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Global Markets Remain Volatile
Fri, 2 Sep RoundUp

Benchmark indices in US ended the week until 1 September 2016 on a flattish note with Dow Jones Industrial Average ending the week marginally higher by 0.1%.

US factory output was released during the week for the month of August. This index contracted for the first time in six months and fell by 3.2% to a reading of 49.4.

The index, however, remained above the 43.2 threshold that is associated with a recession. A reading below 50 indicates a contraction in manufacturing, which accounts for about 12% of the US economy.

Asian stock markets ended the week on a positive note with benchmark indices in Japan and Hong Kong ending the week higher by 3.5% and 1.6% respectively.

China too reported its factory output for the month of August. Activity in China's manufacturing sector picked up unexpectedly in August.

The official Purchasing Managers' Index (PMI) rose to 50.4 in August, compared with the previous month's reading of 49.9 and above the 50-point mark that separates growth from contraction on a monthly basis. Benchmark indices in China ended the week marginally lower by 0.1%.

Back home, BSE Sensex ended the week higher by 2.7%. BSE Mid Cap and BSE Small Cap too ended the week higher by 1.8% and 1.3% respectively. Revival in rural consumption coupled with pick-up in the private investments will be the key things to watch out for going forward.

Key World Markets During the Week

On the sectoral indices front, banking and capital goods stocks led the gainers this week. On the other hand, stocks from telecom and realty witnessed selling pressures.

BSE Indices During the Week

Now let us discuss some key economic and industry developments during the week gone by.

India's gross domestic product (GDP) grew by 7.1% in the June quarter, the slowest levels as seen in the preceding six quarters.

The drag was mainly on account of slower industry growth. Mining sector de-grew by 0.4%. While, the construction sector grew marginally by 1.5%. During the same quarter a year ago, the two sectors had grown by 8.5% and 4.5% respectively.

Reportedly, the Gross fixed capital formation, which is used as a proxy for investment demand in the economy continued to contract by 3.1% in the June quarter against a dip of 1.9% during the March quarter. This gives a signal that there is no pick-up in private investment activity in the economy.

However, going forward the boost to the agriculture sector on the back of normal rainfall and a push to urban consumption from the pay hike are expected to considerably push economic growth in the remaining quarters of 2016-17. RBI too in its annual report of 15-16, forecasts the Indian economy to grow at 7.6% in 2016-17.

Cement prices have fallen in almost all parts of the country except the southern region in the on-going quarter. Usually, this quarter is seasonally weak on account of a halt in the construction activity due to the monsoon season.

However, the good part is that the prices have not fallen as steeply as it did in the same quarter in the previous year. Though, the worrying part is that the volume off-takes have still not improved. Despite the government's efforts to push infrastructure and allied activities, the impact of these measures is yet to be felt on the ground level.

Provided, the off-takes do not pick up in the second half of the fiscal year the cement prices could possibly move further southwards which could possibly impact the financials of the cement companies.

A pick-up in the construction of real-estate activities and road projects would be the key things to watch out for going forward.

Reserve Bank of India (RBI) governor, Mr Rajan, in his foreword to the central banks annual report for 2015-16 stated that the economic prospects for the current financial year are brighter than the previous year, but growth is still below potential.

Owing to normal rainfall this year coupled with the implementation of the seventh pay commission, RBI expects the economy to grow at a pace of 7.6% in the current financial year. The economy grew at 7.2% in the preceding financial year.

In the report, the central bank said good rains this year have resulted in a 6.5% increase in sowing of the monsoon crop. This is in line with RBI's latest round of professional survey, which forecast agriculture output growth at 3% for fiscal 2017.

In addition, the government is also expected to pay out as much as Rs 1.02 trillion as allowances under the Seventh Pay Commission by the fourth quarter this year, which in-turn will boost consumption.

Further, implementation of important legislations such as Goods and Service Tax (GST) will also provide the much needed boost to the economy.

To add to this, the report stated that faster clearances of stalled projects have boosted the overall business sentiment. Sectors such as roads and ports have seen significant improvement, with private ports seeing the highest ever capacity utilization in a single year.

