Stock indices are seen firm early next week following the sharp rally yesterday, and as the government's move to allow foreign direct investment in aviation and multi-brand retail is seen keeping overall sentiment positive. The government has allowed 49% investment by foreign airlines in domestic carriers, 51% Foreign Direct Investment in Multi-Brand Retail and 100% FDI in Single Brand Retail and also approved stake sale in five public sector companies. While these moves are slightly positive, most have largely been factored in so the upside on these announcements may be limited. The Reserve Bank of India's mid-quarter monetary policy review on Monday may not have a major impact on the market as the central bank is expected to maintain status quo on policy rates given the high inflation. However, investors will watch out for the central bank's remarks on the state of the economy, and its stance on inflation.
India's inflation rate, based on the Wholesale Price Index, rose to 7.55% in August from 6.87% in July. We expect headline WPI inflation to rise above 8% by end-2012, and hence do not see any scope for the RBI to cut rates until the end of 2012. The market will also eye corporate advance tax payment data for Jul-Sep, due on Saturday. Next week, dealers see the National Stock Exchange's Nifty, which ended at a seven month high yesterday, trading in a range of 5450-5600. The 50-stock index ended up 2.6% at 5577.65. BSE's 30-stock Sensex closed 2.5% higher at 18464.27, its highest closing level in 2012.
Although the bias is positive, the upside is seen restrained as Eurozone and domestic concerns have not completely been addressed. (Despite the US Federal Reserve's decision) We believe the persistent Eurozone crisis and more importantly, domestic fiscal constraints and policy paralysis would cap the gains on domestic bourses as the focus would once again shift towards more sustainable and decisive moves from both the government and (RBI) to perk up investments and consumption.
SECTORS VIEW:
The bias for banking, real estate, automobile, and capital goods companies' stocks are seen positive next week, but sustenance of gains depend on the outcome of the RBI's policy. Aviation stocks could rise more on Monday following the Cabinet's move, but gains may not sustain as the development has already been factored in.
Stocks of companies in defensive sectors may trade mostly flat as the improved risk appetite may result in diversion of funds to other sectors. Any upside in metal and mining companies' stocks will be limited that despite the US Fed's monetary stimulus, global commodity prices may not rally due to weak demand from China. Stocks of metal companies that have strong balance sheets and cash-flow visibility. We like HZL (Hindustan Zinc) for its cost competitiveness and strong balance sheet. We cut our earnings estimates for Tata Steel and SAIL (Steel Authority of India) given the recent iron ore price corrections, but we continue to prefer Tata Steel in the steel space given its higher cash flow visibility from its India expansion. We would avoid JSW Steel given that its recent merger with JSW Ispat has sharply increased balance sheet risk. We maintain our UW (underweight) ratings on Nalco, NMDC, SAIL and Sesa Goa. Stocks of NALCO, Hindustan Copper, NMDC, MMTC, and Oil India may gain on the government's move to allow stake sale in them. Stocks from textiles and consumer goods sector are also expected to trade higher especially on Monday on government's move on multi-brand retail FDI announcement.
