Sensex Ends Dull on First Trading Day of 2017; Realty Index Surges 4.3%

The Indian share markets started the new year's trading day on a dull note. At the closing bell, the BSE Sensex closed lower by 31 points, whereas the NSE Nifty finished lower by 6 points. The S&P BSE Midcap ended up by 0.8% while the S&P BSE Small Cap finished up by 1.2%. Barring banking and IT stocks, all sectoral indices ended the day on a positive note. Realty, and auto stocks witnessed the maximum buying interest.

European markets are higher today as French and German shares show gains. The CAC 40 is up 0.31% while the DAX is up 0.88%.

The rupee was trading at Rs 68.02 against the US$ in the afternoon session. Oil prices were trading at US$ 53.9 at the time of writing.

According to an article in The Economic Times, in a major land deal, realty firm K Raheja Corp and Singapores sovereign wealth fund GIC will jointly purchase a property located at Worli, Mumbai for Rs 6.1 billion from Siemens.

In this regard, Siemens and Whispering Heights Real Estate, a proposed joint venture entity of GIC affiliate Reco Solis and the K Raheja Corp Group, have executed the MoU for the transfer and assignment of leasehold interest in the property located at Worli.

The proposed assignment is subject to receipt of all requisite statutory and regulatory approvals from the concerned authorities and signing of firm agreements between the Company and the Proposed Assignee in this regard. Following the conclusion of the joint bid, Raheja and GIC are planning to develop a 5 lakh sq ft commercial project at the site.

Talking of real estate, we have written about how demonetisation has indeed created a heavy fog of uncertainty on the future of real estate in the country in of the editions of The 5 Minute WrapUp. Richa Agarwal, our research analyst is of the opinion that the banking and real estate sector crisis could lead to a domino effect that topples other sectors and ultimately, the economy.

Will Realty Prices Fall Soon?

However, increasing unaffordability and pile up of unsold inventories in metros pose a real threat to the real estate sector. We believe that prices may have run up ahead of themselves and would normalize going forward.

Siemen's share price ended the day up by 0.6%.

Moving on to the news from stocks in pharma sector. As per an article in the Livemint, Natco Pharma has launched a generic Hepatitis C treatment drug in Nepal under the brand name 'Velpanat.' The product is the first generic version of Sofosbuvir 400mg/Velpatasvir 100mg fixed dose combination sold by Gilead Sciences Inc under brand name Epclusa.

In this regard, Natco has signed a non-exclusive licensing agreement with Gilead Sciences Inc, to manufacture and sell generic versions of its chronic hepatitis C medicines in 101 developing countries. The company has priced the medicine at a maximum retail price of Nepalese Rupee 25,000 for a bottle of 28 tablets in Nepal.

As the M&A activity has been heating up globally, the M&A activity in the Indian pharma space has been on the rise in recent times. Rahul Shah has penned an interesting piece in one of the edition of The 5 Minute WrapUp on how generic pharma companies are benefitting from global M&A activity. Here's an excerpt from the article:

  • "M&A activity among the innovators provides an opportunity for the generics to build a product portfolio by buying the product basket. For small to midsized companies, this is perhaps the quickest way to expand.

    Given the high costs and even higher risks in developing a drug, the innovator companies have increasingly turned towards investing resources in the acquisition of existing drugs or promising ones already in the pipeline."

Meanwhile, it was reported that, Lupin Limited has received final approval for its Cevimeline Hydrochloride Capsules, 30 mg from the United States Food and Drug Administration (USFDA) to market a generic version of Daiichi Sankyo Inc's Evoxac Capsules, 30 mg.

The capsules are indicated for treatment of symptoms of dry mouth in patients with Sjogren's syndrome. Further, the company's product is a generic version of Daiichi Sankyo Inc's Evoxac capsules.

Reportedly, the company will commence promoting the product immediately. Evoxac capsules had US sales of US$40.8 million as per IMS MAT September 2016 data. Our pharma sector analyst, Bhavita Nagrani, is of the opinion that Lupin was able to insulate its growth despite rising pressures in the sector. She has recently shared a detailed view on the company and valuations in the recommendation report of The India Letter.

Pharma Stocks ended the day up by 0.6% with Elder Pharma & Ajanta Pharma leading the gains.

