Earnings, F&O expiry and FII flows among 10 key things to watch out for this week

Bears took control of Dalal Street last week as the market erased all its gains from the previous week, with the Nifty falling 1.6 percent to end tad above 10,300 levels on October 19.

The fall was caused by sell-off in the later part of the week due to liquidity and asset quality concerns in non-banking financial companies (NBFCs), weak global cues on growth worries, mixed corporate earnings and consistent outflow from foreign institutional investors (FIIs). But stability in crude oil prices and the rupee led support to the market.

Earnings will continue to be in focus as 15 Nifty companies will announce their Q2 earnings in F&O expiry week. Experts caution there could be a bit of volatility as well as stock-specific action.

“The market will continue to trade rangebound this week. With the froth in the market beginning to fade away, we believe no new lows will be reached at least till expiry," Jimeet Modi, Founder and CEO at SAMCO Securities & StockNote, said.

However, volatility will remain heightened due to the uncertainty in macros because of rising trade war fears and impact of oil prices, Modi said.

He said the short-term mood will be mainly guided by corporate results. Therefore, investors are advised to be very selective in their purchases and avoid any leverage at this juncture.

The ongoing liquidity crunch in NBFCs and concerns over upcoming assembly elections in five states are likely to cap market upside, experts stated.

Vinod Nair, Head of Research at Geojit Financial Services, said the ongoing turmoil led by financial crunch in the domestic economy, global risk-off and worries over upcoming elections is likely to weigh on markets.

July-September quarter earnings season, so far, has been mixed and there was no major disappointment from companies, which could be one of reasons for supporting markets at lower levels.

This week is also going to be busy one for Dalal Street as more than 300 companies will release their second quarter results, including 15 Nifty50 firms.

ICICI Bank, Asian Paints, Maruti Suzuki, HCL Technologies, Dr Reddy's Labs, Bajaj Finance, Bharti Airtel, Wipro, Bajaj Finserv, Bharti Infratel, Bajaj Auto, Kotak Mahindra Bank, Yes Bank, UPL and ITC are among the big names which are going to announce earnings this week.

 

The country's largest private sector lender will announce its quarterly earnings on Friday. The overall results are expected to be a mixed bag as profitability is likely to decline sharply YoY due to elevated provisions and lower other income while net interest income growth is expected to be in the range of 6-10 percent with strong retail loan growth. Asset quality may remain stable sequentially with improvement in provision coverage ratio.

Motilal Oswal expects loan growth at around 10 percent YoY with moderate corporate loan growth and healthy retail loan growth. It expects profit degrowth of 76 percent YoY and net interest income growth of 6.6 percent YoY.

While seeing 88 percent fall in profit and 8 percent growth in net interest income, Kotak said it expects muted earnings led by higher provisions for bad loans and weak treasury (base had stake sale of Lombard Insurance). "Slippages to be sharply lower at around 2.5 percent of loans and NIM may decline 10 bps QoQ."

It further expects reduction in gross NPLs on the back of resolution of a few more Insolvency and Bankruptcy Code cases as well as write-offs, and feels watchlist may decline QoQ.

The company is expected to announce good earnings growth for the quarter ended September 2018, driven by key segments like cigarette and FMCG.

Brokerage houses expect sales growth in the range of 8-9 percent and profit to be around 7-17 percent YoY with good volume growth in cigarette.

Motilal Oswal expects sales to grow by 8 percent YoY (with mid-single-digit increase in cigarette volumes on a base of a 6 percent decline in 2QFY18), EBITDA by 15.4 percent YoY and PAT by 13.3 percent YoY on favourable base.

ICICI Securities also expects ITC to post 8.1 percent sales growth during the quarter mainly due to robust growth from cigarettes, FMCG and paper segments. "The cigarettes segment is likely to witness around 6 percent volume growth on a low base and FMCG segment is likely to post 16 percent growth in sales on the back of new launches during the quarter."

With improving margins in the FMCG business and higher realisations in the cigarette business, net profit is likely to grow 17.2 percent, the research house feels.

