Home Markets After smart rally, play for correction and consolidation

After smart rally, play for correction and consolidation

by Arun Kejriwal (Market veteran investor and Opinion Maker)
Aug 15, 2022
After smart rally, play for correction and consolidation, Market, KonexioNetwork.com

Markets were on a roll in the week gone by and continued to gain strongly. BSESENSEX gained 1,074.85 points or 1.84% to close at 59,462.78 points while NIFTY gained 300.65 points or 1.73% to close at 17,698.15 points. The broader indices saw BSE100, BSE200 and BSE500 gain 1.70%, 1.75% and 1.71% respectively. BSEMIDCAP gained 1.17% and BSESMALLCAP was up 1.09%. Markets gained on three of the four trading sessions and they had a minor correction on the fourth day.

The Indian Rupee lost 43 paisa or 0.54% to close at Rs 79.66 to the US Dollar. Dow Jones had a strong week and gained on four of the five trading sessions. It was up 957.58 points or 2.92% to close at 33,761.05 points. 

Inflation seems to be coming under control and the rate seems to have come down for the month of July at 6.71%. This is good news and would help RBI take a controlled measure when they meet next in October for the monetary policy meeting to decide on interest rates.  

Our markets were helped by the fact that FPI’s who have been aggressive sellers bought stock in the week gone by. On a weekly basis, they were buyers to the extent of Rs 7,850 crs. In the month of August, they have been net buyers of Rs 14,850 crs. It’s indeed a positive sign. 

After a lull of over two months an IPO is hitting the markets. The issue from Syrma SGS Technology Limited is tapping the capital markets with its fresh issue of Rs 766 crs and an offer for sale of 33.69 lac shares. The price band is Rs 209-220 and the issue opened on Friday the 12th August and would close on Thursday the 18th of August. The company is an EMS manufacturer catering to Automotive, Consumer, Healthcare, Industrial, IT and Railways and other segments or verticals. The company had reported an EPS of Rs 5.17 on proforma, condensed combined financial information for the year ended March 2022. The price earnings multiple based on this is 40.43-42.55. This is comparable to the listed peers Dixon and Amber which are much more expensive.

The company has signed up for the government’s PLI (production linked incentive scheme) in the consumer appliances and telecom sectors. It would be investing Rs 156 crs under the scheme. Besides the above investment, the objects of the issue envisage a further capex of Rs 350 crs in the immediate 15-18 months. The company has an asset turnover of about 5.1-5.4 times its gross block which gives huge opportunity for ramping up revenues in the coming 36 months. With sustainable margins in the region of 10.5-11.5% at the EBITDA levels, the company has a bright future ahead of it. The issue which had opened on Friday, is already subscribed 0.37 times with three days to go. An added comfort is the fact that the company had allotted shares in a pre-IPO at Rs 290 to marquee investors. The share warrants subscription. 

Coming to the markets, they have been on a roll and have risen from levels of 51,000 on BSESENSEX and 15,200 on NIFTY from the 17th of June. The rally has been sharp and sustained. It’s time that after this meaningful rally it needs to consolidate at some point of time if there is to be any further rise. Expect the week ahead which has four trading days to see some consolidation after early gains. The levels of 60,000 and 17,850 on the benchmark indices could be levels from where we could see markets turn and pause to take a breath. Assuming they do so, the first key levels of support would be 58,400-58,600 and 17,350-17,400 respectively. The next level of support which is unlikely this week would be around 57250-53400 and 17,100 respectively. I do not expect the second level this week. 

The trading strategy would be to sell into the strength witnessed on opening on Tuesday. Allow the heated markets to cool off and use the opportunity to lighten positions. In the correction which would be sharp, one could rebuild positions all over again. Results season is over and there would be no surprises on this account. 

Movement from hereon would be swift and sharp in both directions. Be nimble footed to derive maximum benefit.