Closer the end of lockdown, faster the fund-raising spree!

Reliance, the largest private sector company by market cap, has scheduled its AGM in the coming week.

Jul 10, 2020 04:07 IST India Infoline News Service

Markets continued their fractured upmove defying grim economic growth prospects of India as well as the world as projected by IMF in its latest report. It seems that first time investors and traders who can also be termed as lockdown players have taken this market higher specially by shoring up the share prices of small cap and penny stocks. Majority of stocks in BSE500 and Nifty50 are hovering close to 200-day moving average levels which bring the markets at an equilibrium and going forward even a slightest push of liquidity would take the bourses higher, but this seems unlikely to happen given the outflow of funds.

Mutual fund industry witnessed its lowest monthly net inflows in equity schemes in four years at Rs. 240 Crs which implies good proportion of redemption in domestic equity funds. At an aggregate level, average mutual fund AUMs have reduced by nearly 8% QoQ, this can majorly be attributed to redemptions in the months of April-June 2020. A large chuck of liquidity will also be squeezed-out from secondary markets in the form of FPOs, IPOs, and QIPs. When too big to fail financial institutions like ICICI Bank and Axis Bank are expected to raise amounts of Rs. 15,000 Crs each, non-bank lender HDFC Limited is expected to raise around Rs. 14,000 Crs to meet any potential inorganic growth opportunities, SBI which took an enabling resolution of Rs. 20,000 Crs to raise capital and many more come one by one to raise money, this optically raises a question mark on the financial sector of India. Why is so much money required so suddenly? Investors are hoping that by September quarter earnings, clarity will emerge but it is also expected that majority of money will be raised prior to the September quarter. How India Inc’s September earnings would turn out only time will tell but given the fund-raising exercise it seems all is not well. It is advised to remain cautious while picking NBFCs and PSU banks for now.

Event of the Week
Country's largest software services firm Tata Consultancy Services reported its Q1FY21 net profit at Rs. 7,008 Crs vs. Rs. 8,049 Crs the previous quarter. IT giant’s constant currency revenue growth has also slipped to -6.9%. However, taking a forward-looking view, the IT major has given a glimmer of hope that margins in coming quarters would be back to pre-COVID-19 levels by Q4FY21. Its software and IT service verticals are also expected to accelerate growth post COVID-19. It would be interesting to judge future growth of other manufacturing and service companies from their Q1FY21 results and management commentary. So far so good for TCS operating in IT services but the health check-up of real economy is needed for markets to find their feet at current juncture.

Technical Outlook
Nifty 50 opened gap up in the current week, however, trading range remained very narrow compared to all other weeks since the bottom of 7500. The entire rally has unfolded in the form of rising wedge formation and at the current juncture Nifty index is trading around the resistance of rising wedge and approaching the crest of the wedge. The participation in the rally is not broad-based, only a few heavyweights are driving the index higher. The bank nifty index, which had been rising mutedly until now, has outperformed the benchmark index in the week gone by and financial stocks have contributed the most towards Nifty gains. We believe the market is little stretched in the short term and expect a very limited upside. A break below 10600 will significantly dent the strength of the bulls.

Expectation for the Week
Reliance, largest private sector company by market cap, has scheduled its AGM in the coming week. Given by recent past records, RIL’s AGM improves the mood of its stock price and given the huge weight in index, markets too are expected to remain on a higher side unless negative global cues spoil the RIL AGM party. This time it is expected that the AGM would garner maximum viewership given the slew of deals cracked for Jio Platforms. Q1FY21 results are bit slow but will be important to assess the impact of post lockdown scenarios and the extent of demand uptake in the economy. Nonetheless, results are expected to be exceptionally weak but commentary is expected to be strong enough which would keep the prices where they are in a narrow range. In general, the bigger trend triggers will emerge on the back of how developed countries and foreign funds behave and respond to the post COVID-19 dynamics. Domestic factors may not have any major impact going ahead for the next few weeks. US markets are likely to remain rangebound but any severe crack can bleed domestic bourses as well. As usual, investors are advised to stay on the sidelines and not indulge into FOMO buying but wait patiently. However, they should continue with their SIPs and regular investments in the market. Nifty50 closed the week at 10,768.0, up by 1.5%.  

The author of this article is Mr. Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote

Pubslished as Received
The views and opinions expressed are not of IIFL Securities,

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