Initiate fresh position only on fall below 8,600

Nifty April Futures (8,616)

The Nifty Futures contract opened gap up at 8,662 after a long hiatus on Monday. After marking an intra-day high at 8,664, the contract began to witness selling pressure and gave away its intra-day gains. The contract recorded an intra-day low at 8,607, just above its key support level of 8,600, and is now hovering around this level.

A decisive fall below the immediate support level of 8,600 will be cue for initiating fresh short position with a stop-loss at 8,615 levels. Such a fall can pull the contract down to 8,574 and then to 8,550 levels. Next key supports are pegged at 8,530 and 8,500. On the upside, the contract needs to rally conclusively ​above 8,662 for an up move to 8,684 and 8,700 levels.

Strategy: Initiate fresh short position only on a strong fall below the immediate support level of 8,600 with a stop-loss at 8,615 levels.

Supports: 8,600 and 8,574

Resistances: 8,640 and 8,662

Source : Business Line

Those that lose from rate cuts

Cash-rich MNCs and PSUs will earn less interest income

While lower interest rates are good for consumers and companies that have borrowed heavily, those sitting on a large cash pile will be an unhappy lot.

Companies that invest their surplus cash in debt instruments such as fixed deposits and non-convertible debentures may see their interest income fall with a cut in interest rates. The RBI has effected only a 50 basis point cut in policy rates, but the yield on the benchmark 10-year Government bond has declined by over 80 basis points in the last six months. Likewise, the yield on the 10-year AAA rated corporate bond has fallen by almost 100 basis points during this period.

So, which are the cash-rich companies that will see their investment income shrink, with a fall in interest rates? Indian subsidiaries of multinationals that have significant cash reserves and do not have any major capex plans may see a marked decline in their interest income. For instance, drug maker Novartis India earned interest income of ₹81 crore in 2013-14, which constituted over three-fourths of the company’s pre-tax profit.

A further fall in interest rates may lower the interest income earned by the company.

Similarly, interest income accounted for over half of engineering major Ingersoll-Rand India’s pre-tax profit in 2013-14.

Similar to MNCs, PSUs such as Coal India, MMTC and NBCC, which have significant cash reserves and earn a sizeable portion of their profits by merely investing the cash surplus, may have to bear the brunt of falling interest rates. Take MMTC, for instance; interest income accounted for over three-fourths of its pre-tax profit.

Likewise, for Coal India which held massive cash reserves in excess of ₹52,000 crore as of March 2014, interest income accounted for almost a fourth of its operating profit in 2013-14.

Given the huge cash in its books, the company’s interest income can moderate with a reduction in interest rates by banks.

Five stocks that gain from rate cuts

Companies sitting on a huge pile of debt and struggling to pay interest are the obvious beneficiaries.

The wait for lower interest rates has finally ended and the rate cut cycle appears to have been kick-started. Drawing comfort from the falling consumer price inflation, the RBI has cut rates twice in the last three months reaffirming the downward trajectory in lending rates. With this, it appears to have set the ball rolling for a lower interest rate regime.

So, what does a lower borrowing rate mean to India Inc? Who will benefit from the gradual reduction in interest rates?

Companies sitting on a huge pile of debt and struggling to meet their interest payment obligation are the obvious beneficiaries. Companies with precariously low interest cover ratio (profit before interest and tax as a proportion of interest outgo) will be the first to see an improvement in their earnings as the rate cycle starts sloping downwards.

Here are five companies with sound fundamentals that can rake in higher profits with a fall in interest rates.

Economic recovery to spur sales

South-based cement maker India Cements’ profit is expected to get a boost from lower lending rates.

Here’s why. Even as India Cements managed to achieve a modest growth in sales, its profitability took a beating in the last five years – thanks to the economic downturn and aggressive capex plans to augment cement capacity and acquire bulk carriers for its shipping division.

India Cements posted a loss of almost ₹117 crore at the consolidated level in 2013-14, compared with a profit of about ₹352 crore in 2009-10.

Even as the company’s debt to equity ratio, which measures the total borrowings as a proportion of its shareholders’ funds, remained comfortable at less than one time as of March 2014, there was barely any profit available to make interest payment to lenders.

