Sensex Trades in Red; Capital Goods Stocks Top Losers

Wed, 10 Jan 01:30 pm

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After opening the day on a positive note, Indian share markets witnessed selling pressure and are currently trading in red. Sectoral indices are trading mixed, with stocks in the capital goods sector and stocks in the consumer durables sector witnessing maximum selling pressure.

The BSE Sensex is trading down 83 points (down 0.2%) and the NSE Nifty is trading down 30 points (down 0.3%). Meanwhile, the BSE Mid Cap index is trading down by 0.5%, while the BSE Small Cap index is trading down by 0.3%. The rupee is trading at 63.75 to the US$.

In news about the economy. The world bank has pegged India to regain the 'fastest growing major economy' tag in 2018.

After losing the top spot to China in 2017, India is set to bounce back to being the fastest growing major economy, with the World Bank estimating GDP growth at 7.3% in 2018 and to 7.5% for the next two years.

India, despite initial setbacks from demonetization and Goods and Services Tax (GST), is estimated to have grown at 6.7% in 2017, according to the 2018 Global Economics Prospect released by the World Bank.

According to the report, India's future is looking good on several fronts. Strong private consumption and services are expected to continue to support economic activity. Private investment is expected to revive as the corporate sector adjusts to the GST, which over the medium term is expected to benefit economic activity.

Moreover, the recent recapitalization package for public sector banks announced by the government is expected to help resolve banking sector balance sheets, and spurring private investment.

The report added that, on the productivity side, India has enormous potential with respect to secondary education completion rate. All in all, improved labor market reforms, education and health reforms as well as relaxing investment bottleneck will help improve India's prospects.

GDP growth will also ease the earnings pressure on Indian corporates, with the market cap to GDP ratio hovering close to 100%.

Market Cap to GDP Ratio Close to 100%

The market capitalization to GDP ratio. Is one of Buffett's favourite indicators of broader market value. The market cap of all the listed companies in the country divided by the gross domestic product (GDP) of the country gives us this ratio.

The idea behind this ratio is simple. Stock prices are derived from expected earnings for corporates and GDP represents revenue of the country. This gives investors an estimate of whether the two are moving in tandem. A ratio above 100% shows overvaluation and one below 50% shows that the market may be undervalued.

Even this ratio is showing valuations reaching its peak levels. India's market cap to GDP ratio reached 95%. This ratio was more than 100% after the 2007 bull run. Stock prices had seen a significant meltdown after that amid the global financial crisis.

2018 will, therefore, be critical for Indian companies to justify their valuations with earnings growth. Investors must remain cognizant about valuations and ensure they take some profits off the table whenever the opportunity is ripe for the picking.

Moving on to news from stocks in the automobile sector. State-run Energy Efficiency Services (EESL) is trying to rope in more states and make a pan-India roll out of 9,500 electric vehicles this year, as the first 500 cars are ready to be delivered in Delhi next week.

EESL gave out a contract in September 2017 to Tata Motors Ltd and Mahindra and Mahindra Ltd for 10,000 cars in total, kicking off India's electric vehicle procurement programme.

These vehicles will be used to replace petrol and diesel cars used by the government and its agencies, which have around half-a-million cars, of which about a third are leased.

The first batch of 500 electric sedans is ready to be delivered to the Central government around January 15 and the supporting charging infrastructure is in place.

EESL is looking to approach more states for the second phase of the electric vehicles, the order for which should arrive by the second half of this year.

Currently, electric vehicle sales are low in India, rising 37.5% to 22,000 units in the year ended 31 March 2016 from 16,000 in 2014-15. Only 2,000 of these were cars and other four-wheelers, according to automobile lobby group Society of Indian Automobile Manufacturers (Siam).

The government wants to see 6 million electric and hybrid vehicles on Indian roads by 2020 under the National Electric Mobility Mission Plan 2020.

The government is targeting to have all cars propelled by electric engine by 2030. The target is more daunting than in many advanced countries.

According to the industry, the 2030 target would require eight to ten times the global stock of such vehicles. India would need to sell more than 10 million electric cars in 2030, compared to 5,000 electric vehicles India had on the road in 2016.

Another issue is the price of the lithium ion battery, which constitutes 30% to 40% of the cost of the car. For this plan to succeed, the price of the battery needs to come down.

The auto industry is already facing regulatory headwinds. The shift from BS-IV emission norms to BS-VI has been two years ahead of schedule without an intermediate stage. The government, if it is serious about such ambitious targets, should offer the necessary infrastructure support and do its bit for a smooth transition.

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