Stock Markets Ahead – 28-05-2014 …


The decisive election verdict is an unambiguous endorsement of a changing India. With the market having gone up 25% from the time Modi was anointed Prime Ministerial Candidate and looking at the challenges the new govt will have to face, there is understandable disbelief amongst the investing community on the new government’s ability to move ahead decisively on reforms.

However we strongly believe that the growth has bottomed out, CAD is under control and INR stablised. The immediate priority of new govt – inflation control, clear stalled projects and kick start the investment cycle and undertaker bureaucratic reforms. We reiterate that we are at the cusp of economic turnaround and LT bull market.

Over last couple of days we have seen some profit booking. We maintain that this correction is healthy. Volatility is expected to remain high as we go into the Derivative expiry. Budget will now emerge as the next key milestone for the market. Expect govt to lay roadmap for raising country’s energy security, undertake labor reforms, focus on improving centre state relationship, undertake thrust on FDI, increase government plan expenditure, undertake subsidy rationalization. Nifty trades at a reasonable valuation of 15X which are reasonable. We continue to be OW domestic cyclicals.

Key Buys : RIL(1.82), ICICI Bank(1444), Tata Motor DVR(242), Dr Reddy(2305), Tata Power(Rs. 99).

Key mid-cap Buys: Oberoi Reality(230), ITNL(195), H Zinc(Rs. 157).
Rollovers: Market-wide roll 42%; Nifty roll 36%
After yesterday’s fall, the index showed weakness in today’s session as well. On the D-2, market-wide rollovers stands at 42% compared to average rollovers of ~40% (last three series). Market wide futures OI stands at ~INR 860bn compared with an OI of ~INR 638bn on the D-2 of April expiry.

Roll levels (cost to long rollers) in the market contracted slightly. It was ~60-62bps as compared to ~65bps yesterday. Lower currency hedging rates for foreign arbitrageurs have kept the roll levels suppressed in the current series.

Nifty rollovers stand ~36% compared to the average rollovers of 35% (last three series). In line with stock futures, Nifty roll levels also contracted after starting the day at ~19.5 points (cost to long roller), it went down to ~17.5 points. Adjusted for dividends expected to go ex next month (~31 points), Nifty rolls were happening at ~48-49 points (67bps). Nifty future holds an OI of 517.7k contracts (INR 189.9bn) as compared to 431.4k contracts (INR 147.5bn) on D-2 of April expiry. Around 41k Nifty contracts were rolled while ~9.4k contracts were unwound in May series.

Rollover activity has picked up in pharma (46%/27%), cement (53%/35%) and oil & gas (48%/32%) on the D-2. Counters where rolls have picked up are Bajaj Auto (53%/29%), HDFC Bank (49%/27%) and Bharti Airtel (41%/21%).

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