Markets ignore Covid wave amid better Q4

Buoyed by better-than-expected Q4 earnings, positive global cues like US Federal Reserve's accommodative stance and short covering; the domestic markets ignored rising number of Covid cases and logged gains during the week ended.

The BSE Sensex rallied 903.91 points or 1.89 percent to 48,782.36, and the Nifty climbed 289.75 points or 2.02 percent to 14,631.10. Broader markets also performed impressively with the BSE mid-cap index gaining 1.9 percent and small-cap index rising 3.2 percent.

Perturbed by the record rising number of Covid cases and weak rupee, FIIs sold over Rs 8,500 crore in April after buying in previous six consecutive months. However, markets remained stable on the back of more than Rs 9,900 crore buying from DIIs. Early part of coming week will see market response to the Assembly election results and results of RIL. With economic recovery sustaining, Goods and Services Tax (GST) collections hit a record ₹1.41 lakh crore in April. This is seventh successive month of the mop-up exceeding ₹1lakh crore. More than economic activity closer monitoring against fake-billing, deep data analytics using data from multiple sources including GST, Income-tax, Customs IT systems and effective tax administration have also contributed to the steady increase in tax revenue.

Earnings season will gain more pace in the coming week with as many 125 companies releasing their Q4 numbers. Companies to watch include Kotak Mahindra Bank, SBI Life Insurance Company, Adani Ports, Tata Steel, Hero MotoCorp, HDFC, Tata Consumer Products, Dabur India and Ultratech Cement. Market observers expect the volatility to continue given the rising Covid cases, uncertainties regarding vaccination, while stock-specific action will continue given the March quarter earnings season along with global cues.

Heard on the Street

What happens when stocks only go up. Losing your fear of bear markets can lead to complacency - and new risks. Bear markets haven't gone extinct. They've evolved into teddy bears. That's what some investors seem to believe - and who can blame them? The stock market used to take years, sometimes decades, to recover its prior peak after the start of a bear-market decline. After last year's 34 per cent meltdown, however, stocks regained record highs in only 126 trading days. Post this year's Union Budget, many market players estimated the probability of another crash in the ensuing 12 months at only five per cent.

"Sure, stocks only go up. They only go up-until they go down!" This isn't the firsttime, people have thought that bear markets had been rendered extinct. The best way not to be overwhelmed by fear during a bear market is to retain a trace of it in bull markets, too.

Quote of the week

"We don't prognosticate macroeconomic factors, we're looking at our companies from a bottom-up perspective on their long-run prospects of returning." - Mellody Hobson

It's very difficult to predict when the next recession or stock market crash will come, so many of the best investors don't even try. Instead, look for good companies with the strength to make it through the occasional challenging economic environment.

F&O/ Sector Watch

Settlement week witnessed brisk trading in the derivatives segment. Rollovers in Nifty futures declined to 66 per cent compared to last month 82 per cent and also well below the 3-month average of 79 per cent. However, in value terms it has increased at Rs 15,249 crore versus Rs 14,087 crore. On other hand, market wide rollovers stood at 83 per cent compared to last month 93 per cent. In value terms it was Rs 1,35,039 crore which is higher than last month Rs 1,22,782 crore. Maximum Call Open Interest (OI) was seen at 15,000, 14,900 and 14,800 strikes, while Maximum Put OI was seen at 14,000, 14,500 and 14,600 strikes. Call writing was seen at 15,000, 14,800 and 14,900 strikes with Call unwinding at 14,100 and 13,900 strikes. Put writing was seen at 14,000, 13,900 and 14,200 strikes with Put unwinding at 14,900, 15,000 and 15,200 strikes. The Implied Volatility (IV) of Calls closed at 22.19 per cent, while that for Put options closed at 24.19 per cent. The Nifty VIX for the week closed at 23.31 per cent and is expected to remain volatile. PCR OI for the week closed at 1.68. Fresh uptrend should be expected only if volatility index starts declining.

Stock futures looking good are Aurobindo Pharma, Cipla, Coal India, Granules, Jubilant Food, Sun TV, Sun Pharma and Zee Entertainment. Stock futures looking weak areAU Bank, Bajaj auto, L&T Info, Dabur, PVR, and Mindtree.

Stock picks

SH Kelkar and Company Limited now renamed as Keva is an fragrance and flavors manufacturing company. The company is engaged in offering fragrances in various categories, such as personal care, hair care, skincare and cosmetics, fabric care, household products and fine fragrances.

The future of the fragrances and flavours industry is secure, as it caters to end-user industries that will remain an indispensable part of global consumers' lives. Fragrances segment continued to dominate the revenue share of business with approximately 90 per cent share. Fragrances find application across wide spectrum of daily consumption items. The company's team of specialised perfumers' crafts innovative complex compounds and ingredients which are used across a wide range of the fragrance portfolio.

Why we are recommending

1. The entry barriers are high in this field and the new entrants have to make a huge effort to grow.

2. The seamless relocation of the company operations from Barneveld, in the Netherlands, to Mahad, in Maharashtra (India), was concluded and led to a significant lowering of expenses. The Mahad facility began operating at full capacity by December 2019, within one year of commencing operations, which is exceptional for bulk chemical manufacturing.

3. First sampling of an Ayurvedic product for a major MNC client already done and is a breakthrough for company. There is huge scope in the natural ingredients and immunity-boosters business after this contagion and company is exploring several opportunities here.

4. Fragrance division went beyond FMCG products and made inroads into industrial applications.

Buy between Rs130-140 for medium term price target of Rs275. In the event of sharp correction in markets, keep stop loss at Rs115. Risk / Reward ratio is 1:8.

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