India Cements’ interest cover ratio slipped from over three times in 2009-10 to 0.7 times in 2013-14 — implying that the company’s operating profits could cover only 70 per cent of the interest that was due to lenders. While weak operating performance also played a role, a ballooning interest burden that has more than doubled — from ₹143 crore in 2009-10 to almost ₹354 crore by 2013-14 — was the principal reason for the weak coverage ratio.

But now, the demand for cement is expected to pick up, given the Government’s focus on increasing investment in infrastructure. This, alongside a steady fall in interest rates, should aid India Cements’ profitability in the near term.

De-leveraging to aid growth

Likewise, South-based commercial vehicle manufacturer Ashok Leyland is well poised to benefit from the downtrend in the rate cycle. The company’s interest cover ratio, which slipped from a comfortable five times in 2010 into negative territory at -0.01 in 2014, due to a two-fold rise in the interest outgo, is expected to improve with a moderation in the lending rates.

Ashok Leyland’s total loan has almost doubled in the last five years on two counts. First, the company borrowed more to fund its capacity expansion projects such as its greenfield plant at Pant Nagar, which was commissioned in 2010. Second, increased working capital requirement due to a slump in the economy led to an increase in the company’s borrowings.

Even as the company’s operating profit remained steady during the 2011-13 period, the sharp jump in interest outgo — which has more than doubled in the last five years — dragged Ashok Leyland’s interest coverage ratio. The company did not have any profit in 2013-14, to meet its interest obligation.

But now, with the economy gradually returning to the growth path, the demand for commercial vehicles has also improved in the past year.

For instance, sales of Ashok Leyland’s medium and heavy commercial vehicles have grown by 29 per cent during the April-February 2015 period compared with the same period last year.

Further, the company sold some of its non-core assets — physical assets such as land and investment in other ventures — to pare debt on its books. For instance, the company sold its Chennai property for ₹210 crore to tyre maker MRF. Likewise, it liquidated its holding in Hinduja Tech to Nissan International Holdings, the investment arm of the Japanese carmaker, in 2014, for an undisclosed amount. The company also plans to monetise its investment in group companies Albonair GmbH, Albonair India and Avia Ashok Leyland Motors in the near future, to reduce debt.

Improvement in the demand for commercial vehicles, fall in interest rates, coupled with the company’s efforts to prune debt should help Ashok Leyland return to profit.

Benefit from infra thrust

Civil engineering and construction company Sadbhav Engineering will not only benefit from the government’s thrust on improving infrastructure but also from a moderation in the interest rate, given its appallingly low interest coverage ratio. The company’s aggressive project wins not only led to a sharp increase in assets but also its borrowings to fund these projects.

Sadbhav’s total debt more than tripled from ₹1,455 crore in 2010 to ₹5,714 crore by 2013-14.

As a result, Sadbhav’s interest outgo almost trebled from ₹141 crore in 2009-10 to ₹459 crore, leading to a sharp fall in the interest cover. From over 1.3 times in 2009-10, the interest cover ratio has almost halved to less than 0.8 times.

However, the diversified nature of the company’s business — it has presence across key segments such as roads and mining — should help sustain growth in the medium term. Sadbhav’s healthy order book and good execution capabilities can give it an edge over competitors.

The company is consolidating its project portfolio by buying out its partner’s stake in projects that have been stalled due to its partner’s inability to infuse funds. These should provide a leg-up to the company’s revenues and profitability in the near term. In addition to improving fundamentals, lower interest outgo in the light of a moderation in bank lending rates should boost the company’s bottom line.

Investments to pay off

Having started off as a cycle maker, Tube Investments, over the years, has gradually expanded into the engineering and value-added steel components space.

The company has invested aggressively over the last five years to scale up presence in new product segments, such as large diameter tubes, to meet growing demand from the auto and infrastructure sectors. Tube Investments has added assets worth about ₹1,500 crore in the last five years through greenfield and brownfield expansions. This has led to a multi-fold increase in borrowings.

From about ₹2,450 crore in 2009-10, Tube Investment’s total debt has swelled by over nine times to about ₹19,460 crore in 2013-14. Of this, the company’s secured borrowings, which was predominantly used to fund its capex, witnessed a five-fold rise. The steep jump in borrowings was primarily due to higher working capital borrowings by the company, following a slowdown in the economy during 2011-13.

