Expect profit booking at higher levels
Share prices will remain range bound in the week ahead. The Nifty currently is at critical juncture and is facing resistance at higher levels of 9,000 points. Technically, we are at very crucial levels both on Nifty and Sensex where there is psychological resistance at 9,000 and 30,000 respectively. The firm base for Nifty is 8,700 points. PSU banks will continue to remain under pressure while IT, pharma and private banks will continue with their bull run. A slew of fundraising lined up over the next two-three months from public sector banks will also have its own impact on the Bank Nifty. In the previous week, RBI’s surprise repo rate cut made investor sentiments buoyant. The Nifty crossed 9,100 while the Sensex breached 30,000. Everything looked hunky-dory. However, after the initial adjustment of positions there was a big bout of profit booking by local traders. FIIs continued to pump money into this market but they are pretty much well met by the local traders who are looking to book profits at higher levels. FII buying is likely to continue but it will be combated by domestic selling.
More repo rate cut in the pipeline
We expect an additional 50-75 bps repo rate cut by end-December 2015 after the 0.25 per cent rate cut recently. While the direction in which rates are headed is known the only uncertainty is on RBI’s timing. Factors that would drive future rate cuts include an easing of supply side constraints and availability of key inputs, progress on fiscal consolidation, effective monetary transmission, monsoon outturn and international developments. Recent data suggests that disinflationary pressures continue and are in fact evolving at a much faster-than-expected pace. However, the RBI has clearly articulated the upside risks that may alter its inflation outlook, viz a firming up of oil prices, a seasonal uptick in food prices (government’s efforts critical here), and a possible spillover of volatility from international financial markets. The strength of aggregate demand versus capacity may strongly influence near-term inflation. The RBI expects inflation to remain benign in first half 2015-16 before rising to sub-6 per cent levels in mid 2016. As per the framework agreement, the RBI will seek to bring inflation down to 4 per cent by 2017.
Business on upswing
Sonata Software is a global IT services company that focuses on enabling businesses gain value with strategic IT initiatives. During the latest quarter of fiscal 2014-15 the company’s PAT increased 63 per cent to ` 321.38 million from ` 196.81 million. Revenue for the quarter grew 39 per cent to ` 1,245.99 million from
Rs 897.83 million. Sonata is scaled up its engagements with strategic customers across ISV, retail and travel segments by helping in their digital information in the areas of omni-channel commerce, mobility, social and analytics. The core drivers of its performance thus continues to get strengthened. The stock P/E ratio is at 12.85 x FY15E and 10.79x FY16E respectively. We recommend BUY in this particular scrip with a target price of ` 170 for medium to long term investment.
Strong operating performance
We have raised our TP of Axis Bank recently as we believe that the stock deserves to be traded at higher multiple. The operational performance of the bank is strong with public private partnerships (PPP) rising at 31 per cent CAGR in the past six years. This is due to strong loan growth, healthy net interest margin (NIM), fee income growth and strong cost control. Return on equity (RoE) is stayed in the range of 18-20 per cent while return on assets (RoA) has increased consistently to 1.7 per cent. Going ahead, we expect the return ratios to stay at current healthy levels. A major positive that came out of the Budget for private banks is that the distinction between different types of foreign investments is going to be done away with and replaced with composite capital. Earlier, the maximum foreign investment in private banks was capped at 74 per cent of which FII holding was capped at 49 per cent. With the abolition of such sub limits FIIs will have larger headroom to increase their holding in private banks. Major beneficiary will be Axis Bank. The fundamentals of the bank remain same. However, owing to enhanced FII headroom, the strong investor interest in the stock will continue further.