Finally, an upward breakout: After remaining in a 15,450-15,900 range for several weeks, Nifty finally broke out on the upside as expected
(see chart). The stock market usually ‘climbs the wall of worry’ and it was no different this time. While doctors and economists are worried about the fallout of a covid third wave, the market is going up because this fear is resulting in increased money flows. For instance, the fear of a third wave is keeping the US Federal Reserve from carrying out early rate hike; despite the fact that inflation in the US saw its biggest jump in 13 years and the US jobless claims fell and hit a new low since the pandemic started. Stable crude oil price, on the hope that Opec will use its spare capacity and won’t allow crude to reach much higher levels, also helped the stock market sentiments.

Where is the market expected to move in coming weeks? Closing above 15,900 for the last two days of last week shows its inherent strength and indicates that the Nifty is now shifting to a higher range. Since 15,800 is a high put writing level and 16,200 is a high call writing level now, Nifty may range between these two points in the short term. “We will remain hopeful about further upside as long as Nifty remains above its immediate support level of 15,800,” says Sameet Chavan, Chief Analyst, Technicals & Derivatives, Angel Broking. Being a round number, 16,000 is a psychological level and therefore, will act as immediate resistance. There are also other resistance points, like 16,040, based on other technical parameters. “The intermediate Nifty target, based on last week’s breakout, is 16,530 and when the same will be achieved depends on how fast the immediate resistance of 16,040 is taken out,” says Sacchidanand Uttekar, Deputy VP, Trade Bulls Securities.

(Narendra Nathan/ET Bureau)

Sector update: Building materials

Long-term demand outlook positive for tile and pipe manufacturers
We expect tiles and plastic pipe manufacturers to deliver a weak performance q-o-q, as the second wave hit sales of both the segments in April and May. In case of pipes, agri sales were severely impacted during the peak demand period. Reversal in PVC prices mid-quarter has also led to slower channel stocking and, hence, sales. Thus, operating margins across both segments declined q-o-q on account of lower utilisation, higher gas prices (for tiles) and expected inventory loss for pipes companies. However, demand has been picking up June onwards with easing of lockdown restrictions. Thus, we maintain a positive stance on the profit prospects for both the sectors.

Tiles: Domestic sales were hit by the second wave. The second wave hit both the urban and rural regions in April-June. Hence, the countrywide lockdowns in this period led to poor offtake q-o-q in domestic markets during April/May, with the situation improving in June. Thus, domestic players will be hit both on account of lower-than-usual demand and subsequent top-level loss, although the low base of April-June ensures that companies will still deliver growth. Even gas prices have gone up.

Pipe companies: Pipes sales have been hit sharply during April-May. The agri demand was severely affected by the lockdown. Plumbing demand was less impacted in April-June. As PVC prices started to cool off, leading to fall in pipes prices, even distributors deferred purchases, impacting April-June quarter sales. Thus, profitability will suffer in the quarter, owing to lower sales and inventory losses.

Performance of companies: We estimate Kajaria’s consolidated revenue/EBITDA/PAT to fall 39/63/73% q-o-q on sales loss during April-May and elevated gas prices. For Somany, we expect these factors to drive down consolidated revenue/EBITDA/PAT by 38/69/93% q-o-q. In case of pipes companies too, we expect a sharp decline. We estimate that Supreme Industries’ consolidated revenue/EBITDA/PAT would fall 34/53/63% q-o-q, mainly on account of higher sales loss in the pipes segment. For Astral, we estimate revenue/EBITDA/APAT would fall 37/51/59% q-o-q. We estimate pipes EBITDA would decline 53%, while adhesives should decline at 41%. For Prince Pipes, we estimate a revenue/EBITDA/APAT decline of 53/75/84% .

Stock views: We remain positive on tiles and pipes companies, owing to healthy demand outlook. We maintain Buy ratings on

, and Prince Pipes. We maintain Add rating on Supreme Industries. We downgrade rating on Astral Limited to Reduce, given that recent run-up has made its valuations expensive.

(HDFC Securities)

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