Penny stocks have been doing well recently and outperforming the market, impulsion in investors to invest in small stocks.
Vinod Nair
An important development in this week was the ban of H1-B visa for IT players in US till December 2020. Over view is that IT companies will not be significantly impacted, since most of the IT players from 2017 onwards have reduced H-1B visa filings due to strict restriction put forth by Trump administration.
Companies like TCS, Infosys, Wipro, HCL Technologies etc have de-risked their business model by reducing visa applications by 50 percent to 60 percent till FY19 and increased local hiring.
The current ratio of H-1B to local hiring stands at 40:60 in the IT space. View of prominent US technology companies is negative on this measure expecting to impact the US economy. We can expect a better deal post December with a likely change in the misleading policy.
US companies continue to have a constructive view on immigrants given the fact that availability of local talent is limited.
Currently, the market is contemplating to invest in underperformers like Aviation sector assuming a better half in the rest of the year due to re-opening of the economy.
Operations have resumed recently; the capacity utilisation remains low at around 40 percent due to low demand given cautious view of public & corporates. We expect the demand situation to be weak for the next couple of months given the increasing COVID-19 awareness & cases in India, impacting travel and tourism sector.
This will hit profitability and we expect consolidation in fleet operators in the short-term. Though airlines enjoyed some respite in terms of aviation turbine fuel (ATF) prices, given high fixed cost it is not going to help the situation. We expect situation to gradually improve starting from August to September 2020. We have a positive view in the long-term but considering near term demand headwinds and likelihood of higher losses, we have a negative view in the short-term.
Penny stocks have been doing well recently and outperforming the market, impulsion in investors to invest in small stocks. Penny stocks usually do that, they have the tendency to start late in the market rally and outperform the main indices & stocks during the last phase of the rally.
This time too, in majority many of these penny stocks are doing well, also because they had corrected hugely too during the market fall of February to April. They may hold on to the momentum and neither it is known how long will be the time of this ongoing rally, but would fall more when the main indexes and quality stocks start to do better after the ongoing consolidation in main indices.
The market may be in a mild consolidation phase after the solid performance of the last 2-3 months. The current fall in the market is triggered by the alleged second wave of COVID-19 virus in the world, selling by FIIs and high valuation post the momentum in the last 2-3 months while the fundamentals continue to be weak. Domestically, this week's F&O expiry and increase in COVID-19 cases impacted the market.
We were suggesting a range of 9,500 to 10,500 for Nifty 50. Currently Nifty 50 is at the upper-side of the range, Friday closing is 10,363. After touching the 200-day moving average of 10,520, it has moved down, the next level of strong support is level-1 of 10,050 and level-2 of 9,800.
In the near-term, market may range between 10,000 and 10,500. In technical analysis terms, the best level could be 10,900. We suggest profit booking at current level especially for traders and maintain accumulate strategy for long investors with focus on sectors like Pharma, Chemical, IT and FMCG.
Fundamentally, pre-COVID-19 we had a one-year forward target of 12,500 for Nifty 50 which is downgraded to 10,500, due to fall in earnings growth & outlook. The base financials of FY20 have fallen substantially and FY21 earnings is forecast to fall by 10 percent, compared to estimate of 15 percent CAGR for FY21 & FY22 earlier.
Currently, it is also expected that growth will revamp substantially in FY22 with more than 30 percent growth in earning due to low base, revamp in health crisis and strong liquidity support.
We expect relaxation in growth from Q2FY21 onwards with quarter-to-quarter jump in economic activities. We continue to value Nifty 50 at a P/E valuation of 17.5x on one year forward EPS, still leading to a fall of 2,000 points in target. The possibility of upside & downside to Nifty 50 target is evenly balanced today. The sensitivity of the scenario is widely open on both the side with huge positivity & negativity if we have vaccination or fall in virus threat and vice versa. Today, the market is working more towards the positive side.
The author is Head of Research at Geojit Financial Services.
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