Sensex Opens Higher; Capital Goods & IT Stocks Gain

Thu, 24 May 09:30 am

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Asian share markets are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is up 1.1% while the Hang Seng is up 0.3%. The Shanghai Composite is trading flat. US stocks closed slightly higher on Wednesday, paring earlier losses after the Federal Reserve said it would be comfortable letting inflation temporarily run above its inflation target.

Back home, India share markets opened the day on a positive note. The BSE Sensex is trading up by 87 points while the NSE Nifty is trading up by 26 points. The BSE Mid Cap index and BSE Small Cap index both opened the day up by 0.4%.

Barring automobile stocks and energy stocks, all sectoral indices have opened the day in green with information technology stocks and capital goods stocks witnessing maximum buying interest. The rupee is trading at 68.21 to the US$.

We are nearing the end of May. That's almost five months of 2018.

While the BSE-Sensex has increased marginally so far, the mid and small cap indices have fallen between 10% and 12%.

Uncertain Times for the Benchmark Index

But that's just the indices. Individual mid and small caps have fallen much more.

The steep fall in these indices is due to several reasons.

First, there has been some profit-booking in the mid and small cap space. After all, these indices were sharp outperformers in 2017. Second, rising crude oil prices and a falling rupee have taken a toll.

And third, there is some pressure in this space due to the re-alignment of investments by mutual fund managers prompted by the recent changes in regulation.

In such an environment, it makes sense for investors to be selective while buying stocks. Focus on value and the underlying fundamentals of the business. Then, they need not worry about the market.

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Automobile stocks opened the day on a mixed note with Panacea Biotech & Biocon leading the gainers. Tata Motors share price opened the day down by 1.8% after the company's net profit halved to Rs 21.8 billion on a year-on-year basis for the three months ended 31 March 2018.

A one-time provision for impairment and sharp rise in expenses on account of rise in cost of materials consumed impacted profits for the quarter.

The one-time impairment of Rs 16.4 billion relates to provision for impairment of certain intangibles under development and capital work-in-progress. The company reviewed product development programmes in capital work-in-progress and consequently provided for impairment for the quarter.

The net sales were up over 18% y-o-y to Rs 912.8 billion, with strong contributions from domestic and JLR volumes and foreign exchange gains. Revenues from JLR were up 3.8%, while the revenues from Tata Motors standalone grew 45.3% on account of broad based volume growth of 34%.

Commercial vehicle segment volumes were up 34%, while the passenger volumes grew 35% during the quarter.

With the rise in sales volumes, the consolidated Ebitda (earnings before interest, tax, depreciation and amortization) surged over 4% y-o-y to Rs 122.8 billion during the quarter, however, Ebitda margins declined 180 basis points to 13.5% as the growth in sales was offset by the sharp rise in costs.

The total expenses during the quarter increased by a sharp 19% on a y-o-y basis.

At the standalone level too, higher costs and one time impairment led to a net loss of nearly Rs 5 billion, albeit narrower than the corresponding quarter when the net loss stood at Rs 8.1 billion on the back of improvement in the company's domestic performance. Standalone net sales stood at Rs 197.8 billion, which was a sharp rise of 45% on a y-o-y basis.

Further, Tata Motors, said that the company will continue to invest at JLR about 4.5 billion pounds in new products, technology and capacity to drive long term growth. The company is planning a range of 4-7% EBIT between FY19-21 and 7-9% growth over the long term. As for Tata Motors standalone, the company is planning for 3-5% EBIT between FY19-21 and 5-7% over the long term.

Meanwhile, Jaguar Land Rover's profit before tax was up by 46% y-o-y to 364 million pounds for the quarter ended 31 March 2018. The net revenue of the company grew by 4% to 7.6 billion pounds in the quarter.

Tata Motors share price opened the day up by 0.8%.

Moving on to the news from the aviation sector. Jet Airways (India) posted a loss in the fourth quarter (Q4) due to higher fuel expenses. Jet Airways posted a loss of Rs 10.4 billion (US$151.5 million) in the three months ended 31 March, compared with a profit of Rs 6 billion a year earlier.

Revenue from operations rose about 9% to Rs 59.3 billion, while aircraft fuel expenses surged 31% to Rs 20.6 billion.

Despite these challenges, in Q4 FY18 Jet Airways increased its capacity by over 10%, increased passenger load factor by 3.9% points, reported a positive year-over-year passenger and cargo RASK, reduced net debt (excluding debt taken for BKC property) by Rs 3.6 billion and achieved a year-over-year reduction in non-fuel CASK of 1.1%.

Each of these metrics showcase Jet's commitment to its transformation plan despite financial pressure arising from the lag between the increase in crude oil prices and air fares. Over the last two years, air fares have remained flat while fuel prices have doubled.

During the quarter, as part of its strategy to deepen domestic connectivity, the airline re-designed its network and announced several new services from its twin hubs at Mumbai and Delhi to the North East, with Guwahati as its North-East gateway.

Jet Airways share price plunged 5.6% in the opening trade.

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