Sensex Opens Flat; Metal Stocks Rally

Wed, 26 Jul 09:30 am

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Asian equity markets are trading on a positive note with Shanghai Composite trading higher by 0.2%. The benchmark index in Japan too is trading higher by 0.5%. US benchmark indices closed their yesterday's session in green after a bunch of companies reported better than expected quarterly results.

Back home, share markets in India have opened the day on a flat note. The BSE Sensex is trading higher by 10 points while the NSE Nifty is trading higher by 13 points. The BSE Mid Cap Index opened up by 0.1% while BSE Small Cap index opened the day up by 0.3%.

All sectoral indices have opened the day in green with metal stocks and energy stocks leading the gainers. The rupee is trading at 64.36 to the US$.

Tata Steel share price gained 1.2% in the early trade on the reports that the company will evaluate acquiring steel firms referred to the National Company Law Tribunal (NCLT).

Five stressed steel companies - Essar Steel, Monnet Ispat and Energy, Electrosteel Steels, Bhushan Steel, and Bhushan Power and Steel have been referred to the NCLT by the RBI in a recent directive.

Asian Paints share price opened the day on a negative note on the back of weak performance for the June quarter due to the impact of GST and increased cost of raw materials.

In the first quarter, the company's revenue recorded a growth of about 5% to Rs 42.3 billion, year-on-year. Decorative Paints, the company's key segment (contributes 81% of revenue), registered a low single-digit volume growth due to restocking on account of GST.

Bank stocks opened the day on a mixed note with Dhanlaxmi Bank and City Union Bank leading the gains. Axis Bank share price opened the day down by 1.5% after the bank reported a 16% year-on-year (y-o-y) fall in net profit to Rs 13.06 billion in the June quarter (Q1) on the back of flat net interest income (NII).

Net interest income (NII) grew marginally by 2.2% to Rs 46.16 billion from Rs 45.17 billion last year.

Gross non-performing assets surged 130.6% to Rs 220.31 billion from Rs 95.53 billion a year ago.

As a percentage of total loans, gross NPAs were at 5.03% as compared to 5.04% in the previous quarter and 2.54% in the year-ago quarter. Net NPAs were at 2.3% in the June quarter compared to 2.11% in the previous quarter and 1.08% in the same quarter last year.

The perceived safety of some of these private sector banks has turned out to be a mirage. This became amply clear after a recent RBI notification mandated banks to report diversion in their report and audited NPA numbers (varied more than 15%).

India Inc in the Centre of the Bad Loan Storm

At Equitymaster, we never get carried away by the favourable dynamics of a sector. Rather, we've always followed a rigorous bottom-up approach to stock picking.

Even at the height of the bad loan crisis, we steered clear of private sector banks that were growing recklessly. After conservatively weighing risk management capability, only a few private sector banks made the cut for our large-cap recommendation service Stockselect.

Moving on to the news from stocks in telecom sector. Bharti Airtel share price began trading down by 0.9% after the telecom major reported fourth successive quarterly decline in profit as rising competition from Reliance Jio's aggressive tariffs hit the company hard.

Airtel's net profit in the first quarter of 2017-18 declined by 75% YoY. This is the steepest fall in last one year to Rs 3.67 billion against Rs 14.62 billion in the same period in 2016-17.

This follows a 72% drop in net profit in the previous quarter (January-March '16-17), and signals the difficult times for older telecom operators after the entry of Jio in September last year with disruptive tariffs.

Airtel also recorded a 14% fall in consolidated revenues in Q1. The most worrisome factor is net realisation from voice and data has been declining sharply, while overall consumption is growing.

As per the company, the pricing disruption in the Indian telecom market, caused by the entry of a new operator continued with industry revenues declining over 15% year-on-year, creating further stress on sector profitability and cash flows.

We believe that the telecom sector is certainly in for a rough ride. Competition is likely to dent the operating profits of the largest players like Bharti Airtel and Idea Cellular for several quarters.

Rahul Shah, Co-head of Research, offered a very detailed explanation to our subscribers on this in an issue of Research Digest (subscription required).

• "There is a feeling that the day these companies start earning high ROCEs is not likely to come in the near future at least or even if it comes, it will be short lived because that's the way the industry functions.
  
  There will always be some or the other problem on the horizon that will put a downward pressure on margins and ultimately the returns on capital.
  
  And if one wants to stick to this view of things always remaining difficult in the industry, then there's no way the stocks can command the kind of valuations they are commanding currently."

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

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