Fundamental

Overview

• Indian markets witnessed a sharp selloff this week, in line with the global markets amid some concerns about the Federal Reserve’s future monetary strategy, volatile Japanese markets and disappointing Chinese data.
  
  

• Meanwhile, flash PMIs from the Eurozone showed that the debt-plagued region’s downturn continued in May, although at a slower pace than in recent months.
  
  

• On the domestic front, there was no major development except for a few top earnings announcements from the likes of L&T, SBI, BHEL and Tata Steel. Markets were disappointed with the results of L&T, SBI and BHEL while Tata Steel managed to buck the negative trend.
  
  

• Pharma companies such as Ranbaxy and Wockhardt were in the spotlight after the USFDA penalized the former and sent an alert to the latter for violations of good manufacturing practices.
  
  

• State-run oil & gas companies came under pressure amid media reports that the Government was planning to switch to export parity pricing for calculating oil subsidies.
  
  

• This could result in an INR 18,000 crore loss to OMCs as the new pricing mechanism excludes costs like freight and various taxes and duties in the pricing of petrol and diesel.
  
  

This Week's Market Round Up: Sensex loses 2.90%, Nifty down 3.30%

• The Sensex lost 2.90% while the Nifty fell by ~3.30% this week.
  
  

• The BSE Mid-Cap index sank ~3.40% while the BSE Small-Cap index dropped by ~3.30%.
  
  

• JP Associates, Ranbaxy, DLF, Reliance Infra and SBI were the top five losers in the Nifty during the week.
  
  

• Coal India and HCL Tech were the notable gainers in the Nifty this week.
  
  

• Pharma, Real Estate, Banking, Capital Goods, Power, Consumer Durables, Metals, Cement and Airlines stocks were the noteworthy laggards during the week.
  
  

• Paper, Hospitality and Paints stocks were the main gainers this week.
  

Market Outlook: Maintain bullish stance...

• Indian markets trade at ~15.0x FY14E and ~13.0x FY15E versus historic average of 15.5x. We believe that valuations have room for upside.
  
  

• The Indian government has moved on a number of important policy reforms in the form of FDI in retail and aviation, besides unleashing other measures like SEB debt restructuring, diesel price deregulation and sugar decontrol. The Union Budget has also been balanced and credible one with more emphasis on fiscal correction.
  
  

• The biggest reform has been the curtailment of the fiscal deficit and the diesel price deregulation. The Finance Minister has also promised that the Government will stick to the reforms agenda, notwithstanding the political uncertainty surrounding the Lok Sabha elections.
  
  

• So, the Indian markets could gradually advance over the next 12 months, as the Government’s policy measures start to bear fruit. FIIs are likely to remain positive towards the Indian equities this year also, as the RBI is set to maintain its accommodative monetary policy stance amid steady moderation in inflation.
  
  

• Further, global central banks too continue to keep their easy monetary policies for the moment, leaving the world markets awash with liquidity. Some of this abundant liquidity is expected to come to the Emerging Markets such as India.
  
  

• We see the main Indian indices ending FY14 on a positive note although in the short-term there could be some temporary hiccups due to political uncertainty and uncertain global economic backdrop.
  

Sectoral Outlook: Recommend mix of consumers and rate-sensitives ...

• The RBI in its May 03 Annual Monetary policy meeting cut the repo rate by another 25 bps to 7.25%, to support economic recovery, as it acknowledged that inflation is moderating at the wholesale level due to reduced demand. The CRR was left untouched at 4.0%.
  
  

• However, the RBI reiterated that it has “little space” for further monetary easing given the elevated level of CAD and sticky CPI inflation. The RBI also projected relatively lower level of GDP growth at ~5.7% YoY while WPI inflation has been projected at ~5.5% YoY.
  
  

• The RBI is likely to cut the repo rate by another 50bps during the remaining part of FY14 and undertake open market operations (OMO) to ease liquidity conditions and aid monetary transmission.
  
  

• We advice investors to play quality interest rate-sensitive shares like Banks and Capital Goods (ICICI Bank, J&K Bank, Bajaj Finance and L&T).
  
  

• At the same time, in consumption we recommend buying into Maruti and Zee Entertainment.
  
  

• Other stocks we like include Mid-caps like Mindtree and Wabco India.
  

Outlook:

• After this week’s sudden slump on global turbulence, investors would surely like to take stock of the situation before jumping to conclusion about market’s near-term direction. The impending F&O expiry and GDP data (Q4 and FY13) will add to the volatility. Onset and progress of the southwest monsoon will also have some bearing on sentiment in the days to come. Investors could turn slightly cautious in the wake of the global market fluctuations.
  
  

EdelStar - Buy Bajaj Auto Ltd.
CMP: Rs. 1805, Target Price: Rs. 2050

Time Horizon – 3 months

• BAJAJ AUTO LTD (BAJAUT) is the second largest two-wheeler manufacturer in India with a domestic market share of 28%. It offers products in all motorcycle segments—Platina (entry), Discover (executive) and Pulsar (premium). It is also the largest three-wheeler manufacturer in India. Post the demerger in May 2008, BAL has been solely focused on the automobile business. In the past few years, the company has shown strong growth in exports that now forms nearly 35% of its total volumes.
  
  

• Bajaj Auto is likely to gain market share in the domestic market driven by new launches namely, six new variants under Discover series. BAJAUT has developed a strong in-house research and development, and product design capability with initial assistance from a noncompeting partner - Kawasaki (Kawasaki globally being focused on the 500 cc+ segment). This is a key long term advantage; especially as product life cycles shrink and continuous innovation in product performance and styling become increasingly important success factors in the highly competitive market. These factors have made earnings outlook favourable for BAJAUT compare to its peers.
  
  

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Technical

Round-up: Sharp Reversal in Nifty...

• Nifty has seen strong profits booking after making new 52 week highs at 6239. Prices corrected by 230 points in last week with advance decline ratio favoring the bears.
  
  

• Reality, PSU Banks and Infra stocks saw maximum selling pressure. Pharma stocks outperformed the market.

Nifty Outlook: Bearish...

• Nifty has corrected sharply to close below the 20 DMA (6041) and is already trading below the 9 DMA which shows significant selling pressure in short term.
  
  

• It has broken the previous swing low of 5970 levels which shows a reversal of an uptrend.
  
  

• Relative Strength (RSI) has started falling at 48.65 and loosing momentum.
  
  

• Parabolic Sar has got triggered and come above the current market price.
  
  

• Hence we expect Nifty to trade with a negative bias for a downside target of 5852 ( 50 DMA). We change our current view to ‘Bearish’ from ‘Neutral’.
  
  

• On the way up, 20 DMA (6040) is an important short term resistance; if Nifty closes above these levels then we will review the outlook.