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Sensex Surges 400 Points; HDFC Twins Up 3%

Thu, 18 Jan 01:30 pm

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After opening the day in green, share markets in India have continued the momentum and are presently trading near all-time high levels. Sectoral indices are trading on a mixed note, with stocks in the banking sector and stocks in the metal sector leading the gains.

The BSE Sensex is up by 410 points (up 1.2%) and the NSE Nifty is trading up by 90 points (up 0.9%). Meanwhile, the BSE Mid Cap index is trading down by 0.6%, while the BSE Small Cap index is trading up by 0.2%. The rupee is trading at 63.46 to the US$.

In news from stocks in the banking sector. HDFC Bank share price is in focus today. HDFC Bank, which is the country's most valuable bank crossed another milestone today. The bank crossed the Rs 5 trillion market capitalisation for the first time, making it the first Indian bank, and only the third Indian company to achieve this milestone.

The stock of HDFC Banks was trading near all-time high levels of Rs 1,950 per share, with a market capitalization well above Rs 5 trillion.

Tata Consultancy Services Ltd (TCS) and Reliance Industries Ltd (RIL) are the other two companies which crossed market capitalisation of Rs 5 trillion. RIL remained the most-valued company with a market cap of Rs 5.9 trillion, followed by TCS with a market cap of Rs 5.5 trillion.

HDFC Bank's steady 20% profit growth quarter-after-quarter as well as its immunity to the bad loans crises has helped the stock.

The bank also reports bad loan ratio below 1%, the lowest among Indian lenders. Thus, investors continued to buy the stocks despite high valuation of close to 4.8 times its expected book value for this

The recent gains in the stock along with other banking shares was due to news report on the government mulling 100% foreign direct investment in the banking sector.

At the time of writing, HDFC Bank share price was trading up by 2.8%.

Financial Sector Takes Centrestage in Stock Market

The changing fortunes of businesses leave imprints on the broad market indices. Over the past decade, the composition of market index Nifty has materially changed. While the weightage (in terms of market capitalisation) of utilities, energy, and telecom has fallen drastically, sectors such as financial services and consumer discretionary have been the biggest gainers during this period.

As a matter of fact, the share of financial services has more than doubled. Presently, it occupies the highest weightage in the Nifty index. Among financial services, retail banks have gained heftier weightage. However, state-run banks have underperformed due to stressed loan books.

This essentially means that Nifty's expensive valuations is the handiwork of a few stocks and their strong performance in earnings and is not broad-sector based. Additionally, the share of financial services in the overall gross value added (GVA) is low.

In FY16, financial services accounted for a mere 6% of total GVA at constant prices. This reflects the dichotomy between its contribution to economic growth and the disproportionately huge weightage commanded by it in the equity markets. Until the state-run banks come out of the bad loan mess and start contributing meaningfully to credit growth, Nifty's picture of financialization in the economy may remain distorted.

Moving on to news from the Goods and Service Tax (GST) space. Market participants are eyeing developments from the GST council meet which begins today. The council is likely to announce a rejig in rates of as many as 70 different goods and services.

This will be the final GST meet before the Union Budget on 1 February 2018.

Along with a planned reduction of rates on goods and services, the council will also consider a host of proposals including simplifying procedures for return filings and take stock of the GST network's readiness before its rollout from 1 February.

As we have saying, GST is a much-needed economic reform. It should eventually expand India's narrow tax base and increase government revenues.

The council is also expected to take up the issue of declining GST revenues. The declining revenue collection from GST has been a matter of concern since the November collection came at Rs 808 billion, an all-time low since the roll out of the new tax regime on July 1.

That said, every coin has two sides. GST is no exception. It has had its fair share of chaos in the months immediately post its implementation from 1 July 2017. Many businesses reported depressed earnings due to the transition to GST.

Our colleague Vivek Kaul has studied the finer aspects of the GST and predicted what could go right and wrong.

Download his special report - The Good, the Sad and the Terrible (GST).

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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