The rally is continuing, will it sustain?

An important development this week was the ban on H1-B visa for the IT sector. US President Trump has signed an order banning all new visas for the rest of the year, till December. The order will negatively impact Indians in IT services who have been looking to secure jobs in the US. From IT companies’ perspectives, there won’t be any significant impact, as since 2017 most of the IT players have been reducing the filing of H-1B visa’s due to strict restrictions put forward by Trump administration. Companies like TCS, Infosys, Wipro, HCL Technologies have de-risked their business model by reducing the visa application by 50-60% till FY19 and increased the local hiring. The current ratio of H-1B to local hiring stands at 40-60% in the IT space.  We have a view that companies will try to increase their offshore presence and the restriction on visas would have no significant impact on Indian IT service in the near term.

The stock market continues to be buoyant since the lows touched in March with some high volatility in the month of May. The second half of May was impacted, due to FII’s selling before and post FOMC policy meeting. There is also a view that a large section of the gains in the market was from few sets of stocks, which is not a correct interpretation considering the solid trend in the broad market including mid and small-cap which have a handsome average return of 40-50% in the last 3months. In an absolute term to maintain this trend will be challenging in the short-term to medium-term. The recent rally is supported by FII inflows which have increased after a gap of about one month.

We are maintaining our view that the market will trade in a range with mixed bias in the near-term. For Nifty 50 we had a range of 9,500 to 10,500 which is currently trading on the higher side. In technical analysis terms, the upper side is 10,900. After touching 200 days moving average it has moved down, the next level downside Support1 is 10,050 and Support2 of 9,800. We suggest profit booking at the current level especially for traders and maintain accumulate strategy for long-term investors with a focus on sectors like Pharma, Chemical, IT, and FMCG.

Pre-covid we had a one-year forward target of 12,500 for Nifty 50 which is downgraded to 10,500 dues to fall in earnings growth and outlook. The base financials of FY20 have fallen substantially and FY21 earnings are forecasted to fall by -10%, compared to an earlier estimate of +15% CAGR for FY21 and FY22. Currently, it is also expected that growth will revive substantially in FY22 with more than 30% growth due to low base, revamp in the health crisis, and strong liquidity support. We expect relaxation in growth from Q2FY21 onwards with a quarter to quarter jump in economic activities. We continue to value Nifty50 at a P/E valuation of 17.5x on one year forward EPS, still leading to a fall of 2,000pts in the target.