India Stock Analysts Turn to Cash, Volatility Amid Profit Doubts

(Bloomberg) -- As analysts struggle to assess India Inc.’s corporate earnings and debt-servicing capabilities amid the nationwide lockdown due to the coronavirus pandemic, they have begun relying on alternative indicators to inform their investment recommendations.

Equity analysts speaking in interviews with Bloomberg highlighted measures ranging from volatility and cash levels to daily infection numbers and techical charts. So far, the drop in analyst price targets for the NSE Nifty 50 Index has trailed the actual slump in the stock gauge.

Market participants appeared more optimistic on Tuesday as China reported no new coronavirus deaths for the first time and other global hot spots showed signs of slowing infections. India’s broader S&P BSE Sensex Index posted its best day since 2009 and the measure was little changed as of noon Mumbai time on Wednesday. Volatility has fallen from a record high over the past few trading sessions although volumes are thinning.

Nifty companies will start announcing earnings for the quarter ended March 31 from mid-April. The lockdown imposed on March 25 has slowed down an economy already set for its weakest pace of growth in 11 years, and a panel of Indian government ministers on Tuesday advised the country’s prime minister to partially lift stringent curfew measures. A total of 5,351 people in India have been infected with 160 deaths, according to data compiled by Johns Hopkins University.

Here is what analysts are watching for signs of a turning point for India stocks:

Volatility

The India NSE Volatility Index is inversely related to the Nifty, “clearly showing if Vix declines we could see some reversal in the correction,” said Amar Singh, head of advisory at Angel Broking Ltd. “Ideally below 40 would be a great sign of relief.”

Singh said that investors should also watch for a further appreciation in the rupee. “Once it starts trading below 74 levels, we might see a likewise bottom in the equity market.”

Dip in Infections

Manishi Raychaudhuri, head of Asia Pacific equity research at BNP Paribas, said signs of containment of the Covid-19 outbreak, particularly in developed economies, is a key factor being watched. “The number of daily incremental infections (particularly their day-on-day change) is an important data point,” he said.

BNP Paribas has not changed its an end-2020 target of 44,500 for the Sensex, implying a nearly 50% surge from the current level. The French bank is recommending defensive sectors such as consumer staples as well as those benefiting from a decline in commodity prices and an appreciation in the U.S. dollar such as IT services exporters.

Cash Levels

Investors should focus on stock-specific factors such as levels of cash and cash equivalents, said Joseph Thomas, head of research at Emkay Wealth Management. “Under conditions of fall in business volumes and lockdowns, companies which have cash and which do not have heavy debt will find the going relatively more smooth,” he said.

“Companies with a competitive market share tend to be less affected as they are leaders and they are bound to be back in the saddle as soon as things improve,” he noted.

Fund Participation

“There are some fund managers who are not working actively” as trading volumes for cash equities, futures and options thin, said Kranthi Bathini, director at Wealthmills Securities Ltd. If cash volumes rise, that may be “a good indication” of a comeback, he said.

“Mutual fund data will also be an important watchpoint to see whether that liquidity remains,” he added.

Technical Levels

“Looking purely at technical charts I would not summarize that the bearish phase of the markets is over,” said Manish Hathiramani, proprietary trader and technical analyst at Deen Dayal Investments.

The Nifty could fall to 7,500, and if it rises, “the next level to watch out for would be 9,050,” he said. “We must spend a couple of days at those levels. I am not referring to a touch and go situation. If we spend time around those levels it will mean sufficient volumes are being traded.”

Valuations

Investors can use the historical price-to-book bear market valuations to judge if a stock can be bought in the absence of clear earnings and revenue visibility, said Abhimanyu Sofat, head of research at IIFL Securities Ltd, adding that he is watching infection and death rates across India, Europe and the U.S.

The firm slashed its Nifty index target in March from 12,000 to 7,500, following a 25% reduction in earnings estimates.

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