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  • Short-term & medium-term outlook on infrastructure, cement companies

    Publish Date: 30th August, 2018

    By: Shrikant Chouhan

    In this webinar, we will run the rule over the infrastructure and cement companies.

    But before that, let us take a look at how the Nifty is performing.

    Nifty (infrastructure)

    This index includes companies belonging to the telecom, power, port, air, roads, Railways, shipping and other utility service providers. The index comprises 25 companies listed on the National Stock Exchange.

    The index is computed using free float market capitalisation.

    People usually check this index before launching exchange traded funds (ETFs), index funds and structured products.

    Top constituents by weightage: Larsen & Toubro has 34% share, Bharti Airtel has 10.8% and NTPC (10.17%).

    Adani Ports also has a 5.9% share in the index. Its share may increase as they are likely to benefit from economic reforms.

    Tata Power and NTPC will be a part of this index as well, which will help the overall Nifty numbers.

    Voltas (2.76%) and Bharat Heavy Electricals (2.11%) are also part of the index.

    Nifty infra index: What does it suggest

    It is moving into a rounding-bottom formation, which suggests the sector is in bullish mode.

    Right now, the index suggests that infrastructure and cement companies are in a consolidation/restructuring phase and in a positive way. That’s why we are bullish about infrastructure and cement companies.

    Let us look at when the rounding-bottom formation developed in 2013. That time, the companies gradually surged to lifetime high levels.

    Reasons for being bullish about cement sector

    Technical analysis: The technical chart shows cement companies to be in a bullish consolidation formation. This is why we see most cement companies are recovering well and are inching towards their peak levels. We feel it will cross its resistance mark (4,000 mark).

    Patterns of NCC and L&T have also shown strong reversal formations, which helps companies perform in the medium- to long-term. Reversal formations usually support bullish traders.

    The other reason is the spate of government reforms and post-reforms, which have been beneficial for the cement sector. We believe that there will be an uptrend from 2019 onwards.
    Fundamentals: For the first time in the current quarter, cement and infra sectors have surpassed Street expectations, which is unique. This has happened after a gap of four years. The across-segment order book is getting better too.

    Past case study — Biggest Reform Period — 1998 to 2008

    Cement and infrastructure companies have done exceptionally well in the post-reform period. Post-reform period is the time when the reform policies rolled out by the government are actually being implemented.

    Let us look at how companies fared in the previous reform period (1998 to 2004) and the post-reform period (2004-2008).

    Let is look at the infrastructure sector first.

    Between 1998 and 2004, Nifty (infrastructure) rose from 963 to 1,485, which is a 54% increase. From 2004-2008 (the post-reform period), Nifty rose from 1,485 to 6,350, a 328% jump.

    Larsen & Toubro: In the reforms period (1998-2004), the company stocks grew by 220% from 25 to 80. In the post-reform period, L&T grew from 80 to 1,040, which is a whopping 1,200% jump.

    NCC: The company grew by 900% between 1998 and 2004, while the stocks surged by 2,200% between 2004 and 2008.

    BHEL: The company’s stock gave 96% returns in the reform stage and 756% returns in the post-reform period.

    ABB India: The company grew 100% in the reform period and jumped by 929% in the post-reform stage.

    Siemens: The stock grew by 653% in the reform period and by 891% in the post reform period.

    Cement sector

    Nifty: In the reform stage, the index increased by 54%, while the post-reform stage spurred the index by 328%.

    ACC: The company’ stock improved by 150% in the reform stage and 333% in the post-reform stage.

    India Cement: This company was an outlier in the reform stage. It fell by 63% in the reform stage. However, the company rebounded sharply in the post-reform stage, recording a 1,000% increase during that time period.

    Shree Cements: The company’s stock surged by 1,033% in the reform period and by 9,900% in the post-reform period. This company usually outperforms in this category.

    Ambuja Cement: The company’s stock jumped by 137% in the reform period and 256% in the post-reform period.

    Birla Corporation: The company grew by 109% in the reform period and by 410% in the post-reform period.

    * Source: Spider Software Private Ltd

    Individual stocks

    Let’s look at Larsen & Toubro first. If you study the company’s quarterly chart, you’d notice that the company has consistently surged upwards (from 650 levels to 1,350 levels). The announcement of a buyback program for Rs 1,500 has also been a shot in the arm. The stock has started developing a triangle formation, which suggests the stock will go up. So, we think it’s a good buy for short- and long-term.

    The NCC saw a price correction a few months back due to sluggish markets and reports of increasing inflation. But now, the company’s stock is in a reversal formation and is expected to do better.

    Ultratech Cement remained in a consolidation period during the reform phase. But, the company is likely to do well in the post-reform stage, which we believe will begin in 2019 or 2020.

    ACC is also rising. It is in a consolidation mode but is rising steadily. Basically, the company seems to be on the upward or trending mode.

    Nifty outlook for the current month

    Based on the monthly formation, we believe the Nifty has broken its resistance zone of 10,800. It has moved to levels of 11,750. In case we see any fall, it will not go lower than 11,180. In the short-term, the Nifty may go up to 11,850.

    Q&A session

    1)   Outlook of Nifty for next 12 months: Broadly, the market looks good. There is liquidity in the market and the supports will help fund managers. However, currency depreciation is a concern but the currency will remain around Rs 69. Crude prices are likely to rise further, around $85-86 mark but it is not going to impact heavily. Maybe in the short-term, there will be a likely impact but overall, it looks manageable.

    2)   HDFC Bank: We are bullish on private banks, especially IndusInd Bank and ICICI Bank.

    3)   GAIL: We remain bullish about the company. We think it is heading towards Rs 430-440 from the long-term perspective.

    4)   Axis Bank: This bank gave fabulous returns in the previous series. Currently, the stock has broken the resistance levels and is in the midst of a breakout mode. We feel the stocks can go up to the Rs 900 levels over the long-term.

    5)   ITC: Today, the company’s stock broke its previous high and heading towards the Rs 320-325 levels. At this levels too, we remain bullish. It may go up to Rs 350-360. It remains a good stock from the long-term perspective.

    6)   UBL: It correctly trading at Rs 1,420 and may go up to Rs 1,600 in the long run. But this being an election time, liquor companies usually remain subdued.

    7)   HPCL: This company may not give extraordinary returns at the moment. It is better to buy Reliance or GAIL right now.

    8)   Dr Reddy: Pharma sector is bullish. The strategy, though, should be to buy one or two stocks. We are confident the pharma sector will do well. From the MNC pharma space, we like Glaxo for the next six to 12 months. Sun Pharma and Lupin Labs are a good bet too.

    9)   Bajaj Auto: The two-wheeler segment isn’t doing that well but the festival season may spur demand. Hero Motors is also a strong bet. But you need to keep the stock for at least three months.

    10)   Raymond: Technically, the stock is heading towards the levels of Rs 920-930. It is better to buy in tranches and especially if the market dips a little.

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    Disclaimer: Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Full disclaimer here

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