Derivatives Monthly Outlook Nifty to consolidate with major hurdle at 10800

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1 February 28, 218 Derivatives Monthly Outlook Nifty to consolidate with major hurdle at 18 Other Product offerings Derivatives Strategy Underlying Action Hero MotoCorp Buy Duration : 1 month PRODUCT 1 Click here to see open calls Q u a n t (De riva tive s) P ick S crip Action Nestle India Buy A pollo Hospital Buy JSW Steel Buy Duration: 1-3 months Click here to see open PRODUCT calls 2 Research Analysts Amit Gupta amit.gup@icicisecurities.com Raj Deepak Singh Rajdeepak.singh@icicisecurities.com Azeem Ahmad azeem.ahmad@icicisecurities.com Nandish Patel nandish.patel@icicisecurities.com

2 Recap for February series: Worst sell-off in more than a year triggered by both domestic, global cues Expiry Returns ICICI Securities Retail Equity Research February series: Ends month with loss of more than 6% The meltdown in equity markets was seen globally. The Nifty was no exception as the index ended the February series with a loss of over 6% The loss of 6% was the largest since December 216 The Union Budget has triggered negative sentiments after the introduction of long term capital gains (LTCG) but fear escalated as US bond yields rose sharply due to fear of accelerated rate hikes in the coming quarters Volatility has moved up sharply and tested highest levels since demonetisation while US VIX moved to its highest levels seen since Brexit 8% 6% 4% 2% % -2% -4% -6% -8% Nifty lost almost 6% in February Series Sectoral performance: IT hogs limelight while midcaps take breather Last month was particularly negative for outperforming stocks. Stocks from private sector banking and capital goods space witnessed sharp declines. At the same time, the recovery seen in the technology and pharma space last month also faded away Midcap & small cap stocks were again major laggards. They lost 9% and 12%, respectively, in the February series. Both these indices tested their 2 DMA during the month The other notable underperformance was in automobile heavyweights. Profit booking was seen in large cap auto stocks and in the oil & gas space Auto Nifty Oil & Gas Pharma Bank Nifty Capital Goods Mid Cap Small Cap Midcaps, small caps - The worst performer -12% -1% -8% -6% -4% -2% % % returns February 28, 218 ICICI Securities Ltd. Retail Equity Research 2

3 Nifty March outlook: Long series may end up in consolidation; 18 remains crucial hurdle ICICI Securities Retail Equity Research Why Nifty may find hurdle near 18 in short-term Broader markets witnessed their worst performance in February since late 216. Unlike previous corrections, no immediate recovery was seen. Moreover, despite a moderate recovery and cool down in volatility, current levels of volatility still seem elevated (above 14) suggesting continued scepticism in the market. In such a scenario, we believe the Nifty will spend some time in consolidation before moving higher again At the start of the February series, the highest Call base was at 18. Post the Budget announcement, the Nifty moved below these levels. Since then, continued Call writing was seen at 17 and 18 strikes suggesting a hurdle can be expected around these levels. We expect the Nifty to remain below these levels in coming weeks A significant liquidation was seen in the Nifty open interest during the February series. The March series has started with quite low leverage. Fresh addition is likely to provide fresh directional cues for the index Global equities have remained under pressure. Apart from US markets, no other markets are still hovering without any major recovery. Equity indices remained largely range bound after making lows in the first week of February. Thus, elongated consolidation in equities cannot be ruled out Why immediate support for Nifty is at 13 The level of 13 will remain the immediate support for the Nifty as fresh Put writing was observed near 13 and 14 strikes. We believe only a move below 13 may trigger fresh volatility in the index. At the same time, in the recent market decline, open interest in the Nifty has declined substantially indicating long liquidation. As the March series has started with subdued open interest, risk related to further liquidation seems remote till the Nifty does not breach 13 The rise in yields in the bond market has remained a concern for across the asset classes. Fear of accelerated rate hikes in the US has taken a toll on bond yields across the globe. Any reversal in bond yields is likely to be positive for equities as well. At the same time, FIIs have remained continued sellers. Selling experienced in heavyweights in the current round of market indicates the same. However, given continued DIIs support to the market, levels near 13 seem to be a value area February 28, 218 ICICI Securities Ltd. Retail Equity Research 3

