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Informist, Friday, Aug 30, 2024

By Alina Geogy

MUMBAI – With the key indices venturing into uncharted territory the past few days, analysts are divided on what direction the market might take next week. Some analysts are of the view that the indices could scale new peaks over the next few days supported by healthy macroeconomic factors and strong domestic inflows. On the other hand, some recommend a cautious approach due to expensive valuations in select sectors and the probability of profit-booking kicking in.

"Right now, I am having a very cautious stance as I am unsure at what point the market will reverse and even whether it will reverse or not," a research analyst at a domestic brokerage firm said. The analyst suggested taking a stock-specific approach by sticking to stocks with strong fundamentals rather than targeting the broader market. Profit-booking is a must in the current scenario to ensure fresh entries in the market, the analyst said.

The Nifty 50 is expected to face resistance at 25500-25600 points and find support seen at 24980–24950 points. Today, the Nifty 50 and the Sensex ended at 25235.90 points and 82365.77 points, respectively, up 0.3% each.

The liquidity seen in the market right now, especially the high inflows from domestic institutional investors, is a major factor for the rise in the benchmark indices, analysts said. The asset management companies are also in a tough position because they cannot sit on the inflows but have to deploy the money, they said.

Shares of several real estate companies and public sector enterprises, particularly those of defence companies, are at stretched valuations, analysts said. Defence stocks were undervalued a year back, but these have rallied so much that they are no longer being recommended for buying at this point due to "overvaluation", an analyst said.

However, analysts are positive on shares of pharmaceutical firms, chemical manufacturers, and metal companies. Chemical and metal stocks are expected to gain over the coming days, and they are a "good bet for sector rotation", analysts said.

Shares of banks have been underperforming in the past and these are expected to reverse the trend, analysts said. "Its high time that these stocks catch up with the market," a research analyst at a domestic brokerage firm said. Shares of HDFC Bank and Kotak Mahindra Bank have underperformed for at least a year, while shares of State Bank of India have been sideways, the analyst said. Shares of smaller banks, such as Bandhan Bank, have also been under pressure, while those of ICICI Bank have performed slightly better, the analyst said.

The Nifty Bank index has been an underperformer and as per the closing data, there has been selling and distribution, which suggests weakness, Brijesh Ail, head of technical and derivatives at IDBI Capital Markets & Securities, said in a note. "We maintain a cautious approach and wait for further confirmation for an extended move," he said.

Shares of HDFC Bank will be in focus as global index provider MSCI will increase the stock's weight in its indices from Sep 2, as part of its review for August. MSCI will also add seven stocks, including Dixon Technologies India, Oil India, Rail Vikas Nigam, and Vodafone Idea, to its global standard indices. It will remove Bandhan Bank from this index. Further, MSCI will add 27 and delete six Indian stocks from its MSCI Global Smallcap Indices. These changes are expected to trigger buying in stocks that are added and selling in stocks that are removed from the indices but analysts said this will play out over a few days.

Meanwhile, pharmaceutical stocks are expected to remain a favourite for investors and will continue to gain. Pharmaceutical companies are showing signs of improvement in margins after seeing some slowdown in the last few quarters, Deepika Murarka, research analyst at Choice Equity Broking, said. The US business, which is a significant market for several domestic drugmakers, is also showing improved momentum, especially with lower price erosion, she said. These factors will lead to better earnings for these companies from October, she said. 

The Nifty Pharma index could gain 4-6% in the coming month, provided there is no sudden downfall in the market, Murarka said. The Nifty Pharma has gained nearly 7% so far this month. It was also among the top three gainers in sectoral indices this week. Most large-cap and mid-cap pharmaceutical stocks are not overvalued, Murarka said. "We are valuing them at an average of 20-25 times on FY26 (2025-26), which is a very decent valuation for pharma companies," she said. Besides reasonable valuations, the pharmaceutical space has been a "safe bet" for investors, which could be a reason for the current buying interest for these stocks, she said.

Shares of sugar refiners and ethanol producers are not expected to gain as strongly further. These stocks rose 5-10% today after the government revoked a restriction on the usage of sugarcane juice and sugar syrup for ethanol production starting November. While this development will benefit the sugar industry, the upside for these stocks is now capped because of their stretched valuations, Shailesh Kanani, fundamental equity research analyst at Centrum Broking said.

The positive news flow for the sector is expected to continue, Kanani said, as a 5-8% upward price revision in ethanol prices is expected soon, followed by an increase in the minimum support price for sugar. The positive effect of this development will be seen from October, said Atul Chaturvedi, executive chairman of Shree Renuka Sugars, a sugar refining and ethanol production company, as per a CNBC-TV18 report.

Shares of automobile companies will also be in focus as investors will react to the sales data for August, which will be released Sunday and Monday. Sluggish retail demand and higher inventory levels at dealerships are expected to weigh on monthly passenger vehicle wholesale volumes, Nomura Financial Advisory and Securities (India), said in a report today. Similarly, sales figures of commercial vehicles are also likely to be lower due to sluggish demand and a higher base, the brokerage said. In contrast, sales of two-wheelers and tractor are likely to grow, led by improved rural sentiment and above-normal monsoon, it said.  End

Edited by Ashish Shirke

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