Q1 results likely to weigh on markets

Buoyed by news about infection rates slowing in some countries, as well as plans for a smooth reopening of economies, speculation about possible coronavirus treatments, the Reserve Bank of India (RBI)'s measures to boost liquidity with easing NPA classification norms and rising hope for an economic stimulus package with likely opening up of businesses; major indexes notched second consecutive week of gains last week.

The gains this week are especially notable because they build on a blockbuster week for stocks.

Nifty climbed 1.7 per cent to 9,266.75 and BSE Sensex rose 1.38 per cent to 31,588.72, taking total recouped gains to 22 per cent from lows touched on March 23. After two liquidity stimuli from RBI, market players hope that the government could announce a big package before the lockdown ends, which could help the economy.

However, the best two-week performance of benchmark indices in nearly two decades and a dramatic rebound that has left many investors with a confounding reality: soaring share prices and a floundering economy.

The explosive rally is a sign that many are positioning for the economy to make a speedy recovery when the coronavirus crisis eases.

It is pertinent to understand that it is going to take many more months after the lockdown restrictions are removed for the economy to be back on rails.

Further, the spotlight is now increasingly on corporate earnings, which kicked off this week with reports from Wipro, TCS and HDFC Bank.

Q4 results season has the potential to act as a bit of a wake-up call because companies are going to be providing some clearer guidance on how they see virus hitting their revenues in 2020-21.

On the back of Q4 earnings, expect stock-specific movement in near term. Key earnings to watch out for in the coming week would be Infosys, Tata Elxsi, ICICI Prudential, ACC, Bharti Infratel, Alembic Pharma, MindTree and Persistent Systems, etc.

Key observations from the last fortnights rally are: a) strong resolve across developed market equities (Dow witnessed best two-week performance since the 1930s), b) an out performance of broader markets (strong rally and resilience in Midcap and Smallcap stocks) and c) leadership shifting from already run up defensives to cyclical stocks (New sectors like pharma are leading the rally).

Further, an extended decline in India VIX index also highlight rejuvenation of sentiments. These observations indicate that ongoing rally has further legs on the upside.

Savvy market players are of the opinion that a sustained close above 9500 levels would further accelerate the positive momentum thereby leading Nifty towards psychological mark of 10,000 levels over coming month, as it is a) 50 per cent retracement of entire fall (12450-7511) and b) yearly lows of 2018-2019, placed at 9950 levels, which are now expected to reverse their roles as resistance.

Valuations are still reasonable for most sectors, long term investors may accumulate stocks with strong balance sheets, market leadership, and quality management.

Futures & Options

Mirroring the 'exuberance' in cash market, derivative segment witnessed heightened activity and improvement in volumes. Maximum Call open interest was at 9,000 strike and 10,000 strike.

Maximum Put open interest was at 8,000 strike and 9,000 strike. Aggressive put writing was seen at 9,000 and 9,200 strikes; while call writing was seen at 9,500 and 9,800 strikes. Punters predict short covering by call writers ahead of April expiry may trigger spike in Nifty towards 10,000 level.

The Implied Volatility (IV) of calls closed at 38.51 per cent while that for put options closed at 36.84 per cent. The Nifty VIX for the week closed at 42.59 per cent and is expected to remain volatile. PCR OI for the week closed at 1.33. The near term trend of Nifty continues to be positive.

The overall chart pattern indicates some more upside up to 9650-9750 levels by next week. Possibility of downward correction from the highs of around 9600-9700 levels in the next couple of weeks is not ruled out.

Sectorally, all major indices ended in green led by financials, metals, infra, auto and pharma. Both IT biggies Wipro and TCS disappointed the Street with their numbers and expect weakness in earnings to continue for first half of FY21.

In the week ahead, second largest IT company Infosys on April 20, is expected report around 4-8 per cent sequential de-growth in Q4FY20 profit.

Despite weakness in rupee, IT stocks may remain range bound on concerns over new orders in near term. Investors have also treated some corners of the stock market as a hiding place, piling into the pharmaceutical stocks that were ignored for several months.

Drug majors like Biocon, Dr Reddy, Cipla and Divi Labs have been flirting with 52-week highs. Avoid fresh purchases and wait for correction to enter quality counters like Biocon, Dr Reddy and Divi Labs.

Ahead of relaxations in lockdown good buying interest was seen in infrastructure counters. Industry expects strong fillip from government to rejuvenate the economy. Buy on declines in NCC and GMR Infra.

GMR Infrastructure has received Rs 5,248 crore from Groupe ADP as part of a deal wherein the French major is buying 49 per cent stake in the domestic group's airport business.

Buy GMR Infra for target price of Rs 35 in medium term. Stock futures looking good are Adani Power, Berger Paints, Bajaj finance, InduSind Bank, LIC Housing and UPL.

Stock picks

Dark Horse: Vodafone Idea Ltd is an India-based telecom service provider. The company's offerings include consumer and enterprise.

After the verdict by the Supreme Court on AGR dues, the company has been on the brink of bankruptcy and survival of the company hinges on any relief the government may provide from statutory dues.

Ahead of resolution of the AGR dues issue, apart from raising tariffs the company has started operationally merging 6-7 of its weaker telecom circles with stronger ones.

It is pertinent to observe that the market share in its top-10 circles, which form 77 per cent of its revenues, at 31 per cent is 1 percentage point ahead of Bharti Airtel.

Vodafone Idea's AGR dues will likely be 40 per cent of ad-hoc provisions and growth is set to accelerate led by tariff hikes, and cash EBITDA is likely to triple by FY22.

leading foreign institutional brokerage house CLSA has upgraded Vodafone Idea to 'buy' from 'sell' and raised target price on the stock to Rs 12 from Rs 3.5.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)