May 13, 2018 / 6:28 AM / 10 months ago

India Markets Weekahead: Time to invest in mid-cap and small-cap stocks

Indian stocks resumed their upward journey as global markets rebounded on softer-than-anticipated U.S. inflation, which alleviated worries of faster rate hikes by the Federal Reserve. Investors also welcomed continued moves between the U.S. and North Korea to reduce tensions.

A man walks past the NSE (National Stock Exchange) building in Mumbai, India July 11, 2017. REUTERS/Danish Siddiqui/File Photo

Back home, cautiousness prevailed ahead of the Karnataka state election and amid concerns of a weakening macro-economic situation emerging from widening current account deficit due to rising oil prices and a depreciating rupee. The Nifty ended the week at 10,806, up 1.77 percent, but mid-cap and small-cap indices fell 1.3 percent and 0.96 percent respectively. The rupee went below the important barrier of 67.20 for the week on the back of rising crude prices, despite a fall in the dollar index.

American President Donald Trump announced that he was withdrawing from the 2015 Iran nuclear deal and would impose sanctions on the OPEC nation. Brent crude prices rallied to $77 a barrel for the first time in three-and-a-half years.

In a breakthrough deal, Walmart Inc said it will pay $16 billion for a roughly 77 percent stake in Flipkart. This is the highest price any foreign company has paid for a stake in an Indian company, and the e-commerce firm is now valued at more than $20 billion. India's e-commerce market, pegged at a modest $38 billion in 2017, is expected to grow up to $200 billion by 2027, which explains Walmart’s interest. Apart from capital, Walmart brings expertise in online groceries and a strong food supply chain.

In stock specific action, Fortis Healthcare’s shares fell after it decided to accept an investment offer from Hero Enterprise Investment Office and Burman Family Office after a five-way bidding war. The recommendation of the board will be placed before shareholders for approval.

Banking stocks were in focus after government bond yields declined sharply after the RBI announced a $1.5 billion debt purchase. It was a positive surprise for market as it comes earlier than expected amid a surplus in liquidity.

Separately, state-run lenders rallied on reports the RBI would provide another leeway in accounting for losses from trading in government securities. In early April, RBI permitted lenders to spread out their trading losses over a four-quarter period, saving them of provisioning expenses.

Telecom stocks tumbled after Reliance Jio unveiled a new post-paid plan which promises the “lowest tariffs in India and abroad to post-paid users”, resulting in Bharti Airtel stocks plunging over 6 percent on Friday. There is still some pain left in the sector.

ICICI Bank was in action during the week and ended up 10 percent despite weak Q4 results. Its net profit dropped nearly 45 percent on higher provisioning. The other prominent results that stood out were mainly from the consumer space, namely Asian Paints, Nestle, Titan, Jubilant, GCPL, Avenue Supermart and Parag Milk Foods. The management of these companies were upbeat about future growth potential. Lenders like Union Bank, Indian Bank, Federal Bank, Canara Bank, Dena Bank reported numbers which were below estimates.

The IMF expects the Indian economy to grow at 7.4 percent in the current fiscal and accelerate further to 7.8 percent as it recovers from the impact of demonetisation and GST rollout. China is projected to grow at 6.6 percent in the current year, which will moderate to 6.4 percent next year. Asia continues to be the main engine of the world’s economy, accounting for more than 60 percent of global growth, of which three-quarters comes from China and India, the IMF said.

On the macro front, IIP faltered in March after registering robust growth for four consecutive months. It grew 4.4 percent in March against a downward revised 7 percent increase in the previous month.

Monday will see markets reacting to exit polls from the Karnataka assembly election, where no single party is expected to get a majority but is tilted in favour of the BJP. This means the regional Janata Dal (S) could assume the role of a kingmaker. Results are expected to be announced on May 15.

In the coming week, key corporate earnings that will be out include Lupin, Hindalco, ITC, and Bajaj Auto. Apart of these large-caps, a plethora of mid-caps will be declaring their numbers. On the macro front, CPI and WPI data for April will be announced on Monday.

Most retail investors are worried about the performance of mid- and small-cap stocks but I see it as a huge opportunity because they cannot move in the opposite direction of the benchmark index for too long. Even if the Karnataka election result goes against expectations, it would lead to a knee-jerk reaction and not a U-turn for markets. It’s time to invest in these segments because some of the stocks are quoting at levels as if the Nifty is below 9,500.

Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.

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