Chinese Fall Rocks Indian Markets

Mon, 4 Jan 11:30 am

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After opening the day in the red, the benchmark Indian indices booked further losses and are now trading deep in the red. The reason for the fall is the turmoil in the Chinese markets where trading has been suspended. Chinese markets crashed this morning due to fears that a major economic slowdown is just around the corner. Manufacturing surveys seem to have confirmed that there is no recovery in the Chinese economy despite the best efforts of the government and the central bank.

Major sectoral indices in the Indian markets are trading on a discouraging note with auto, banking, and healthcare stocks witnessing maximum selling pressure.

The BSE Sensex is trading down 404 points (down 1.5%) and the NSE Nifty is trading down 127 points (down 1.6%). The BSE Mid Cap index is trading down by 0.9% and the BSE Small Cap index is trading down by 0.8%. The rupee is trading at 66.46 to the US$.

Stocks in the cement space are trading on a negative note with India Cements and Ramco Cements leading the losses. As per an article in Economic Times, average cement prices witnessed a sharp decline of 7.3% in December 2015 on a YoY (year-on-year) basis. This was mainly on the back of weak demand. All India average cement prices are currently around Rs 285-290 per bag compared to an average price of Rs 308 per bag in December 2014.

Particularly, northern and western regions witnessed the maximum correction between 10-12%. Eastern and central regions corrected by 6 to 10% on a YoY basis. However, prices remained resilient in the southern markets barring Andhra Pradesh and Telangana. The region noted a marginal increase of 1.4% in prices during December 2015 on a YoY basis.

As regards valuations, stocks of cement majors were trading in the range of 20x to 38x their trailing twelve-month earnings. However considering that earnings have been depressed in the year gone by and the cyclical nature of this business, this would not be the right metric to use. As one of our articles states that the enterprise value per tonne (EV/tonne) is an ideal indicator (enterprise value = market capitalisation + net debt). We use this metric, as we believe consolidation is imperative in this sector. If a company were to be bought, the likely price at which one would be interested in acquiring this business would be dependent on its replacement cost. Thus, evaluating a cement company based on EV/tonne does bring in a lot of clarity.

As per a leading financial daily, Mahindra & Mahindra (M&M) has reported a 3% increase in its tractor sales during the month of December on a YoY basis. The company sold 12,868 units in December as against 12,474 units in the same month last year.

Domestic tractor sales rose 4% during the concerned period at 11,686 units. However, exports during the month witnessed a decline of 1% YoY at 1,182 units as against 1,188 units recorded in December 2014.

Overall, Mahindra & Mahindra has reported a 4% increase in its total sales for the month of December. In the domestic market, its sales were up 1% while exports witnessed a robust pick-up during the month and stood 65% higher on a YoY basis.

The company's net profit for the second quarter (2QFY16) came in flat because of higher tax expenses. In addition, the sales were down by 3% YoY due to tepid performance of the both automotive and farm equipment divisions. However, the future prospects for the company are good. To know more on what can drive the performance ahead for the company, read our detailed analysis of the company here (subscription required).

Presently the stock of M&M is trading down by 1.7%.

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