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Sensex Finishes in Red ahead of RBI Policy; Automobile Stocks Drag
Tue, 7 Feb Closing

Indian share markets finished the trading day below the dotted line ahead of the central bank's policy meeting and weak Asian markets.

Many expect the Reserve Bank of India to cut the repo rate by 25 basis points on Wednesday after December inflation hit a two-year low. It may be a close call however, since the central bank may even opt to maintain status quo until its next review in April.

At the closing bell, the BSE Sensex closed lower by 104 points, whereas the NSE Nifty finished lower by 33 points. The S&P BSE Midcap finished down by 0.2%, while the S&P BSE Small Cap finished down by 0.1. Losses were largely seen in auto and metal stocks.

ITC share price rallied over 5% during early trading amid market buzz that Specified Undertaking of Unit Trust of India sold 2% stake in the company via a block deal to LIC. ITC finally closed the trading day up by 0.3%.

Asian markets finished lower today with shares in Japan leading the region. The Nikkei 225 is down 0.35% while China's Shanghai Composite is off 0.12% and Hong Kong's Hang Seng is lower by 0.07%. European markets are mixed today. The FTSE 100 is up 0.48% while the DAX gains 0.32%. The CAC 40 is off 0.01%.

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The rupee was trading at Rs 67.37 against the US$ in the afternoon session. Oil prices were trading at US$ 52.81 at the time of writing.

Tata Motors share price plunged 3.5% in today's trade after Deutsche Bank estimated that the proposed border tax adjustments in the United States could hit Tata Motors' earnings per share (EPS) by 50%.

As per an article in The Economic Times, an analysis of border tax adjustments being proposed under House speaker Paul Ryan's "Better Way" tax reform plan in the US indicates significant negative impact for auto makers that rely on imports of components or fully built cars for sales in the US.

Under the proposed border tax adjustments, cost of an average vehicle could increase cost of an average vehicle by US$2,300, while JLR could face an impact of US$9,000 per vehicle on its US volumes. In Tata Motors' case, the US accounts for 20% of subsidiary Jaguar Land Rover Automotive Plc's global volumes. This volume is exported from the UK and there is no assembly in the US.

Meanwhile, Tata Motors' luxury car unit Jaguar Land Rover reported lower-than-expected 4% growth in sales to 47,693 units in January. The sales were dragged by low growth in China, which rose 11% on-year January against 36% on-year in December.

The holding arm of Tata Motors, Tata Sons, had recently claimed that the auto major's market share in commercial vehicles hit an all-time low of around 40% under former chairman Cyrus Mistry. Tata Motors has lost market share to rivals like Ashok Leyland, M&M and Force Motors in the medium and heavy commercial vehicle and light commercial vehicle segments in the past two-three years.

Automobile stocks finished in red with Tata Motors and Ashok Leyland leading the losses.

Moving on to news from stocks in oil & gas sector. ONGC share price finished down by 2.9% after it was reported that the company's planned Rs 780 billion investment for development of oil and gas discoveries in Andhra Pradesh will be credit negative and lead to an upfront increase in leverage.

As per an article in The Business Standard, the decision to invest further in on-shore and off-shore assets comes at a time when gas prices in India are falling due to government's intervention. Moody's sees this as a detrimental to ONGC's future investments in these blocks.

Prices of domestically produced natural gas were revised down on October 1, 2016 to US$2.5 per million British thermal unit (mmbtu) from US$3.06/mmbtu. For natural gas produced from deep water and ultradeep water areas, prices are capped at $5.3/mmbtu, which is among the lowest in Asia. As per Moody's report, if ONGC's entire incremental production from the Andhra Pradesh investment were eligible for the higher gas price, that price would still be materially lower than prices in Asia.

Moody's also expects ONGC's retained cash flow (RCF)/debt to decline to 40% by March 2018 and 33% by March 2019 if the proposed investment is equally spread over FY18 and FY19. Any increase in shareholder payments or weak operating performance would exert downward pressure on its ratings, the report noted.

ONGC recently posted a near three-fold increase in quarterly net profit despite a slight dip in crude oil output as realizations rose sharply on account of higher global prices. Net profit in the December quarter rose 197% to Rs 43.52 billion from Rs 14.66 billion a year ago. While total crude oil output contracted 1.9% to 6.4 million tonnes from a year ago, net realization rose 16.8% to $51.8 a barrel.

Meanwhile, commodity prices can have a large impact on inflation data as well. As per the latest wholesale price index (WPI), WPI inflation accelerated to 3.39% in December 2016 as compared to -1.06% during the corresponding month of the previous year. For November 2016, WPI stood at 3.15%.

Can Inflation Come Back to Haunt the Economy?

Can Inflation Come Back to Haunt the Economy?

Fuel and Power index rose sharply (on YoY Basis) on the back of the recent decision by the Organization of the Petroleum Exporting Countries (OPEC) to reduce crude oil output. Even oil producers outside the group led by Russia agreed to reduce the output. The low base effect of last year also contributed to a sharp increase of fuel and power index.

And here's a note from Profit Hunter:

ITC limited hit a new all-time high and is probably the most watched stock in the market today.

ITC ltd. has traded within the broad range of Rs 190-270 since 2013. But last month it rallied bravely and broke out of this range on 1st February with heavy volumes.

After the Specified Undertaking of the Unit Trust of India (SUUTI) sold 2% stake in the company via block deals, ITC rallied over 5% intraday, and hit an all-time high of Rs 292 today. But the rally didn't sustain for long and the stock limped to close on a flat note. This price action created a 'shooting star candlestick pattern', indicating an exhaustion of the uptrend, as you can see on the daily chart below. The RSI indicator is trading in its overbought zone at 73.5 level.

It will be interesting to see if the 4-year range break-out is for real, or whether the stock will simply sag back down and continue to trade in its range.

End of Rally in ITC?
End of Rally in ITC? 

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Jan 16, 2018 (Close)