The sharp rise in borrowings led to a whopping increase in the company’s gearing (debt/equity ratio) from about 2.8 times in 2009-10 to seven times by 2013-14. Despite a strong operating performance, the full benefit did not flow to the bottom line. And this was largely on account of a massive jump in the interest outgo. While the company’s operating profit rose eight-fold during the five-year period, its interest expenses saw a faster 10-fold increase in the last five years to ₹1,897 crore. Tube Investments pays out almost two-thirds of its profit as interest costs and charges, hence, progressive cuts in lending rates by the RBI can benefit the company.

Profit from lower interest

Similarly, investors in the country’s leading power distributor Tata Power may have some reason to cheer, should the lending rates continue to head down. Reason: The company is sitting on a huge pile of debt — its total debt as a proportion of its total equity shareholder funds has swelled from 1.5 times five years back to over three times now. In addition to this, Tata Power’s operating profits are just about enough to make interest payment to its lenders. Its interest coverage ratio has fallen from about four times to a little over one time, over the last five years. Given that the sharp rise in interest expenses has eaten into the company’s profits, a moderation in interest rates should augur well for the company.

Sector trends

In addition to these, there are a host of other companies across sectors with leveraged balance sheets and low interest cover ratios that can benefit from the downward movement in interest rates. Of the 418 companies (excluding financials) that constitute the BSE 500 Index, 181 companies had an interest cover ratio of less than four times as of March 2014. The aggregate interest cover for these companies stood at 3.7 times.

Are there any sectoral trends? Well, rate-sensitive sectors such as banking and financials, realty and auto are set to benefit the most from a falling interest rate regime.

Consider banks and financial companies, for instance. Lower interest rate, coupled with improvement in the macro fundamentals, can encourage India Inc to reconsider its capex plans, which were stalled for the last two-three years.

So also, individuals who were waiting on the sidelines to take a loan for big-ticket purchases such as home, luxury car, etc, may seize the opportunity and borrow now.

This should spur credit growth for banks and financial companies.

Similarly, a cut in interest rate will provide banks and other deposit-taking, non-banking financial companies with access to low-cost funds as deposit rates will also be revised downwards.

Hence, lower interest rates should boost the profitability of companies in the financials space. For realty companies, cheaper loans could translate into better demand for homes, which can boost sales and profits. Likewise, lower borrowing rate can encourage customers to make discretionary purchases, such as two-wheelers and cars.

Apart from the rate-sensitive themes, companies in the engineering and infrastructure projects space that had borrowed to fund projects may get some respite from falling interest rates.

For instance, the interest cover ratio of companies such as IVRCL, Lanco Infratech and Punj Lloyd, which were bogged down with high-cost borrowings, can improve from the current less than 0.5 times, if banks lower their lending rates.

Similarly, sugar companies, which are struggling to make their interest payments, can expect some relief from rate cuts.

Even as structural problems such as irrational sugarcane pricing mechanism, global sugar supply glut and downturn in the domestic sugar market stay put, lower interest outgo can help sugar makers narrow their losses. For instance, the interest coverage ratio for companies such as Bajaj Hindusthan and Shree Renuka, which is currently negative, can improve with a drop in interest expenses.

Market poised on the brink

The first quarter of 2015 has been full of sound and fury signifying nothing; at least in terms on index returns. Stocks have been struggling to hold on to higher levels. Despite the Sensex crossing above 30,000 briefly and the Nifty hitting the 9,000 peak, conviction level among investors has been low.

The correction that began in March has erased all the gains made by the Sensex and the Nifty since the beginning of this year. In short, the benchmarks have made absolutely no progress in the first three months of trading this year.

However this kind of sideways movement should not be derided. This is the best that market can do – move in a range – till earnings catch up with price.

The last week of March has not been too good for Indian markets. After trudging desolately lower in the first three sessions, indices recorded a sharp sell-off on Thursday.

Traders unwinding long positions in the last trading session of the March derivative series as well as geopolitical tension caused by Saudi Arabia launching military operations in Yemen caused stocks across the globe to crash in that session.

The truncated week ahead could see stocks try to stabilize at current levels. With the Sensex and the Nifty down almost 9 per cent from their recent peaks, bargain hunting can emerge in the week ahead.

