We were presented with a growth-oriented budget, where the government has addressed some key issues like disinvestment, liquidity concerns for NBFCs, addressing problems of PSU banks, subsumed FDI and FPI limits, took certain steps to increase the free float in the market and did all of this without inflating the fiscal deficit, in fact, the budget deficit has been revised downward to 3.3%. The government has for the first time decided to venture into the vibrant global market and raise a dollar-denominated sovereign bond. The global market is flushed with liquidity and the interest rates to raise capital globally are clearly lower so this move is definitely a positive. The tone of the budget sounded more tilted to create a longer-term vision where the government laid a roadmap to transform India into a $5 trillion economy. While we believe the proposals are good, implementation will be the key and the implementation process will actually have to play out in the long term. So perhaps the market will now start looking back at near terms factors and we will shift focus again to technicals.
Skewness in the Market towards mega caps at the highest level!
In our March 19 letter, we highlighted how the market is skewed towards those few pockets that are working. The selloff in the past 12 months had triggered a massive risk on sentiment and investors flocked to safety to invest in those counters where there were stability and predictability in earnings namely in some select mega-cap stocks. This shows that the market breadth has completely narrowed down and we will need some fresh set of triggers to kick start a broader based recovery in the market.
The polarization in the NIFTY has continued into the month of June where Top 15 stocks have delivered 30% returns, while other 35 stocks are down 11% over Dec’17-June’19. The top quartile is trading at a premium to their historical valuations while the balance 35 stocks are trading at a significant discount to their historical averages. Stocks like Eicher Motors, L&T, ITC, M&M, Coal India, and ONGC are all at substantial discount to their long term averages while Bajaj Finance, Reliance, Titan, Asian Paints, Kotak Bank, TCS, HUL, and Ultratech are trading at a substantial premium to the 5/10 year avg PE/PB ratios.
Institutional holdings have also been concentrated in these small pocket, for instance, the top 10 stocks account for 41% of total institutional holding. Moreover out of 3000+ listed stocks – the Top 100 stocks account for nearly 94% of all institutional holding, the next 5% goes to the next 150 stocks which are midcaps and only 1% of the entire small-cap universe
Midcap underperformance continues
The mid and small cap space has been under pressure, although they got some respite when election uncertainty was lifted by the strong mandate won by the incumbent government. But currently, the NIFTY midcap is trading at a 10 percent discount to the Nifty 50 Index so far this year compared with the 2019 daily average of 6.8 percent.
NIFTY Midcap trading at a discount to NIFTY
Fibonacci confluence zones provide support to the midcap index
The Mid Cap Index corrected more than 25 percent from the highs but some of the mid-cap stocks got a severe beating in the process. The fall in the Index halted at the Fibonacci confluence zone of 4484-4534 and has not broken the zone since it first touched it in Oct-18. The 38.2% of the higher swing from 2734 lies at 4470 and that’s the zone the Index held on to. The Fibonacci analysis states that an Index/stock that doesn’t correct more than 38.2% of a major swing is in a strong uptrend. In this case, the 38.2% of a higher swing is still intact and that tells that the mid-cap Index is in a strong uptrend. The RSI on the monthly charts is still in the bull zone. But on the weekly charts, RSI fell in the bear zone and is still oscillating between 35-65 which is the bear zone of RSI. RSI now taking support above the bull zone of 40 on weekly charts is indicating strength and a move above the 65 levels will confirm the same. Therefore looks like a good opportunity to buy some of the mid-cap stocks that have corrected around the 50% levels and are indicating reversal signals.
Investment Implications – Go Bottom Up!
This indeed is a difficult time for investors as there is a lot of chatter around a slowdown, headline market leaders are issuing statements of slackening demand. Earnings growth in the current quarter will be elusive as the banking space will account for the bulk of the NIFTY’s earnings growth; stocks in this space are already richly valued. The other sectors will struggle. The mid-cap index is yet to recover but considering that narrowing down of the valuation differential and consistent under-performance investors can go bottom up and look for plays in the mid-cap space where earnings visibility and trend momentum is still intact. At Plus Delta Portfolios, were are identifying such plays for our clients and also sharing one such company with our readers.
JustDial – a strong pick in the mid-cap space!
Just dial has been showing strong momentum in the recent past and is one of our picks in the midcap space. Justdial is a leading local search engine with a database of 25.7Mn listings and over 139.1 million unique quarterly visitors. The company has displayed strong financial performance in FY19, the profits have been growing 44% and revenues growing 14%. The company has grown its unique visitors by 25% in FY19, added 1200+ feet on-street staff to grow its business and added 17000+ paid customers to its kitty in Q4FY19. The company is nearly debt free and generates free cash flow of Rs201crs in FY18 and has continued to throw out more free cash in FY19.
We first highlighted this in our advisory service “Traders Central” and the stock has remained resilient since then.
We continue to remain bullish on Justdial as the stock has sustained strong momentum post a 16-month consolidation. Justdial has shown an ascending triangle breakout which has been accompanied with large volumes and a favorable bullish up move in the RSI which has consistently stayed above the 60 mark.
Fund Manager – Plus Delta Portfolios
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