4 Oct-16 Nov-16 Dec-16 Jan-17 Nifty level Bank NIfty/ Nifty Price Ratio ICICI Securities Retail Equity Research Jan-17 OI in Thousands Nifty OI (in millions) F&O data suggests Nifty positive bias remains intact Nifty options OI build-up: 14 Put highest OI base Nifty Futures OI: Leverage closed in recent correction 4 Put OI Call OI Nifty: In convergence mode, suggesting consolidation Bank Nifty/Nifty price ratio: Near support at Spot Price Mean + 2 Sigma 2 DMA Mean - 2 Sigma February 28, 218 ICICI Securities Ltd. Retail Equity Research 4

5 Bank Nifty: Sustainability above 26 crucial for recovery to continue OI in Thousands Bank Nifty OI (in millions) Jan-17 ICICI Securities Retail Equity Research The sharp decline in PSU banking was the major culprit of the recent underperformance of the banking space. The Bank Nifty has declined more than 11% from its recent peak against the 8% decline in the Nifty. Even the recovery in Bank Nifty was much slower. It failed to move above 26. We believe a move above 26 is crucial for Bank Nifty to gain momentum once again The open interest in the banking index has also declined sharply entering the March series. It is currently one of the lowest seen in many months. Low premium in the banking index is visible in the March series as well clearly suggesting lack of buying support in the banking space In the options segment, the Put base is placed at the 24 strike, which is still 5% away from current levels while the Call concentration remains at 26 strike. Thus, a move above 26 is crucial for any meaningful recovery With the recent underperformance even among private sector heavyweights, stock specific Call writing was witnessed at OTM strikes indicating limited recovery expectations Bank Nifty Options OI build-up Bank Nifty March series Futures OI 12 1 Put OI Call OI February 28, 218 ICICI Securities Ltd. Retail Equity Research 5

6 Flows in US $ million crore South Korea Taiwan India Malaysia Indonesia Thailand ICICI Securities Retail Equity Research I crore Continued FII outflows remain concern The meltdown in equities continued throughout in February 218, with MSCI world index down 3.3% in the month, MSCI EM Index down 3.5% in February FII money inflow was not seen in bond markets. It continues to grapple with higher bond yields FII outflows in the February series has reached beyond 16 crore. This is the reason for rupee depreciation in the recent period Yield surge keeps debt inflows contained Strong inflows seen across EMs 28 Equity risk-on sentiment well participated by FIIs February 28, 218 ICICI Securities Ltd. Retail Equity Research 6

7 Derivatives Strategies: Open recommendations Date Scrip Action Recommendation 12- Hero MotoCorp Buy Long/Short Strategy : Buy Hero MotoCorp Feb Futures at and Sell Nifty Feb futures at ; Current Price Ratio (Nifty/Hero MotoCorp): 2.96; Rolled to March at 2 roll cost Back February 28, 218 ICICI Securities Ltd. Retail Equity Research 7

8 Quant Picks : Open recommendations Date Scrip Action Buy Price Target SL CMP %Ret Time Frame 28- M&M Buy % 3 Months 17- V Guard Buy % 3 Months 23- Vedanta Buy % 3 Months 1- Apollo Hospitals Buy % 1 months 1- JSW Steel Buy % 1 months 15- Nestle India Buy % 3 months 23- Hind Zinc Buy % 3 months 26- L&T Buy % 3 months Yearly Quant Picks 14- Engineers India Buy % 12 Months 14- Havells Buy % 12 Months 14- Arvind Buy % 12 Months Back February 28, 218 ICICI Securities Ltd. Retail Equity Research 8

9 Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road no.7, MIDC Andheri (East) Mumbai 4 93 research@icicidirect.com February 28, 218 ICICI Securities Ltd. Retail Equity Research 9

10 Disclaimer ANALYST CERTIFICATION We /I, Amit Gupta B.E, MBA (Finance), Azeem Ahmad MBA (Fin), CS, Raj Deepak Singh BE, MBA (Finance), Nandish Patel, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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