Fasten your seatbelt: Q1 earnings may send market soaring post current pause

The domestic equity market corrected steadily this past week, especially the index heavyweights, as FPIs continued to book profit. Investors have broken out of the defensive shackles of 2020 and increased their risk appetite. Global central banks undertook huge borrowing activities to tackle the economic contraction that triggered revival in the economic growth. As fiscal deficit was fast expanding, India’s debt witnessed a 1,090 bps jump to 58.8 per cent of GDP as of March 2021 from 47.9 per cent in FY19.

As the situation evolved, leading sectors such as consumer durables and auto fell out of favour and handed the baton to pharma, technology, infrastructure and construction. India Inc took a more conservative approach, as they moved from aggressive capex and expansion towards cleaner balance sheets to cushion the impact of any future uncertainties.

In fact, based on a research of 1,000 public firms, debt reduction across companies came in at about Rs 1.7 trillion in FY21, one-fifth of FY20 levels.

FY21 may be the year of deleveraging, but does that mean most of these companies would be debt-free? Not really. Since they have resorted to borrowing funds at lower rates by issuing bonds to repay their high cost debt — a smart tactic to benefit from lower yields!

Companies have been looking to better manage and turn operating leverage in their favour with cost control measures. They are deferring non-critical capex and curbing excess operating expenses to maintain cash flows.

Such prudent capital management has been well received by investors, who have rewarded these companies with premium valuations, despite some macro-related uncertainties. Hence, a simple strategy for investors to remain in the market would be to continue to hold their long positions in strong players, while those on the sidelines can enter the market on healthy pullbacks. However, aggressive investment in smallcaps should be avoided for now.

Event of the Week

With an attempt to push credit/liquidity to the most-needy distressed pockets of the economy, the Finance Minister announced Rs 1.5 lakh crore additional credit to small businesses, more funds for the healthcare sector and loans to tourism agencies and guides. These measures are aimed at cushioning the sub-stratum of the economy, both from the demand as well as supply sides. While these measures are aimed at the right direction, they do not seem enough to completely erase the pain, since the economy continues to remain bleak as indicated by the core sector data.

India saw a 16% YoY jump in May, which is much lower than the 61% YoY jump we saw in April. As the core data points to a slowdown in recovery, India may need more support from the government to recover swiftly.

Technical Outlook
Nifty50 closed negative and remained in the red throughout the week, but still it has gone nowhere. In fact, the index is seeing strong demand around 15,600 level and is trading in line with other emerging market indices. As long as we trade above the current support, which seems a more likely scenario, traders are advised to maintain a cautiously bullish bias and can initiate long positions around the support while keeping a stop loss just below 15,560 level. The immediate resistance is now placed at 15,900.


Expectations for the Week
The Q1FY22 earnings season is about to commence next week with largecap IT companies scheduled to announce their numbers to begin with. IT services companies in the US announced exemplary numbers and saw an upward revision in their outlook given strong tailwinds. Accordingly, IT stocks in India have been witnessing a strong uptrend over the past couple of weeks, driven by strong earnings expectations.

Therefore, investors should look for any short pullbacks post earnings as an opportune time to enter the IT stocks.

Nifty50 closed the week at 15,722, down 0.87%.

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