­­Correction more likely amid high valuations

Sustained by further progress on the vaccine front, the latest stimulus package to revive the manufacturing sector, consistent FII inflows and positive global cues; the markets ended Samvat-2076 on a high note. Samvat- 2077 started on a positive note for the equity markets with the Nifty notching gains of 0.47 per cent, to end at 12,770 and the BSE Sensex ended at 43,638, a 0.45 per cent gains during the ceremonial one-hour-long muhurat trading session. It is pertinent to observe that the BSE Midcap index hit a 52-week high of 16,028 in Muhurat trades surpassing its previous high of 15,931 touched on February 12, 2020. Both the Nifty Midcap and Small-cap indices have been forming a higher base above 50 days exponential moving average (EMA), which has been held well since June. Analysts expect midcap and smallcap performance will gather steam on the back of price and valuation comfort.

Given the economic recovery, analysts remain bullish on the mid-cap segment and expect it to do well in Samvat 2077. Samvat-2076 had been a roller-coaster ride, as the benchmarks swung from all-time highs to their March lows. The Nifty touched a three-year low of 7,610.25 on March 23 as panic gripped the markets. Since then markets touched all-time highs in November, crossing the 12,600 mark on November 10. The market has discounted almost all major positive developments like announcement of successful vaccine, US elections outcome, and moderation in number of Covid cases and proportionate improvements in India's economic parameters. Majority of market participants believe that the markets would witness a correction due to its peak valuations and witness profit taking in the first half of Samvat-2077. Current bullish valuations have been attributed to the-better-than-expected results in the September quarter. However, savvy market players feel that the market valuations are ahead of corporate earning potential. Expect a 5-10 per cent correction in the markets. Sectors poised to do better in the coming year are banks, NBFCs, automobiles, oil &gas, telecom, utilities, capital goods, cement and metals. Corporate earnings growth will be the most crucial factor in driving the markets in the next few quarters. Robust bottom-up activity data suggests that the economy may be recovering faster than expectations and the RBI is unlikely to continue the rate easing cycle. Concerns of inflation are back with the average inflation significantly above six per cent in the fourth quarter of the current fiscal. RBI may hold policy rates in December monetary policy review meeting. Going forward, market direction will be dictated by macroeconomic data, movement of Indian rupee, crude oil prices and global cues. On the back of just 2.06 times subscription, listing of Gland Pharma is expected to be muted. Performance of the stock after listing will have strong bearing on other forthcoming high priced IPOs feel observers.

Quote of the week: 'An investment in knowledge pays the best Interest' - Benjamin Franklin. When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research, study, and analysis before making any investment decisions.

F&O/ sector watch

Riding on momentum in cash markets, the derivatives segment witnessed heightened activity. Nifty gained for the second straight week with gains of more than 3.5 per cent and Bank Nifty outperformed with gains of nearly six per cent. In the options segment, maximum Open Interest (OI) in Call options is at 13,000 strike and in Put options is at 12,600. The Implied Volatility (IV) of Calls closed at 16.70 per cent, while that for Put options closed at 17.06. Continuous fall in the volatility is giving fillip to the bulls. The Nifty VIX for the week closed at 20.62 per cent. PCR of OI for the week closed at 1.53. With no major events in near term, overall option data indicates that in the coming truncated week the Nifty is likely to oscillate in the range of 12,500-13,000 in the coming week.

Use declines to buy National Aluminium Company Ltd, Punjab National Bank, REC Limited and Indian Oil Corporation Ltd. Stock futures: Looking good are Ashok Leyland, Axis Bank, BEL, Bandhan Bank, ICICI Bank, Infosys, Hero Motocorp and Manappuram Finance. Sell on rallies Bharat Forge, InduSind Bank, DLF, Lupin and UPL.

Stock picks

Tata Steel BSL LTD is engaged in the steel business. It also offers Galume Coil and Sheet. It manufactures high carbon, low alloy hardened and tempered steel with a combined production capacity of over 2,200 metric ton (MT)/Month. The company has steel production capacity of approximately 5.6 million ton per annum. Its plants are located at Ghaziabad, Uttar Pradesh; Raigad, Maharashtra, and Dhenkanal, Orissa. Turnaround performance in Q2 indicates good visibility of earnings in next few quarters. Buy for medium term target price of Rs75.

DCW LTD is engaged in the manufacture of caustic soda, soda ash and polyvinyl chloride (PVC) resin. Through its SIOP division, DCW also operates in the specialty chemical segment. The Company produces Calcium Chloride at its SIOP Plant. The company has manufacturing units at Dhrangadhra, Surendranagar District, Gujarat, and Sahupuram, Arumuganeri Post, Thoothukudi District, Tamil Nadu. The company produces over 150,000 tons per annum (TPA) of industrial salt for captive consumption. It also runs a 36-megawatts (MW) furnace oil based Captive Power Plant and a 58.3MW coal based Cogeneration Plant. Buy for medium term target of Rs30.

EMAMI LTD is a fast moving consumer goods (FMCG) company. Its brands include Navratna oil, BoroPlus antiseptic cream, Zandu and Mentho Plus balms, Fair and Handsome fairness cream for men, and Kesh King ayurvedic medicinal oil. It also offers Navratna cooling talc, Navratna i-cool talk and Zandu Balm Ultra Power. It has over 2,900 distributors, a direct coverage of approximately 0.64 million retail outlets and indirect reach across over four million retail outlets. Its international business is driven by clusters: the Middle East, North Africa and Pakistan (MENAP); the South Asian Association for Regional Cooperation (SAARC) nations and South East Asia (SSEA); the Commonwealth of Independent States and Eastern European nations (CISEE), and rest of the world (RoW). Buy for target price of Rs650.

(The author is a stock market

expert. He is former vice

chairman of AP Planning Board)