Curbing inflation coupled with the balance sheet clean-up will be the key work in progress areas for the RBI going forward.

As per an article in Livemint, auto makers are upbeat on a double-digit growth for the demand of vehicles on the back of improving economic growth, normal monsoon and a hefty raise for central government employees and pensioners in the seventh pay commission.

However, on the other hand auto ancillary companies are of the opinion that a sustainable, all-inclusive and broad-based rebound in the automobile market may still be some distance away.

Two of the largest automobile companies in India are planning a capacity expansion, which showcases their optimistic view for a pick-up in the demand for vehicles going forward. Maruti Suzuki's first assembly line at the newly developed Gujarat plant will now start operations in the month of February, three months ahead of the scheduled date.

The Society of Indian Automobile Manufacturers (SIAM) too, has raised its sales prediction for 2016-17 to 10% from 6% that it forecasted earlier.

Having said that, it is worthwhile to note that growth has remained confined to some companies. Comparing growth with the other automobile makers, the growth has not been encouraging. Unless a broad-based growth takes place among the major auto makers, it will be difficult to sustain a double-digit growth trajectory.

Movers and Shakers During the Week
Company25-Aug-1602-Sep-16Change52-wk High/Low
Top Gainers During the Week (BSE Group A)
Bajaj Finserv2,6973,04713.0%3,076/1,576
Apollo Tyres17419711.8%199/128
Tata Motors49454911.2%548/266
Century Textiles67074411.0%741/404
Reliance Capital49254510.6%540/304
Top Losers During the Week (BSE Group A)
Future Enterprises2118-14.6%173/17
IDEA Cellular9684-12.1%160/83
Bharti Airtel346319-7.9%385/282
Piramal Enterprises1,9571,813-7.4%2,095/805
DLF Ltd162150-7.4%170/73
Source: Equitymaster

And here are some of the key corporate developments in the week gone by.

Bharti Airtel Ltd, Idea Cellular Ltd and Reliance Communications Ltd lost a combined Rs 158.40 billion in market value after Reliance Industries Ltd chairman Mukesh Ambani announced aggressive tariffs for its Reliance Jio mobile phone services on Thursday. According to Ambani, Reliance Jio Infocomm will sell its 4G internet data at just Rs 50 a gigabyte (GB).

Ambani also announced a 'free welcome offer' for Jio customers from September 5 till December 31. R Jio will offer users data services free for four months, after which it will offer 10 tariff plans starting at Rs 19 a day for occasional users, Rs 149 a month for low data users and Rs 4,999 a month for heavy data users. At the RIL's 42th Annual General Meeting, Ambani said Jio is targeting 100 million users in a shortest possible time.

Reliance Jio plans to cover 90% of India's population by March 2017. The company will introduce 4G handsets at as low as Rs 2,999.

This forces other telcos to change their business model revenue model and the network in use. Bharti Airtel, Vodafone India and Idea Cellular have already slashed effective data tariffs by 67% for prepaid customers.

India's leading telecom companies already have moderate-to-high leverage levels, which will weigh on their participation in the upcoming telecom spectrum auctions slated for October.

Reportedly, Bharti Airtel's financial leverage was 2.4 times in FY16, which is expected to go up in FY17 with the increase in capex and margin moderation due to the intensifying competition in the data segment.

Zee Entertainment Enterprise Ltd (ZEEL) sells its sports network TEN Sports to Sony Pictures Network. This deal struck is an all cash deal worth US$ 385 million.

This is a landmark deal for ZEE, as the deal is a step towards a strategic shuffle of its portfolio of channels as the broadcaster seeks to expand its general entertainment business.

TEN Sports had bagged the rights to get access to matches hosted by the cricket boards of South Africa, Pakistan, Sri Lanka, West Indies and Zimbabwe. In addition, it has the rights to World Wrestling Entertainment (WWE), UEFA Champions League (football league) and many other sporting events such as the Asian and Commonwealth Games.

In the fiscal year ended 2015-16, the sports channel contributed to 10.7% of the company's revenues and registered a loss of Rs 0.3 billion. The move will help the company to focus its energy on the core general entertainment business, which is the company's forte.