Despite the perception that foreign portfolio investors were net sellers last week, they have been buying in many of the sessions last week. The tally for their purchases in equity in March has now risen to $1.9 billion. They have bought $1.4 billion of debt so far this month.

Daily oscillators have moved deeper in to the negative zone. The price rate of change oscillator is attempting to reverse from the over-sold zone.

The worrying part is the negative divergence in the weekly oscillators such as the moving average convergence divergence indicator. This indicator is giving a sell signal since last September even as the indices have been hitting new highs.

Sensex (27,458.6)

The Sensex hit the intra week low at 27,248 on Friday and ended on a shaky note.

The week ahead: The Sensex moved below the support at 27,800 indicated last week. But it is currently pausing just above the 200-day moving average. This is a support that many in the market will be watching. Traders holding short positions should stay on their guard as long as the index hovers above this average line.

Supports on a move below 27,200 are at 26,776 and 26,470.

A bounce from current levels can take the Sensex to 28,336, 28,820 or 29,000. Short-term outlook will turn positive only on a close above 29,000.

Medium-term trend: The Sensex has recorded a close below 28,000 affirming that the medium-term trend is on the verge of turning downward. As we have been re-iterating, one leg of the long-term bull market is in force from the August 2013 low at 17,448. This wave could have ended at 30,024 recorded on March 4.

A correction of this move can be a shallow one that makes the Sensex move between 25,000 and 30,000 for the rest of this calendar. A deeper correction will be short-lived but can pull the index below 24,000. The medium term view will turn positive only on a firm close above 29,000.

Nifty (8,341.4)

The Nifty hit the low of 8269.1 before ending the week 229 points lower.

The week ahead: The Nifty has moved below the short-term support at 8,400. Next support is at the 200-day moving average present at 8,184. Move below 8,184 can take the index to 8,065 or 7,961.

If there is a rebound in the early part of the week, the index can rise to 8,600, 8,700 or 8,800. Inability to move beyond the first hurdle will be the cue for short-term traders to initiate fresh shorts with stop-loss at 8,820.

Short-term view will turn positive on a close above 8,800.

Medium-term trend: The index has moved below 8,400. The medium-term trend is therefore at risk of reversing downward. We will however wait to see the close of this week, before confirming this view.

As discussed earlier, one leg of the long-term bull market that began from the low of 5119, recorded in August 2013 could have ended at the 9,119-peak recorded on March 4.

The corrective move that follows can drag the index lower to around 7,600. A sideways move between 7,600 and 9,000 can then follow over the rest of this calendar year.

If the correction gets deep, a fall to 7,000 or lower is possible. But such a correction can be a short one.

We will retain a negative medium-term view as long as the index trades below 8,700.

Global cues

Global markets sold off last week and most benchmark indices closed with deep losses. CBOE volatility index closed the week up almost 15 per cent as investors turned nervous about their holdings. European indices paused their recent strong uptrend. DJ Euro STOXX 50 closed around one per cent lower.

Dow Jones Industrial Average once again fell-off from the 18,000 level implying that this is turning in to a formidable resistance for the Index. The index is however above its short-term support at 17,500. The index needs to decline below this level to signal a reversal in the short-term trend.

Choppy trading on the cards

It was a lackadaisical show by Indian equities last week. While stocks did not sell off sharply, investors appeared reluctant to put in more money at these levels. Both the Sensex and the Nifty recorded slight declines.

Global markets recovered towards the end of last week but volatility could continue in the Indian equity markets next week. The derivative expiry scheduled for Thursday will make traders nervous about holding long positions.

Conversely, sharp upward reversal in the early part of the week can send bears scurrying for cover, taking stock prices higher.

Increase in derivative turnover to more than ₹300,000 crore on the NSE reflects this nervousness among traders.

Global equity markets, that seemed to be on the brink of caving in, recovered smartly last week, thanks to Janet Yellen’s monetary policy statement that lent hope that the policy rates in US will not move higher in the first half of the year.

This made the dollar retreat from its 12-year high and the euro, crude, and equities launched a relief rally.

Foreign portfolio investors have been on the back foot in the last couple of weeks, selling equity in small lots. But thanks to the money brought in, in the first week of March, the tally for the inflow in March stands at $1.6 billion.

This is surprisingly higher than the money brought into debt in March, at $931 million. Perhaps the currency volatility is making the foreign investors in debt go slow with their investments.

