The Hindu Business Line : Mid-cap stocks may perform well

Though the higher intra-day volatility has become a reflector of the fluctuating market mood and a part of its exercise in finding a stable equilibrium, the general fund flow to equities may tend to improve.

THE stock market seems to have shown some willingness for recovery last week. Having gone through a substantial selling pressure for couple of weeks, the key indices had a breather. But this may not be an indication of a new beginning — of a strong recovery trail.

This week, the apparent reasons for an expected mild recovery are: (i) the year-end funds constraints would be over; (ii) beginning of a near-month derivatives cycle (the first few days are known to be positive); and possibility of readjustments in the market valuations of a number of stocks, which lost significant ground so far during March, in the wake of results season.

The 2003-04 results would start pouring in next week onwards. The much awaited Infosys guidance (and results) would be out on April 13. Some of the key market players think that Infosys would not only give conservative guidance for the 2004-05 earnings but may turn over-cautious. As the noise over the outsourcing is still on, it may not be surprising for Infosys to declare a slightly lower guidance.

The market, as of now, appears somewhat circumspect about the real impact of the hue and cry in the US over outsourcing to Indian IT firms. Industry experts maintain that despite increase in the decibel level, the overall outsourcing flow has not slowed down. On the other hand, the margins have steadied up over the last six months or so. Incremental billing rates, in some cases, were higher than average rates.

For example, Satyam Computer has reportedly strengthened its position in the automotive vertical. Its relationship with TRW has stabilised. Ford is understood to have stepped up its IT spend.

As a result, replay of 2003 April decline in the tech stocks may not happen this year.

This week, the top IT stocks and auto counters may see some improvement in valuations.

Last week, FIIs were net buyers on all the trading days and the investment figures were better than the previous week. However, the domestic mutual funds turned net sellers.

The margin trading and securities lending & borrowing mechanism, which would become operative from April 1 for the cash segment stocks, will not, perhaps, set the market on fire instantly. The appetite for equities (borrowing and lending included), particularly among the retail segment, has not increased much in the recent weeks. However, in the medium-term this mechanism is likely to fill an important gap.

The retail response to the forthcoming equity and rights issues may also be lukewarm, as the capital market will take some time to pick up the bullish thread once again. Before the elections, possibility of negative surprises popping up here and there may not be ruled out altogether.

An overall restraint is likely to limit the commitments for the time being. But an undercurrent of a recovery for select small and mid-cap stocks is gradually becoming visible.

The indices for medium counters may overtake the Sensex and the Nifty in terms of recovery.

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