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

The Nifty Realty index was beaten down most after demonetisation. It tanked by around 13% before finding support near 150 levels. It consolidated for a while before retesting the previous lows. On 31st December, 2016 the PM announced sops for the housing sector. This improved sentiments for the beaten down realty stocks today. The realty index opened with a gap and rallied higher throughout the day. The index closed with gains of over 4%. Despite closing on a strong note one should view this rally with caution as gap resistances will act as hurdles for the index.

Booster Dose for the Nifty Realty Index

Sensex Remains Negative; Realty Stocks Witness Buying Interest
01:30 pm

After opening the day on negative note, the Indian share markets have continued to trade below the dotted line. Sectoral indices are trading on a mixed note with stocks in the Realty sector and the Metal sector witnessing maximum buying interest. Stocks in the Banking sector are trading in the red.

The BSE Sensex is trading down by 85 points (down 0.3%) and the NSE Nifty is trading down 22 points (down 0.3%). Meanwhile, the BSE Mid Cap index is trading up by 0.4%, while the BSE Small Cap index is trading up by 0.8%. The rupee is trading at 68.01 to the US$.

According to an article in a leading financial daily, foreign portfolio investors (FPIs) have withdrawn a massive US $4 billion (Rs 272billion) from the Indian capital market in the month of December alone. This withdrawal comes on the heels of the interest rate hike by the US Federal Reserve.

This was the third consecutive month of outflows by overseas investors and most of the outflows have been witnessed in the debt market during the period under review.

The latest FPI outflow took place following a withdrawal of Rs 497 billion on a net basis from the capital market in both equity and debt during the months of October and November. Prior to that, FPIs had poured in Rs 460 billion in the capital market in preceding three months from July to September.

The FPI withdrawals started in October 2016 with uncertainties over the US election results.

While demonetisation may have impacted the short term sentiment. The withdrawal was further aggravated due to several factors including uncertainty over US ties after Donald Trump's victory, interest rate hike by the federal reserve, and a surge in oil prices.

Net withdrawal by FPIs from equities stood at Rs 82 billion in December, while from the debt market was Rs 189 billion, translating into a total outflow of Rs 271 billion (US $3.98 billion).

As of December, equities still remain positive on inflows for the 2016 calendar year. It was the debt market that was witness to large amounts of FPI outflows in December. The net outflows in the month of November and December alone accounted for 92% of the outflows in the debt market.

Moving on the news from the auto sector, shares of Bajaj Auto have fallen as much as 2.5% in intra-day trading after the company registered at steep 22% decline in overall sales for December 2016.

The company said in a statement that it sold 225,529 vehicles as against 289,003 in the corresponding period a year ago. Sales of motorcycles were down 18%, while those of commercial vehicles plunged 46% on a year-on-year basis.

The decline in sales can strongly attributed to the demonetisation move, especially in the rural areas, where the demand has fallen by 20%.

Demonetisation has had a telling effect on India's prolific two-wheeler industry, with new dispatches from factories to dealers and sub-dealers reducing drastically in December. A big chunk of two-wheeler sales happens in rural India, with a large number of the transactions in cash. With demonetisation causing a cash crunch, potential buyers either scrapped or postponed their decision, hurting demand

Car manufacturers too face a similar predicament. India's largest car manufacturer Maruti Suzuki has reported a decline of 4.4% in domestic sales for the month of December 2016 as compared to the corresponding period last year.

Auto stocks have taken a beating post demonetisation. Stocks from the automobile sector have fallen about 10% since the demonetisation scheme was announced on 8 November, 2016.

The Biggest Losers of Demonetisation

However, as my colleague Kunal Thanvi points out in a recent edition of the 5 Minute WrapUp, the current slump due to demonetisation is only a temporary setback.

Here's Kunal...

  • Even if sales take a big blow this year, the auto growth story won't break down. Individuals and businesses will buy cars, two-wheelers, and trucks irrespective of demonetisation. A one-year hit to profitability won't change the long-term earnings power of fundamentally strong auto firms.

    If anything, the recent correction in auto stocks is bringing valuations down to reasonable levels. The only thing a long-term investor has to do is wait for the market to finish 'voting'. Buying good auto stocks at the right price will likely result in healthy returns a few years later when the market begins 'weighing' them.

Capitalizing on the correction in auto stocks, our Hidden Treasure team has recommended a stock from the auto ancillary sector.

But is it a buy? Find out here.