NBFCs, including the ones in the housing finance space, will be closely watched by the Street this week as these stocks corrected sharply in later part of the last week despite measures announced by the Reserve Bank of India. Credit quality concerns could be one of reasons for sharp fall in stock prices.

In fact, have been under pressure since September 2018 with DHFL, SREI Infrastructure, Indiabulls Housing, Edelweiss Financial, Repco Home Finance, IL&FS Investment, etc falling between 40 percent and 68 percent.

The Reserve Bank of India (RBI) statement on October 12 related to measures for NBFCs indicated that liquidity is not a problem in the market and even the central bank has been saying it would ensure enough liquidity in the market. Experts too feel investors are more worried about non-performing assets (NPAs) than liquidity.

They added that even banks, which was the big source of funding to NBFCs, stopped lending after a major default of interest payments by IL&FS which affected sentiment among lenders. Outside banks, big outflow from debt mutual funds also dried up market funding for these companies.

"The issue is about credit and not liquidity. The move by RBI shows that it doesn't want NBFCs to suffer due to liquidity crisis. Of course, any lender would want to be sure of the borrower's repayment capacity. The RBI circular gives a broader message that liquidity is not an issue,” said a senior executive of a large public sector bank.

The steps taken by RBI will push banks to lend to the NBFCs and provide liquidity comfort, said Keki Mistry, Vice Chairman and Chief Executive Officer at HDFC.

All October's futures & options contracts on the NSE will get expired on October 25 and traders will roll over their positions to next month, so there could be volatility in coming week.

"Volatility may be driven by the traders' roll over positions in the F&O segment from the near month October 2018 series to November 2018 series," Rahul Sharma, Senior Research Analyst at Equity99 said.

Maximum Call open interest (OI) of 43.56 lakh contracts was seen at the 10,600 strike price, followed by the 10,500 strike price (with 38.57 lakh contracts) and 10,700 (with 37.84 lakh contracts).

Maximum Put open interest of 33.53 lakh contracts was seen at the 10,000 strike price, followed by 10,200 strike price (with 26.66 lakh contracts) and 10,300 (with 20.46 lakh contracts).

Hence, 10,000 levels could act as major support for the Nifty while resistance could be 10,600 this week.

The market has been in a consolidation mode after recent correction and moving in a range of 10,200-10,600 kind of levels. Technical experts feel if the Nifty50 breaks 10,138 levels on closing then there could be more selling pressure which may take the index below psychological 10,000 levels.

On the contrary, if the index sustains 10,300 levels for coming sessions then it may inch up towards 10,600-10,800 levels, experts said.

The index lost 1.6 percent in last week and formed bearish candle on the weekly charts, which also resembles a 'Bearish Engulfing' pattern.

"Ending the week with a bearish candle implies, it may kick start the next session on a weaker note. The Nifty broader trading range for the coming week is expected to be 10,100-10,500," Stewart & Mackertich said.

"The Nifty formed a bearish candle on daily and weekly scale which suggests that Bears are holding tight grip in the market," Chandan Taparia, Associate Vice President | Analyst-Derivatives, Motilal Oswal Financial Services told Moneycontrol.

Now till the index holds below 10,400 zones it could slip towards its crucial support of 10,200 then 10,138 mark while on the upside hurdle is seen at 10,450-10,500 zones, he feels.

The flow of money into equities from FIIs will be closely watched as they have been net sellers for the third consecutive month. In September as well as October, they tuned net sellers in equities as well as debt markets.

FIIs offloaded more than Rs 18,500 crore worth of shares in October and Rs 9,600 crore in September. During the same period, they net sold around Rs 11,500 crore and Rs 10,500 crore worth of debts in both months respectively.

Strong dollar demand on improving US economy and rising Fed interest rates, and sentiment ruined by IL&FS' consistent defaults on interest payment to bondholders which led redemption pressure for mutual funds are some of reasons for outflow of FII money.

On the contrary, DIIs have been net buyers in same months (Rs 16,500 crore worth of equity buying in October and Rs 12,500 crore in September) when the frontline indices crashed more than 12 percent.

Foreign exchange reserves data for the week ended October 19; and bank loan and deposit growth for week ended October 12 will be released on Friday.

Source: MoneyControl.com