RBI policy will weigh on markets

Buoyed by positive global cues and $2.3-tillion infrastructure package announced by the US President Joe Biden, strong auto sales numbers and record GST collections reflecting improving economic environment, markets snapped two weeks losses to log impressive gains during the week ended.

The Sensex rallied 1,021.33 points, or 2.08 per cent, to 50,029.83, and the Nifty50 climbed 360.05 points, or 2.48 per cent, to 14,867.35. Broader market witnessed outperformance from Midcaps and Smallcaps. Weekend death count of 714 due to Covid was highest since October 21, 2020. Given the increase in cases in recent weeks, there has been lot of restrictions imposed by several States including night curfew, gatherings, ban on hotels & malls etc, which experts feel could impact the economy a bit in coming months, though the vaccination across the country is going on since January. In the coming week, investors will take cues from the outcome of the Reserve Bank of India's first monetary policy meeting of financial year 2021-22. Economists expect RBI to maintain status quo on interest rates given the rapidly evolving inflation trajectory and growth dynamics in the country. Watch out for the MPC's commentary on economic recovery in the backdrop of the second wave of coronavirus infections in the country and its update on inflation projections.

Market observers feel the rising bond yields could impact some FII flow to emerging markets, but overall the indication of improving economic recovery is a positive factor for emerging markets. Rising bond yields in US is driven by improving outlook on economic recovery. Though this could strengthen dollar and create volatility in emerging markets in the short-term, the revival in US economy is good news for global equity markets. Look out for the minutes of the US Federal Reserve's latest policy meeting, due for a release on coming Thursday.

Market player's focus will shift to Q4 earnings numbers. Q4 numbers could be strong following better-than-expected numbers in previous three quarters. Investors' attention will be shifting back to fundamentals. This time, investors' expectations are rife for a strong earnings season led by healthy demand recovery and low base effect. On earnings front, revenue growth, margins expansion and management commentary will be key things to watch out for.

Heard on the street

There's always some excitement starting a new quarter and new financial year. However, going by past experience, it can be seen that the market can get stuck on these numbers, too. Lot of times the market has to test the previous high level a few times before it can go higher. Many investors are hopeful that stocks will continue to climb in the Q1. Their optimism is pegged to the prospect of a surge in economic growth amid widespread vaccinations, fresh spending programmes by the government and earnings expectations. Still, they point to risks stemming from the coronavirus which seems to be increasing day-by-day as the second wave of Covid-19 has gradually been spreading fast in some parts of the nation, though there has also been an increase in vaccination. Over the past year, stocks have risen sharply in expectation of an economic rebound. Now that it appears to be here, investors have 'Covid jitters', looking warily at inflation expectations and, ultimately, a reversal of RBI policy.

Futures & options

Supported by bouts of short covering, derivative segment witnessed a strong pullback in the holiday-truncated week. Flavours of the week were metal and cement stocks. Reports of fresh increase in product prices and firm demand propelled Tata Steel, JSW Steel, Shree Cements and others to new highs. Stay invested for further gains.

With the Nifty going through a corrective and choppy phase, focus is back on defensives like FMCG, pharma and IT. Expect IT stocks to outperform against the benchmark index. Use declines to buy Infosys, HCL Tech and TCS. Expect sharp trading moves in banking and rate sensitive sectors after RBI announcement of the outcome of its policy review meeting on April 7.

On the back of AGR dues issue, telecom stocks are expected to remain range bound in near term. The issue of further payment and the total amount due by telecom operators, Bharti Airtel, Vodafone Idea and Tata Teleservices, is back in the Supreme Court, which will now have to decide on the matter. However, none of the three companies paid the 10 per cent of the due amount on March 31, 2021. The reasoning of the companies is that whatever they have paid so far is more than 10 per cent so they were not required to pay anything extra by the March 31 deadline. After the strong pullback last week, markets may consolidate its recent gains in coming trading sessions. Stock futures looking good include Bata, ITC, HPCL, SAIL, Shriram Transport and Motherson Sumi. Stock futures looking weak include Bharti Airtel, escorts, Muthoot Finance, Naukri, Indigo and Godrej Properties.

Stock pick

Power Mech Projects Limited is one among the leading infrastructure-construction companies based in Hyderabad. It has a global presence and provides a spectrum of services in power and infrastructure sectors. With 15,000 direct and 25,000 indirect work force and huge fleet of cranes and machines, it is capable of handling and executing over 4,00,000 MT annually while operating up to 55 sites simultaneously. The company has emphatically established a niche in power generation covering almost every segment including erection, testing and commissioning of BTG and BOPs, and modernisation of power plants and related civil works.

Power Mech extends operations globally and has presence in more than ten countries worldwide. The company has undertaken projects of all types, sizes including ultra-mega power projects, super critical thermal power projects, sub critical power projects, heat recovery steam generators, waste heat recovery steam generators, etc. and entire civil works for power plants.

The company's subsidiaries include Hydro Magus Private Limited for undertaking hydro projects, Power Mech Industri Private limited in Noida, for fabrication, manufacturing and repairing of BTG parts, MAS Power Mech Arabia in Saudi Arabia, to extend the company's services in this part of the world and joint venture GTA Power Mech Nigeria Limited for undertaking project works in the African region.

Why we are recommending

the company

n The company enjoys market leadership position in power O&M and erection business with a market share of 55-60 per cent. Diversification of business to non-power segment, especially civil (including railway, petro chemical, water etc) has helped the company to be in the growth track.

n The company has an order backlog of Rs 7,353 crore (as on February 16, 2021), which shows revenue visibility for next 3 years.

n Expect order backlog to grow at 14 per cent with an average order intake of Rs 3,500-4,000 crore per year. Revenue is expected to grow at a CAGR of 30 per cent during FY21-23 and ROE to be at 16.3 per cent by FY23.

Buy between Rs 565-580 for medium term price target of Rs 925-975. In the event of sharp correction in the broader market, stop loss should be at Rs 525. We are looking at a risk reward ratio of 1:6.

(The author is a stock market

expert. He is former vice

chairman of AP Planning Board)