Indian Indices Trade in the Red; Banking Stocks Witness Selling Pressure
11:30 am

After opening the day on a weak note, the Indian share markets have continued to trade in the red. Sectoral indices are trading on a mixed note with stocks from the banking sector and FMCG sector witnessing maximum selling pressure. Stocks in the realty sector are trading in the green.

The BSE Sensex is trading down 142 points (down 0.5%) and the NSE Nifty is trading down 41 points (down 0.5%). Meanwhile, the BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading up 0.5%. The rupee is trading at 68.03 to the US$.

On the news from global markets, recent data showed that Japan's core consumer prices slumped for the ninth straight month. The core consumer price index slipped 0.4% in November from a year earlier. Household spending too slumped in November. Data showed that housing spending fell 1.5% in November from a year earlier in price-adjusted real terms. This was against a median market forecast of a 0.2% increase. The data suggested that slow wage growth was keeping consumers in Japan from shopping.

This suggests that Japan still lacks enough momentum to jump-start inflation and reach the Bank of Japan's (BOJ) ambitious 2% target. The BOJ has repeatedly been forced to push back the timing for achieving its inflation target.

The bank is still pursuing the above efforts. It has maintained its negative 0.1% interest rate imposed on banks for some excess reserves. It has also kept the 10-year Japanese government bond (JGB) yield target at around zero and its annual increases in JGB holdings at 80 trillion yen.

However, all these efforts by the BOJ, including three years of aggressive money printing, have failed to spur inflation. If there's one place on this planet that epitomises all the wrong kinds of growth, it's Japan. Too much money printing...too much debt...too much government intervention...too much stock market manipulation...

So why bother about Japan? Because that's where the rest of the world's central banks appear to be heading. We don't know about the timing. But the end is going to be ugly. If you want to know what's really happening in the world of man and money, you can claim your free copy of Bill Bonner's latest book, Hormegeddon.

Also, the above developments by the BOJ are in continuation with the easy money policies that central banks are adopting around the world. With the changes at central banks in 2016, it seems that the end of easy money is near.

On the news from the banking space, the government has allowed 12 public sector banks (PSBs) to raise nearly Rs 30 billion via preferential shares. This amount is over and above the Rs 229 billion capital support committed to them in July last year and is aimed at strengthening capital base of PSBs.

Being on the topic of PSBs, the Reserve Bank of India (RBI), in its Financial Stability Report (FSR) for 2016, has raised the red flag on quality of loans in public sector banks. The latest non-performing asset (NPA) numbers show significant levels of stress. This can mean as a negative development for the shareholders in PSU banks. As one of our recent editions of The 5 Minute WrapUp states...

  • 'As a shareholder in banks, if the NPA number does not worry you, here is something that should. The sector's average Return on Equity (RoE) has crashed from 10.4% in FY15 to just 3.6% in FY16. All thanks to the profits written off on account of NPA provisions. 70% of them in the books of public sector banks. More importantly, the drag in the ROE is likely to persist in FY17 too. So shareholders of public sector banks have a reason to re-think the margin of safety required to invest in such stocks.'
Continuous Deterioration in Banks' Return on Equity

Lastly, Prime Minister Narendra Modi, in his speech over the weekend, has announced the launch of 'BHIM: Bharat Interface for Money'. This is another option for users to make or receive payments. The initiative is another step towards a less cash economy. It is built by the National Payments Corporation of India (NPCI).

An Aadhaar-based payments system would be added to the app in the next two weeks. The prime minister in his speech stated that the app does not even require internet connection to work. The intention is to get increased adoption of digital means of transactions in the economy. Though, the implementation will be crucial to the success of this initiative.

Sensex Begins 2017 on a Negative Note; Banking Stocks Drag
09:30 am

Majority of the Asian markets remained closed. Stock markets in the US & Europe closed their previous session in red. Meanwhile, Indian share markets have opened the trading day on a weak note. The BSE Sensex is trading lower by 129 points while the NSE Nifty is trading lower by 41 points. The BSE Mid Cap index opened the day down by 0.1% and BSE Small Cap index have opened the day up by 0.3%. The rupee is trading at 67.95 to the US$.

Sectoral indices have opened the day on a mixed note with realty, oil & gas stocks witnessing maximum buying interest. Whereas, banking and FMCG stocks have opened the day in red.

