Sensex Trades on a Volatile Note; Power Stocks Top Losers

Thu, 10 May 12:30 pm

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After opening the day in green share markets in India  witnessed choppy trading activity and are presently trading marginally below the dotted line. Sectoral indices are trading on a mixed note, with stocks in the oil and gas sector and stocks in the IT sector witnessing maximum buying interest. While stocks in the power sector are leading the losses.

The BSE Sensex is trading down by 17 points (down 0.1%) and the NSE Nifty is trading down by 9 points (down 0.1%). Meanwhile, the BSE Mid Cap index is trading down by 1.5%, while the BSE Small Cap index is trading down by 1%. The rupee is trading at 67.32 to the US$.

In news from the retail sector. In the biggest acquisition for an Indian start-up, US giant Walmart signed a definitive agreement to acquire a 77% stake in India's largest e-commerce marketplace Flipkart with an investment of around US$16 billion.

The acquisition is the largest transaction in history of the online retail space not only in India but also globally.

Post the deal, Walmart will own 77% of Flipkart. The rise has been staggering for India's largest start-up which started with a modest capital of US$ 6,000 in 2007.

Flipkart's story resembles that of its global counterpart Amazon although at a smaller scale. Walmart's deal highlights India's increasing importance in the start-up space.

It also brings to the fore the importance of disruptors in an eco-system. Flipkart incurred losses of US$ 1.35 billion in FY17. Despite this, it is valued at a premium mainly due to its future potential.

The deal also puts focus on India's e-commerce sector, which is showing increasing signs of adoption.

The Growing Importance of E-Commerce

The growing clout of e-commerce is slowly turning it into a formidable distribution channel that's hard for companies to ignore. This is reflected in the sales growth clocked in various distribution channels as per Euromonitor.

While e-commerce functions on a smaller base and is not directly comparable with modern or traditional retailing, FMCG companies can't ignore the rapid rise in its distribution power. Modern retail and internet retail will continue to outgrow the traditional distribution channel over the next five years, according to Euromonitor. Moreover, e-commerce, being less capital-intensive compared to modern retail, is expected to sustain higher growth over the long run.

Therefore, it is hardly surprising that established FMCG companies such as Hindustan Unilever swear by the growing importance of e-commerce. No wonder, Patanjali Ayurved Ltd, a rapidly growing and relatively new player in the FMCG market, has tied up with e-commerce companies to quickly scale up its ante against well-entrenched players.

Modern retail and internet retail are less fragmented and enjoy better pricing power than traditional retail. Therefore, the growing dominance of these formats carry the inherent risk of the bargaining power tilting in favour of the customer. But given their strong emergence, companies cannot afford to ignore them anymore.

Moving on to news from stocks in the aviation sector. Jet Airways share price is in focus today after the aviation ministry did not approve its plan to merge Jet Airways and JetLite, effectively meaning that the two airline entities would operate under separate Air Operator Permits.

JetLite is a fully-owned subsidiary of Jet Airways that operates a fleet of 8 Boeing 737s, within India. Earlier, JetLite operated with a different brand name, which was called Jet Konnect. But that was discontinued and the airline now operates one full-service brand - Jet Airways.

Jet Airways is the second biggest domestic airline after Indigo, ferrying around 17% of the industry passenger traffic in April.

Air travel has recorded double-digit growth for 40 consecutive months, thanks to low fares, the addition of new flights/destinations, and overall growth in the economy.

What's foreseeable for India's aviation traffic in 2018 is some pressure on the back of the consistent rise in crude oil prices. Earlier this month, Brent crude oil briefly breached US$70 per barrel and touched its highest level since December 2014. Crude prices have been driven up by production curbs in OPEC nations and Russia, as well as by robust demand on the back of healthy global economic growth.

Oil prices are closely monitored by the Indian air carriers, as aviation turbine fuel is their single largest input cost. A sharp rise in the cost of fuel puts pressure on margins, and consequently an increase in air fares.

Although air travel is becoming the new normal, investors need to understand the industry dynamics before buying up aviation stocks.

At the time of writing, Jet Airways share price was trading down by 2.3%.

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