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Published on 18/07/2020 9:54:12 AM | Source: Samco Securities Ltd

Q1 Earnings Yet - Weekly Article by Jimeet Modi, Founder & CEO Samco Group

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Below is the Views On Weekly Article by Mr. Jimeet Modi, Founder & CEO Samco Group

Don’t Get Too Excited By Q1 Earnings Yet

Mr. Market continued its range bound movement with intermittent hiccups due to rise in daily COVID-19 cases cushioned by hopes for an early vaccine which capped the momentum neutral with upward bias. Banks in the US are staring at upwards of $30Bn hole in their asset quality and therefore did not participate in the March-June recovery period, as Dow and Nasdaq had witnessed. Back home in India too, the same fears have precipitated in banks and NBFCs who are steadfastly raising buffer capital. A strange scenario of bunching up of FPOs, QIPs and capital raising spree will be witnessed by Indian investors in weeks to come. From Yes Bank to Axis Bank to ICICI Bank to SBI everyone is expected to rush to markets to raise capital in order to beef up their balance sheets. Recently, the RBI Governor too sent a clear signal to the Indian Banking participants that they would need to shore up capital; all this is expected by September when the relaxed NPA disclosure norms expire. Unlike in the US wherein helicopter money from the Fed would make it easier for banks to get money, the financial services sector of India Inc. will face challenges in raising such huge amounts of capital. Investors are advised to stay away and keep a negative stance on the banking sector and accumulate only on panics for their long-term investment portfolio.

India’s retail inflation, measured by Consumer Price Index (CPI), unexpectedly clogged 6.09% in June due to temporary dent on the supply side. This may force RBI to rethink their stance for any further rate cut in August’s MPC meeting. It is also true that a large part of Indian population invests in FDs and reducing interest rates further would not serve the purpose as it may indirectly impact consumption from a bigger perspective. On a deeper look, the hurdle is not RBI’s stance on interest rates but the willingness of banks to dispense loans. Given the current stature of the economy, lenders seem wary and are unwilling to dispense loans on fears of spike in bad loans deforming their balance sheets. At the same time, demand side too seems weak except the MSME sector wherein guarantees are provided by the Government themselves, prompting a flurry of lending and borrowing activities in this segment. RBI will have to smartly act to balance the expectations of all stakeholders. 

 

Event of the Week

IT companies like Infosys, Wipro are amongst a few who witnessed stock frenzy this week and gave an impression of a good head start to the earnings season. These companies surged on the back of sound operating margin expansion and future growth guidance in the range of 1-2%. Although growth expectations are still inline with the past trajectory but the cost reduction trigger has re-rated IT stocks in India. The earnings performance by IT players has brought about renewed confidence in D-Street which was supposed to be a “washout quarter”. Going forward it is expected that such performances will be largely discounted with a kneejerk reaction without significant price movements.  

 

Technical Outlook

Nifty50 formed a hanging man candlestick pattern on the weekly chart after a narrow range candle in the previous week. This gives an impression that the market is tired of gains and is witnessing a tug of war between bulls and bears, waiting for a bearish trigger. BankNifty which is a significant driving force for the market and benchmark indices has witnessed a big bearish candle after a shooting star in the last week. We believe the range of 10900 and 10950 can unfold as a crucial hurdle for Nifty and expect limited upside. Immediate support on the downside is now placed at 10570 and break of the same may lead to downward decent. 

Expectations for the Week

India Inc. will carry on with their pseudo-event of earnings season in the coming weeks. The bellwether of financial service sector, HDFC Bank would come out with their quarterly numbers on Saturday. It is expected that Q1FY21 may not see much pain from the financial space since the real dent will only be felt post the moratorium ends. Hence, markets are expected to flex their muscles in a range bound manner.  Going ahead, intraday traders can follow a buy on dips strategy in the IT sector and for companies coming out with bad earnings performance. Investors are still advised to stay on the sidelines and wait for market dips before investing. Nifty50 closed the week at 10,901.7, up by 1.2%. 

 

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