According to an article in a leading financial daily, State Bank of India (SBI) has cut its lending rates by 90 basis points for maturities ranging from overnight to three-year tenures, after experiencing a surge in deposits.

The SBI move comes after Prime Minister Narendra Modi on Saturday admonished banks to "keep the poor, the lower middle class, and the middle class at the focus of their activities," and to act with the "public interest" in mind. Among the steepest interest rate cuts in a long time, the move is aimed at boosting loan growth, which has fallen to a multi-decade low.

After the move, its so-called overnight marginal cost of funds-based lending rate (MCLR) fell to 7.75% from 8.65%, while three-year loan rates will now be 8.15% from 9.05% previously. This is the second rate cut by the SBI in two months, as the lender had reduced MCLR by 15 bps in November. Following the withdrawal of the old Rs 500 and Rs 1000 notes, banks' loan growth has slumped, with economic activity taking a hit.

Banks Slash Interest rates

Following this, Union Bank of India and Punjab National Bank also announced cuts ranging from 60 to 90 basis points.

Meanwhile, The Economic Times, reported that following the recent spurt in oil prices to well over US$50 a barrel, Indian Oil Corp (IOC) on Sunday hiked prices of petrol by Rs 1.29 a litre, and of diesel by 97 paise, both at Delhi and effective from midnight, with corresponding increases in other states.

One must note that, the prices were last revised on 16 December, when petrol was increased by Rs 2.21 a litre while diesel was hiked by Rs 1.79 per litre. This is the third hike in petrol prices in one month and the second in case of diesel in one fortnight.

The current level of international product prices of petrol and diesel and Rupee-US Dollar exchange rate warrant increase in selling price of petrol and diesel, the impact of which is being passed on to the consumers with this price revision, the reports noted.

Notably, IOC, Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) revise rates on 1st and 16th of every month based on average international price in the previous fortnight. Petrol per litre will now cost Rs 70.60 in Delhi, Rs 73.13 in Kolkata, Rs 76.91 in Mumbai and Rs 70.07 in Chennai. Likewise, diesel will cost Rs 57.82 in Delhi, Rs 60.06 in Kolkata, Rs 63.61 in Mumbai and Rs 59.47 in Chennai.

Will 2016 have an Impact on 2017?

As we move ahead into 2017, let us pause for a minute to review the year gone by. 2016 was definitely a year to be remembered. It has made surprise the new routine and forecasting a mug's game.

Last year saw many major occurrences that changed the global economic scenario... for better or worse. We had the Brexit, Indo-Pak surgical strikes, US Elections, the OPEC deal, Fed rate hike... Oh, and not to forget the demonetisation saga that's still going on.

All of the above had a significant impact on the Indian financial markets. Most asset classes took a beating thanks to volatility caused by these.

With all that happened in 2016 the question arises - 'Will 2017 take it's cues from 2016'?

We believe three key events could have some impact on 2017.

  • US Elections: Donald Trump's unexpected win in the US elections has shaken the world. His stance on immigration, taxation, and free trade practices, among others has generated uncertainty. This could significantly impact the world economy, including ours.

Tanushree Banerjee, Equitymaster's co-head of research, in a recent 5 Minute wrap up asked 9 interesting questions. Here is a question she asked Donald Trump:

  • Will you change the definition of 'fair and reasonable' in US' trade deals with us like you do for your real estate deals?

    The book Trump Strategies for Real Estate suggests that you have, from time to time, changed the definition of 'fair and reasonable'. This was to make your real estate deals more profitable. Should Indian companies with US trade relations get wary of such Trump shockers during your Presidency?
  • Demonetisation: On 30th December 2016, the demonetisation saga concluded formally. But the social, political and economic effects will stick around much longer.

  • We have already seen the first round of the economic impact. Sectors across the economy are lurching. With real estate and microfinance leading the tale. It would be interesting to see how long this impact continues. We also wonder how the transition towards the cash less economy will play out.

  • Budget Reset: The Indian government has decided to prepone the budget presentation. It will present it on the first day of February instead of the customary last day of February. The move is meant to reorder the government's spending patterns.

Typically, a budget presented on the last day of February gets approved by the parliament around mid-May. This way it is only actually implemented after one quarter is past.

An early budget would mean early implementation, and hence higher efficiency.

Even though surprise has become the new routine, we believe these events will definitely continue to make waves in 2017. But only time can tell whether their impact will be positive or negative.