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Informist, Tuesday, Jul 16, 2024

By Alina Geogy

MUMBAI – India's headline indices could extend their record rally by inching higher Thursday as optimism over the upcoming Union Budget is driving positional buying, market watchers said. However, major corporate earnings expected to be detailed in the next 2-3 days will determine whether Indian equities can hold on to these gains before the Budget announcement, they said.

Nifty 50 constituents LTIMindtree and Asian Paints are scheduled to release their earnings for the June quarter Wednesday, and Infosys will declare its results Thursday. The equity market is shut Wednesday for Moharram.

The market sentiment is positive now with data indicating net buying by foreign institutional investors this month and record inflows through mutual funds and systematic investment plans, Amish Shah, research analyst at Taurus Corporate Advisory Services, said. As a result, liquidity in the market is high, which suggests the bullish trend may continue, he said.

Today, the Nifty 50 and the BSE Sensex both closed 0.1% higher at fresh closing highs of 24613 points and 80716.55 points, respectively. Both benchmarks also hit intraday highs, at 24661.25 and 80898.30 points, respectively. The 50-stock index is expected to face resistance at 24750-24775 points and find support at 24550 points.

While the indices may rise, gains are seen to be limited in nature as investors remain slightly cautious because of frothy valuations, which could trigger selling for profit. "The market is overvalued right now, there are no second thoughts about it," a research analyst at a domestic brokerage said. Because of this, we are "finding it difficult to recommend stocks to clients", the analyst added.

There are limited triggers for further re-rating of valuation multiples, which means companies need to grow cash flows and earnings while reinvesting them at high rates of return, Vinay Paharia, chief investment officer at PGIM India Mutual Fund, said in a note. "We are more comfortable with valuations for large-caps versus those of the mid-cap and small-cap segments," he said. Thus, earnings and commentary from companies will continue to be key triggers for the market even after the Budget steals the spotlight for a while.

On Thursday, information technology major Infosys is expected to report sequential growth in revenue for Apr-Jun, aided by an increase in large deals. The company is also expected to retain its revenue growth guidance of 1-3% in constant currency terms and maintain operating margin guidance of 20-22% for 2024-25 (Apr-Mar), according to various broking firms.

Its peer LTIMindtree is also expected to post good earnings for Apr-Jun, with sequential growth in profit, revenue, and margin figures. On the other hand, India's largest paints company, Asian Paints, is expected to report a decline in consolidated net profit for the June quarter.

Next week, investors will watch for key aspects of the Budget such as allocation to capital expenditure. They expect high budgetary outlays in sectors such as railways, defence, and infrastructure. Stocks in these sectors usually gain ahead of Budget day, a research associate at a large domestic brokerage said.

Companies that focus on affordable housing are likely to benefit if the government rolls out schemes targeting the rural or low-income segments, the research associate said. Real estate companies may benefit if the government changes the capital gains tax structure, another analyst said. The government may reduce the real-estate holding period for long-term capital gains tax to 12 months from the current 24 months, news reports suggested. There is speculation that changes may be made to taxes on capital gains from equities too.

Analysts expect bank stocks to gain but recommend caution as some banks struggle with slow growth in deposits. State-owned banks such as State Bank of India are better placed right now, owing to better deposit growth and a robust balance sheet compared to sectoral peers, Shah of Taurus Corporate Advisory Services said. Banks are likely to experience pressure on net interest margins as a result of the rising cost of deposits, he said. Today, the Nifty Bank index snapped a three-day winning streak and closed 0.1% lower at 52396.80 points.

Defensive stocks, such as fast-moving consumer goods and pharmaceutical companies, will continue to be a safe bet for investors amid concerns of high valuations and an impending correction in the market. Improving purchasing power among individuals in tier-2 and tier-3 cities, growing rural demand, reduction in inflationary pressures, and the forecast of a normal monsoon are all set to benefit fast-moving consumer goods companies, Yash Dalal, research associate at Sushil Financial Services, said. However, analysts said the sector is a mixed bag because of the varied rural exposure that these companies have and their product portfolio mix, which could be reflected in their earnings.  End

Edited by Rajeev Pai

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