Oscillators in the daily chart have moved well into the negative zone implying that the short-term trend has turned negative for the index.

Weekly oscillators are also giving a sell signal. But they are poised in the neutral zone implying that the medium-term trend is under threat but has not reversed lower yet.

Sensex (28,261.1)

The close below the 50-day moving average does not bode well for the Sensex.

The week ahead: The index moved below the first support mentioned in our last column. The support at 28,044 is to be watched now. The 28,000 mark will also be a psychological support to the index.

The support below this level is at 27,800. Fresh purchases should be avoided on a close below 27,800 as that will mean that the downtrend can prolong.

Short-term resistances for the index are at 28,893 and 29,304. The failure to move above the first hurdle will signal that the down-move will continue.

Medium-term trend: The medium-term trend is currently under threat. But a firm close below 28,000 is needed to confirm this threat.

Such a break can pull the index lower to 26,500 or lower to 25,000 over the medium term.

Nifty (8,570.9)

The Nifty closed 76 points lower last week, confirming the evening star formation in the weekly chart. Traders need to be cautious with their long positions now.

The week ahead: Immediate support for the Nifty is at 8,500. Reversal above this level can take the index higher to 8,761 or 8,906 in the days ahead.

The failure to move beyond 8,761 will be the cue for traders to go short with stop loss at 8,920. Short-term view will turn neutral only on a close above 8,900.

If the index continues declining, it can move on to 8,470 or 8,408 in the coming sessions. Fresh long positions should be avoided on a close below 8,408.

Medium-term trend: The medium-term outlook remains positive. But a close below 8,400 will put the medium-term outlook at risk.

It will mean that a significant peak has already been formed at 9,119.

The index can then decline to 7,961 or 7,500 in the ensuing months. The next couple of weeks are therefore important to determine the medium-term trajectory in the index.

Global cues

Sharp appreciation in stock prices towards the weekend helped most global indices close on a strong note. European indices such as the CAC, DAX and the FTSE went on to close to new multi-year highs. The CBOE volatility index dipped almost 18 per cent to end close to 13, reflecting increase in investor optimism.

The Dow too reversed to close 378 points higher. The short-term view on the index remains positive as long as it trades above 17,500. But the reversal implies that the index can move on to 18,288 or 18,511 in the days ahead.

The S&P 500 index is also drawing close to its life-time high of 2,119. The Nasdaq Composite is less than 200 points away from its 2,000 peak of 5,207.7

The Shanghai Composite was an outperformer, gaining over 7 per cent. With the break past 3,500, the index appears set to move on to the next target of 3,900. Unless there is a decline below 3,500 in the coming weeks, the index will be on its way to a long-term breakout.

The dollar index retreated from its multi-year peak of 100.38 to close more than 2 per cent lower. The Fibonacci retracement level at 101.7 will be the key level that needs to be watched. If it is not surpassed, the index can retract lower.

Derivative expiry scheduled on Thursday can make indices move in either direction

Source : Business Line

Sensex to touch 54,000 by 2018, but range bound for next few months: BofA-ML

Bank of America-Merrill Lynch (BofA-ML) said on Tuesday that the Indian equity benchmark S&P BSE Sensex is likely to touch 54,000 by end-2018, but will be rangebound-to-negative over the next few months. 

BofA-ML highlighted consensus overweight and lack of on-ground change since formation of the new government as the key near-term risks for Indian markets. 

The investment bank said that the stock rally on positive events such as Union budget and Reserve Bank of India’s (RBI’s) rate cut have been sold into. The Sensex has fallen 2.1% from its record high of 30,024.74 on 4 March despite RBI’s surprise rate cut. 

BofA added that clear roadmap, which may help in increasing spending in sectors such as roads, railway and defence, accompanied by rate cuts would drive recovery in the long term. 

The investment bank remains overweight on rate-sensitives and operating leverage plays such as autos, banks, cement and oil companies. It recently added pharma as an overweight to play a tactical consolidation in the market.

