Research Reports

The markets are likely to be in a consolidation mood in this holiday-shortened week. With Merkel on still on a holiday this week, there is unlikely to be any political bad news from Europe. The economic news emanating out of Europe may not be positive though.

Trading on our bourses would be truncated as well. With markets closed on August 15th for the Independence Day holiday, there is going to a break in the momentum. Our weekend is going to extend into the next week with the Eid Holiday on Monday the 20th August.

The gaps usually make the markets volatile when they resume. Usually punters don?t like to keep large open positions during such times.

18 week high

The Nifty closed Friday with a loss of just 3 points at 5320. The Nifty made a weekly high at 5377 on Wednesday but made subsequent lower tops on Thursday and Friday.  The set up, however, is not exactly bearish, as it seems.

Despite the setbacks, the Nifty still managed to close the week with a gain of 2.01%. To put the weekly close in perspective, it was the highest weekly close in 18 weeks.

The mid and the small cap indices which did better than the larger indices, in the week ended 4th August, lost to the benchmark indices in the week ended 11th August. The BSE Small Cap and BSE Mid Cap indices rose just 0.06% and 0.45% respectively against the 2.01% rise seen in the Nifty during the week.

The levels for the Nifty remain 5377 on the higher side and 5150 on the lower side. One can hope for consolidation with a lower bias, with in this range.

SBI: The fine print concerns

Though the worse than expected SBI results had come during the market hours on Friday and appear to have been fully digested, the fine print guidance of further deterioration of asset qualities in the coming quarters, can weight on the stock.

The NPA?s could further rise to 5% in the current quarter as against the 4.4% in the last quarter.

ONGC to cheer Forex gains, new discoveries

ONGC is likely to likely to absorb any residual discontentment with SBI and cheer the markets.

The largest oil and gas explorer did well to post a 48% increase in net profit for the quarter largely on the basis of a weaker rupee. During the quarter, the rupee declined 8.6 per cent against the dollar. Subsidy sharing for the company increased marginally to Rs 12,346 crore from Rs 12,046 crore year-on-year.

The oil major also announced a major discovery along with three minor ones.

The large discovery is in the D1 block, just 200 km off the coast of Mumbai. The find will catapult D1 to become the third largest field in western offshore after prolific Mumbai High and Heera.

D1, which is currently producing 12,500 barrels per day (bpd), had an approved peak output of 36,000 bpd. With the new discovery, the peak output would jump to 60,000 bpd or three million tonnes a year. The peak production would be possible by 2016-17.

This week in U.S.

One of the key issues that the markets would be watching this week will be the retail earnings. There is no economic data scheduled for Monday.Tuesday kicks the week off with the release of July retail-sales numbers, which will be watched closely as an indicator of economic health. The July CPI and the August Empire State index will come on Wednesday.

The fear factor in the US markets, as measured by the CBOE Market Volatility Index has seen a considerable decline over the past month.

So far this earnings season, 447 companies in the S&P 500 have reported and of those 70% have beaten Wall Street consensus earnings estimates. But what?s more telling is that only 43% of those companies have topped revenue estimates, the lowest rate since the first quarter of 2009.

The outlooks look even grimmer going into the third quarter. Of 84 S&P 500 companies, 67, or about 80%, have projected they will fall short of Wall Street consensus earnings estimates.

Big boys at work

The onus therefore lies on old war horse Reliance and ONGC, which announced better results and some material discoveries, that will help reverse its falling oil production in the coming years. Cairn also seems to have recovered from the initial jolt of Dhir?s resignation. So it ill is the energy gang at work this week.

Markets could also seek some support from Coal India, which presents its quarterly credentials today. The monolith is likely to report a 16% increase in sales and a 6% increase in net profit.

Tata Steel, which also presents its quarterly number, is likely to report a decline in profits. The going also looks tough, as the Chinese dumping is likely to continue.

One needs to remember that the Chinese steel bellwether Baoshan Iron & Steel said last week that it would cut its product prices for September by $12.60 to $28.30. This is the third time in as many months that the company has affected cuts in its selling price. The move is in quite contrast to the recovery expectations in September.

Lets hear what Tata?s have to say on the future.

Asian cues this morning

Japan?s economy grew at an annualized 1.4% in the April-June period. This is contrast to the 5.5% increase seen in the previous quarter.  The expectations were for a 2.7% growth. On a QoQ basis, the economy grew just 0.3%.

However, both the Nikkei and the Hang Seng have recovered form their morning blues. Our markets are likely to open with a minor loss.

Our WPI number will come on 14th of August. The inflation is likely to come elevated at 7.37% form the last month?s 7.25%.

Apart from the large caps talked above one will have to watch the behavior of Hindustan Zinc, Tata Global Beverages and the media stocks.

We for one would recommend increasing exposure to the television media stocks that will tend to benefit form the digitalization of the cable in the four metros.

By Mr V.K.Sharma
Head Private Broking & Wealth
HDFC securities Ltd.