en­cour­ag­ing, they are not enough to ease liq­uid­ity in the sys­tem. How­ever, the mar­ket re­ac­tion to

NBFCs seems ex­ag­ger­ated. The mar­ket al­ways takes a fu­tur­is­tic ap­proach and of­ten be­haves more out of fear than re­al­ity. While liq­uid­ity crunch is a re­al­ity to­day, the RBI and the cen­tral gov­ern­ment have as­sured that req­ui­site mea­sures will be taken to ease liq­uid­ity in the sys­tem. If the gov­ern­ment does not ad­dress is­sues re­lated to the fi­nan­cial sys­tem sus­te­nance on a pri­or­ity ba­sis, it will have a wider im­pact in the global sce­nario. I’m sure the cen­tral bank will con­tinue to take nec­es­sary steps to ease liq­uid­ity and will man­age the sit­u­a­tion even­tu­ally. Hence, con­trary to mar­ket fears, I see the cur­rent sit­u­a­tion as a golden op­por­tu­nity for long-term in­vestors to en­ter some qual­ity NBFC stocks. On the val­u­a­tion front, the mar­kets are now in a much bet­ter shape. How­ever, a fur­ther cor­rec­tion is not ruled out al­though I don’t ex­pect the fall to be as steep as ear­lier. Cur­rently, the Nifty trades at a P/E of 25.4x, down from 26.95x on 5 Oc­to­ber 2018 and 28.17x on 7 Septem­ber 2018. Its P/BV ra­tio stands at 3.35 v/s 3.28 on 5 Oc­to­ber and 3.73 on 7 Septem­ber 2018. The EPS works out to

415.47. Al­though the val­u­a­tions

have cooled off a bit, they are still not in a very com­fort­able range.

The mar­kets are likely to re­main volatile in the next few months. In my view, the mar­kets will con­sol­i­date be­tween 9500 and 10500 for a few months be­fore ris­ing fur­ther. Many events are lined up on the do­mes­tic front, which in­vestors will watch closely. State elec­tions fol­lowed by gen­eral elec­tions next year be­ing the big­gest event. While main­tain­ing Ra­jasthan is a big chal­lenge for the rul­ing NDA, other state elec­tion re­sults will also be watched keenly. Any other state lost by the BJP will be bad for the mar­kets as they will then start an­tic­i­pat­ing the gen­eral elec­tion out­come on sim­i­lar lines. But if BJP wins Ra­jasthan, it may re­verse the mar­ket mood al­to­gether. Po­lit­i­cal sta­bil­ity at the Cen­tre is ex­tremely im­por­tant for the mar­kets to move higher. The mar­kets will re­main volatile ahead of the gen­eral elec­tions next year. In short, the mar­kets may cor­rect fur­ther and con­sol­i­date over the next few months. The val­u­a­tions have not yet reached the bot­tom and hence a fur­ther down­side can­not be ruled out. A good earn­ings sea­son cou­pled with fa­vor­able state elec­tion re­sults may change the mood. How­ever, global events, un­fa­vor­able state elec­tion re­sults, a rise in crude oil prices, a ru­pee slide, etc. are some fac­tors that may weigh neg­a­tively on the mar­kets. How­ever, long-term in­vestors need not worry about the tem­po­rary bumps. Cor­rec­tion is a tem­po­rary phe­nom­e­non but growth is per­ma­nent. There­fore, con­tinue to in­vest for the long term - buy right and sit tight. Happy In­vest­ing!

Oc­to­ber 2018.

On the do­mes­tic front, the RBI has de­cided to buy Rs.40000 crore ($5.45 bil­lion) worth of gov­ern­ment bonds via open mar­ket op­er­a­tions (OMO) in No­vem­ber 2018 to in­ject liq­uid­ity into the mar­ket. The move comes amid wor­ries of a liq­uid­ity crunch af­ter de­faults at one of the coun­try’s largest in­fra­struc­ture fi­nanc­ing com­pa­nies. Ex­ports en­tered a neg­a­tive zone af­ter 5 months fall­ing 2.15% in Septem­ber on a yearly ba­sis. Im­ports, how­ever, went up by 10.45% in the last month. The trade deficit was es­ti­mated at $13.98 bil­lion dur­ing Septem­ber 2018, the low­est level in 5 months. The fig­ure is de­spite a ris­ing oil im­port bill amid con­cerns that US sanc­tions against Iran will re­move a sub­stan­tial vol­ume of crude oil from the world mar­kets. The over­all trade deficit stood at $94.32 bil­lion in the first six months of the cur­rent fis­cal.

A re­port re­leased by the World Gold Coun­cil (WGC) showed that the de­mand for gold in In­dia rose 10% in Q2FY19 in vol­ume terms to 183.2 tonnes on ac­count of a sig­nif­i­cant drop in prices that led to bar­gain pur­chase. How­ever, the sea­sonal in­crease in de­mand is ex­pected to be muted this Dhanteras-Di­wali. Fore­casts re­leased by OECD (Or­ga­ni­za­tion for Eco­nomic Co-op­er­a­tion & Devel­op­ment) show that the global econ­omy is ex­pected to achieve an an­nual GDP growth rate as mea­sured in con­stant dol­lars of 3.7% be­tween fi­nan­cial years 2018 and 2020 be­fore dip­ping to 3.6% be­tween fi­nan­cial years 2021 and 2023 and in turn pass the $100 tril­lion mark around the year 2022.

OECD’s long-term pro­jec­tions stated that China’s growth rate is ex­pected to grow at a slower pace than that of the US in 2040. It ex­pects China to be the top con­trib­u­tor to global GDP growth by a large mar­gin in the near-term. China’s share of global GDP growth is ex­pected to rise from 27.2% to 28.4% by the year 2023. Other coun­tries are ex­pected take a larger slice of the global GDP pie. USA’s share of global growth is ex­pected to fall from 12.9% to 8.5% in 2023. In­dia’s share of global GDP growth is ex­pected to rise from 13% to al­most 16%, a jump of three per­cent­age points. In­done­sia is likely to be in the fourth spot with an ex­pected 3.7% share in the year 2023 and the fifth is likely to be rounded out by Brazil.

Key in­dex surged on Mon­day, 29 Oc­to­ber 2018, on sound cor­po­rate earn­ings. The Sen­sex gained 718.09 points to close at 34067.40.

Key in­dex fell on Tues­day, 30 Oc­to­ber 2018, due to US-China trade war cues. The Sen­sex slipped 176.27 points to close at 33891.13.

Key in­dex ad­vanced on Wed­nes­day, 31 Oc­to­ber 2018, on buy­ing of eq­ui­ties by mar­ket par­tic­i­pants. The Sen­sex was up 550.92 points to close at 34442.05.

Key in­dex edged lower on Thurs­day, 1 No­vem­ber 2018. The Sen­sex was down 10.08 points to close at 34431.97. Key in­dex set­tled higher on Fri­day, 2 No­vem­ber 2018, on pos­i­tive re­sults and con­sol­i­dated buy­ing. The Sen­sex was up 579.68 points to close at 35011.65.

Na­tional and global macro-eco­nomic fig­ures and events will dic­tate the move­ment of the mar­kets and in­flu­ence in­vestor sen­ti­ment in the near fu­ture.

The Di­wali Muhu­rat Trad­ing Ses­sion is sched­uled on Wed­nes­day evening, 7 No­vem­ber 2018. The In­dian stock ex­changes will re­main open for 60 min­utes on this aus­pi­cious fes­tive.

The In­dian stock mar­kets will re­main closed on Thurs­day, 8 No­vem­ber 2018, on ac­count of Di­wali Baliprati­pada.

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