BofA-ML’s top picks include ICICI Bank Ltd, Lupin Ltd, Bharat Petroleum Corp. Ltd and UltraTech Cement Ltd. Reuters

Stocks sway to the global beat

There was pandemonium in financial markets last week with most asset classes, including currencies, gold, bonds and equity markets getting extremely volatile. The initial trigger for this turbulence was the strong US jobs data that re-kindled fears of an early rate hike by the Federal Reserve. This sent the dollar index to a 12-year high near the 100 mark, causing other currencies, including the rupee, to go into a tailspin.

Stock market participants were not too pleased at the rupee’s weakness. Foreign portfolio investors turned net sellers in equity last week and this sent the Sensex and the Nifty hurtling lower.

It is, however, too soon to conclude that a medium-term correction that pulls the benchmark indices 15-20 per cent lower is underway. But as we have been reiterating, our market has been on a breathless run since August 2013, with only mild dips of less than 10 per cent in the interim period. With prices of many stocks moving away from their intrinsic value, stock prices could halt to let earnings catch up.

The correction can be either a swift and sharp one — that causes prices to decline sharply in a very short period — or a relatively shallow one that drags on for many months. With India better placed than most other countries in terms of growth and currency stability, buying is likely to emerge at every decline, making a shallow correction more likely.

Crude is doing its bit to add to the jitters. The ephemeral rally since the beginning of February has fizzled out and prices are once again nearing the recent lows of $43.5. A decline to the 2009 low of $32-34 will be possible if supply continues to exert pressure on prices.

With the US market declining on Friday due to worries on corporate earnings, dollar surging to record highs and falling crude oil, stock and currency markets will open on a tentative note this week.

Economic data releases in India weren’t too cheerful. The consumer price inflation for February recording a year-on-year growth of 5.4 per cent against the index a year ago revived fears that the RBI could halt its rate cuts.

Industrial production numbers for January however, showed that there was some improvement in manufacturing activity. Exports lower by 15 per cent compared to last February is a cause for concern too.

Sensex (28,503.3)

The Sensex lost close to 1,000 points last week and ended on a weak note.

The week ahead: An evening star pattern is visible on the weekly chart of the Sensex. This is a reversal pattern. But we need to wait for confirmation from the next candle before concluding that a top has been formed.

Since the Sensex breached the first support mentioned last week of 28,683, the possibility of a break to a new high in the immediate future is bleak. The index also moved slightly below its 50-day moving average on Friday.

But we will watch for one more session to see if the decline continues. Upward reversal from these levels will face resistance at 29,112 and then at 29,422. Rally to either of these levels will be a good point to initiate fresh short positions.

That said, it is quite likely that the decline will continue in the early part of next week. The targets for this decline are 28,293 and 27,743. The recent trough at 28,044 will also provide support in a decline.

Medium-term trend: The medium-term trend continues to be up. But caution needs to be exercised at these levels as a major long-term wave is drawing to a close. A finish below 28,000 will be the first signal that the medium-term trend could be reversing lower. Downward targets will then be at 26,500 or 25,200.

Nifty (8,647.7)

The Nifty too formed an evening star formation in the weekly candle-stick chart last week.

The week ahead: The short-term trend in the Nifty is certainly down. But the index is halting close to the first support indicated in our last column. It is also perched near its 50-day moving average at 8,660.

Traders with short positions need to watch out for sudden reversal from these levels. Resistances will then be at 8,813 and 8,926. Reversal from either of these levels will provide an opportunity for traders to short the index.

Downward target on a break below 8,600 are 8,575 and 8407. The previous trough at 8,407 will also come in handy in supporting the index in a decline.

Medium-term trend: There is no alteration in the medium-term outlook. But as mentioned in the discussion under Sensex, it is best to be vigilant at these levels.

Global cues

Most global markets retreated from higher levels last week as fears of a US interest rate hike pulled them lower. European benchmarks such as the CAC and the DAX however, made merry as the euro at 12-year low is expected to help their economies by making exports more competitive.

The DJ Euro STOXX 50 gained more than 1 per cent even as other benchmarks declined.

The Dow declined below the near-term support at 17,800 last week, but the next support at 17,500 is the more important one. The short-term view will turn adverse only on a decline below this level, paving the way for a decline to 17,100.

The dollar index closed above the 100 mark on Friday, at its intra-week high. This implies that the index could attempt to move to the key resistance at 101.7 now. If this level is breached, the index will be coasting along to 120.

As the turbulence in global financial market continues, market can open on a weak note