As per an article in Livemint, the aerospace unit of Mahindra & Mahindra Ltd plans to sell planes built by its Australian unit in India this year.

In 2008, Mahindra bought Australia's GippsAero, which makes the eight-seater GA8 Airvan close to Melbourne. Reportedly, around 220 of these planes are flying in 30 countries.

Further, the company is also looking for opportunities to make the plane in India provided they get permissions to sell the plane in India. In order to sell the plane in India the company would require permissions and clearances from the Director General of Civil Aviation (DGCA).

Reportedly, GippsAero's Airvan is designed for single-pilot operation. However, India's aviation regulator insists that planes above 1,500 kg must have two pilots for commercial flights. Therefore, the cockpit needs to be redesigned and re-certified if Mahindra wants to sell these aircraft in India.

The management of the company stated that these planes could be used to fly short segments for tourism like Bangalore to Hampi, Mumbai to Belur, Halebidu, Chandigarh to Dharamsala, and Kolkata to Gaya. The commercial viability of this project will be something to closely watch out for.

Now let us move on to some of the key result announcements during the week.

As per an article in Livemint, Tata Motor's subsidiary Jaguar Land Rover's (JLR) profit after tax on a consolidated basis fell by as much as 57% during the quarter ended June. This revived some of the fears that Tata Motors would be the worst hit Indian company on account of the impact of Britain leaving the European Union.

However, the impact of Brexit on the quarterly result was a one-off and is not going to significantly impact the financials in the coming quarters. The profits fell mainly on the back of a steep depreciation in pound, which led to foreign exchange fluctuation losses.

Reportedly, the pound had depreciated sharply post-Brexit, resulting in losses on derivatives contracts used by the company to hedge its exposure to other currencies. Besides, the restatement of assets and liabilities as on 30 June also led to forex losses worth 84 Million Euros. However, this was a one-off and is not expected to occur henceforth.

In fact, depreciation of the pound will work in favour of the company going forward as it exports 80% of its vehicles outside the UK. It does import 40% of its components, on which it will take a hit on the forex front-but on a net basis, it will gain from a weak pound.

Further, a transition to Indian-AS too impacted the profits adversely. The positives from the declared results were that the new JLR models are gaining traction in the market. The F-Pace model launched earlier this year has a waiting period of three to four months and accounted for 40% of total Jaguar sales during the quarter. The recently launched Evoque Convertible too has created some excitement in the market.

The performance of JLR coupled with the traction from new models such as Tiago and other upcoming launches will be the key things to watch out for going forward.

Coal India registered a near zero sales growth during the first five months of the current fiscal. Production grew 1.3% during the same period. The company produced 32.43 million tonnes of coal in August, missing its target for the month.

Lack of demand growth from consuming industries, mainly power sector, led to the near zero growth. This comes on the back of around 28 million tonnes of coal stock lying at power plants. As a result, Coal India is now saddled with some 45 million tonnes of coal at pit heads.

Three out of eight Coal India subsidiaries witnessed falling production in comparison to the previous corresponding period while four subsidiaries saw negative production growth in comparison to the previous corresponding period.

According to an article in The Economic Times, the government's plan to push Coal India to produce one billion tonnes of coal by 2020 has taken a back seat as officials think that the Indian economy is not yet equipped to consume the quantity. The company has now been asked to produce as much as the market can consume.

As per the reports, Coal India been asked to devise ways so that more coal is sold, including import substitution as well as devise new types of e-auction that can lead to more coal sales.

Apart from global cues, factors such as revival in the rural economy on good monsoon and better farm income and the reform process gaining momentum with the passage of the goods and services tax bill will influence the movement of the domestic equity markets. However, instead of speculating on these macro developments, focusing on fundamentals of companies will prove to be a better strategy.

And here's an update from our friends at Daily Profit Hunter...

Nifty finally managed to breakout of the sideways range of 8,500 - 8,700. It has even closed 100 points above this range at 8,804 which suggests that bulls have finally taken charge and are likely to march forward. On the higher side 8,880-8,900 could act as a resistance while 8,700 will lend support in the short term. You can read the detailed market update here...

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Mar 20, 2018 (Close)