Expect further drop in share prices
It was a disappointing week for equity markets as benchmarks slipped over 3 per cent and fell below their major support zone. Global concerns weighed on sentiments after good economic reports from the US intensified speculation that Fed will go for an earlier than expected rate hike. Besides, participants even overlooked some positive domestic data and upheld the negative bias. This week, participants would be eyeing corporate advance tax data which could provide cues on fourth quarter March 2015 earnings. Developments in the ongoing budget session of Parliament will also be closely watched. The government on March 10 managed to push through the contentious land acquisition bill in the Lok Sabha. The bill will now be taken up for a vote in Rajya Sabha where government is in minority. On the macro economic front, the government will unveil data on inflation on March 16. Among global events, a two-day meeting of the Federal Open Market Committee (FOMC) to review US monetary policy is scheduled on March 17-18. Although no rate changes are expected this time, investors will closely be watching Fed Chairwoman Janet Yellen’s press conference for hints on how patient the central bank will be before tightening its monetary policy. Considering the market’s weekly close, we expect decline to extend further and sustainability below 8,670 spot in Nifty could further retrace it to 8,475 in the coming sessions. So far we haven’t seen any major correction in cash stocks but if the index slips further, stock specific decline may intensify. Hence, traders should strictly follow stop losses or keep their leveraged positions hedged and prefer low beta counters for day trades. On the other hand, investors should uphold buy on dips approach and gradually accumulate fundamentally strong counters with medium to long term perspective.
Jayant Manglik, Religare Securities
Positive outlook ahead
Power stocks have taken a battering recently due to concerns of fuel security, rising international coal prices, dismal SEB financials and coal block de-allocation. But going ahead we see positives for the sector occurring out of rising coal supply, benign global coal prices and easing transmission bottlenecks. The new government has announced an ambitious target of 1 billion tonne of coal production Even 70 per cent achievement of the target would significantly ease coal supply concerns for power companies. New CERC regulations have tightened certain incentive norms thereby lowering the return on equity (RoE) of power utilities. But with rising coal production and hence higher PLF-based incentives, we expect the ROE to improve. While private IPPs are weighed down by leverage concerns most PSUs boast of high annual cash flows but a sub-optimal capital structure. Within the utilities pack we are positive on companies with an optimum capital structure. Further bonus debentures and a few proposed acquisitions would help shore up return ratios in certain stocks. Concern for this sector is high receivables, equity stuck in slow gestation period projects.
Focus on value-added products
Supreme Industries is one of the major players in the plastic pipes business with established brand equity. Besides pipes business which contributes more than 50 per cent of its revenue and profits SIL is diversified across other segments such as packaging, industrial products, furniture, etc. The company’s revenues and net profits are growing at CAGR of 20 per cent and 25 per cent respectively. It is consistent in increasing the revenue share of value-added products. By 2019, the company intends to increase the share of value added products to 35 per cent from current 32 per cent. Increasing share of value-added products protects profitability margins and is a buffer against competition and raw material price volatility. The stock is trading at PE of 23.3x based on 2015-16 estimated earnings. Kotak Securities
Target price downgraded
Lumax Ltd belonging to D K Jain group is a full capability provider of high quality automotive lighting solutions for four-wheelers and two-wheelers. It has a more than two decade old technical and financial collaboration with Stanley of Japan which holds 37.5 per cent stake in the company. Stanley is a world leader in vehicle lighting and illumination products for automobiles. Lumax sales in latest quarter stood at ` 271 crore, which is a drop of 6.3 per cent (year-on-year.) Though the revenues have marginally fallen, the profits have soared due to the improvement in profit margins and significant drop in interest costs. The interest cost is ` 9.91 crore versus 13.47 crore a year ago. We have downgraded the target price of the stock recently to ` 416 from ` 495 with a time horizon of 9-12 months. Equisearch