Markets pin high hopes on Union Budget

Markets extended gains for third consecutive week but failed to sustain the momentum seen during the early part of the week and witnessed too much volatility in the week ended. The Nifty and the Sensex ended the week at 14,434 and 49,035, up 87 points and 252 points respectively. Broader markets took a breather after recent sharp up move, with both the Nifty Midcap and Small cap dropping 1 per cent and 0.5 per cent, respectively.

Sectorally, auto, IT, FMCG and PSU banks outshone while metal and pharma relatively underperformed. Focussed on US stimulus news and weak global cues; good Q3 earnings failed to enthuse the markets. Markets have started focusing on the Budget expectations ahead of Union Budget 2021-2022, which is scheduled to be presented by the Finance Minister Nirmala Sitharaman on February 1.

Market players feel the rotational buying or selling in sectors could be seen in coming two weeks. Majority of analysts feel the government may largely focus on infrastructure, manufacturing and healthcare segments, and segments where the maximum jobs creation can happen going ahead, along with fiscal consolidation path.

The FII inflows continued to be strong in January as well, as they have net bought more than Rs 17,000 crore of shares so far in the current month, in addition to over Rs 1.6 lakh crore of buying in previous year. However, on the other hand, DIIs led by LIC continued their selling in equities for fourth consecutive month. They net sold more than Rs 12,000 crore of shares in January till date.

Important companies announcing their quarterly earnings in the coming week are Reliance Industries, Bajaj Finserv, Bajaj Finance, Bajaj Auto, Asian Paints, Larsen & Toubro Info, Federal Bank, HDFC AMC, Bandhan Bank, Biocon, SBI Card, Gland Pharma and Ultratech Cement.

Reliance Industries will announce its earnings Q3 earnings on January 22. The key focus would remain on its telecom and retail businesses, while the sequential performance is expected to be strong with ARPU at Rs 149, gross refining margin around $7 a barrel and improvement in petrochemical margins.

Heard on the street

The Union Budget for 2021-22 is likely to be tabled in Parliament on February 1, 2021. This Budget will be interesting to watch on how Finance Minister Nirmala Sitharaman plans to reboot the Indian economy already battered by Covid-19. FM has raised expectations hugely by saying that this will be a Budget of 'one in hundred years'. She also said the forthcoming Budget will sustain the momentum of public spending on infrastructure and have a 'vibrancy' to ensure the economic revival continues and that the pace of divestment will soon pick up in the coming months.

Health would take top priority going forward as the government would look to provide not just buildings for hospitals but the technology and infrastructure apart from improving the availability of doctors and nurses to service the industry. Emphasis on digitisation to make India a dominant global player in the fintech industry is on cards.

However, it is pertinent to recall that the Nifty 50 Index clocked its worst Budget-day returns in at least 11 years after the Union Budget 2020-21 failed to impress investors.

From the Indian share market perspective, the last seven years have been mixed under the Narendra Modi-led government. Ahead of the Budget fortnight markets have turned jittery on concerns over high valuation of frontline stocks. Also, strong buying that emerged in the smallcap and midcap space has slowed down. Institutions and brokerage houses have trimmed FY20-21 economic growth forecast for India to between 7.5 and 9 per cent, which is multi-decadal low. But the market is pinning strong on the hopes on the Union Budget 2021, expecting that the Finance Minister will play her magic wand and try and bring about a sustained turnaround in the economy. If the Budget does not meet the high expectations, which historically it rarely has, the market can see a sharp selloff post Budget.

Futures & Options/sector watch

Amidst heightened volatility derivative segment witnessed robust volumes. Technical indicators suggest that markets are now likely to witness intraday volatility in upcoming sessions as well, as traders would wait for upcoming Union Budget for any fresh triggers.

In the option segment, Call writing was seen at 14,500 and 14,600 strikes and also most of out of the money strikes. The maximum open interest is placed at 14,600 strike which will act as a major resistance for the coming week. Fresh addition of Puts was seen at 14,000, 14,200, and 14,300 strikes.

It is known fact that RBI has been fighting the new normal (pandemic times) with excessive liquidity. Indications are that draining of this excess liquidity would happen on a gradual basis. Ahead of Budget, speculation is rife on disinvestment and consolidation of PSU Banks. Use corrections to buy SBI, BOB and Canara Bank. Insurance sector is attracting good delivery buying from funds. There are not many listed players in the insurance space and in challenging times it is better to stick to the leaders which have the highest solvency ratios, a wide distribution network, and a diverse product mix.

Disinvestment of the largest insurer LIC in the coming financial year will put the sector in limelight. Forthcoming week will also witness results from all important insurance companies. Buy HDFC Life, SBI Life and ICICI Lombard. Post-merger of Bharti Infratel, Indus Towers has been witnessing strong buying interest. Reports suggest that synergies from the merger are likely to help the company strong earnings growth. Buy for target price of Rs 300 in next few weeks. True to predictions, on expectations of 'scrappage policy', auto stocks were on fast track. If, therefore, the government does not announce a 'scrappage policy' in the upcoming Budget, the sector might see a massive selloff in the aftermath.

Among stock futures, Buy: Apollo Hospitals, ACC, Indus Towers, ITC, IOC, HPCL and TCS. Sell: Aarti Inds, Asian Paints, Bandhan Bank, Titan and Pidilite.

Stock picks

Apollo Tricoat Tubes Limited is a subsidiary of Shri Lakshmi Metal Udyog Limited, which is a wholly-owned subsidiary of APL Apollo Tubes Ltd. The company has manufacturing facilities at Malur, Bangalore and Dadri, Uttar Pradesh. It has a basket of seven products, all of which are first time launches in India. Fiscal 2019-20 was an important milestone in the company's journey as it commenced manufacturing operations of its two products – steel doorframes and planks.

Overall its four products, Chaukhat, Signature, Elegant and Plank, ramped up reasonably well and operated at about 80 per cent utilisation. Apollo Tricoat is the first Indian company to introduce three coated tubular solution for electrical conduits. From a macro perspective, Apollo TriCoat is into home décor products, hence growth of real estate sector has bearing on its performance. But on declines for medium term target of Rs 1600.

Talbros Engineering Limited is engaged in manufacturing of rear axle shafts for the automobile companies in India and foreign markets. It is the leading manufacturer of axle shafts for OEMs in India, servicing passenger and commercial vehicles, off-road and tractor segments having an installed annual capacity of 3 million axle shafts. The company also developed power steering pully samples for international market. For the purpose, it expanded its hands in manufacturing of torsion bars, spindles and front axles. Top global customers of the company include Volvo, Daimler and Caterpillar. The company is planning to diversify its product portfolio and entering into new international markets. Use corrections to buy for target price of Rs 250 in medium term.

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