Markets Pare Early Gains

Indian equity markets started the day's proceedings on a strong note and continued this trend in the morning session. However, indices witnessed some pressure in the afternoon trading but still managed to finish above the dotted line. At the closing bell, the BSE Sensex closed higher by 50 points, the NSE Nifty closed higher by 14 points. S&P BSE Midcap and S&P BSE Small cap closed on a positive note with the indices up by 0.2% and 0.9% respectively. Gains were largely seen in metal and consumer durable stocks.

Asian markets maintained a positive start to the new trading week with shares in Hong Kong leading the region. The Hang Seng is up 1.36%, while Japan's Nikkei 225 is up 0.90% and China's Shanghai Composite is up 0.75%. European markets are trading mixed. The DAX is higher by 0.16%, while the CAC 40 and FTSE 100 are down 0.38% and 0.11% respectively. The rupee was trading at 67.64 against the US$ in the afternoon session.

According to an article in the Economic Times, National Aluminum Company Limited (Nalco) will send a team of officials to Iran, Qatar and Oman as early as next month to explore opportunities for setting up a gas-based thermal power plant and an aluminum smelter. Previously, the over US$2-billion project was slated to come up at one of the specially designated economic zones in Iran's Kerman province, but could not materialize due to sanctions on the Persian Gulf nation.

Reportedly, the company is also in talks with the Gujarat Mineral Development Corporation (GMDC) to set up a 0.5 million tonne per annum alumina refinery in Gujarat based on the supply of bauxite from GMDC's mines. It will help Nalco stay competitive and counter cheap aluminum imports from China and the Middle East. Nalco expects India to double its aluminum consumption to 5 million tonnes in the next four years.

On another note, global margins of aluminum companies have been under severe pressure due to concerns over Chinese aluminum exports and global meltdown in commodity prices (Subscription Required). Moreover, domestic aluminum companies are also struggling with higher fuel costs. Aluminum companies were forced to source coal from the open markets in the wake of cancellation of the captive coal blocks allotted to them by the Supreme Court last year. And price hikes taken to pass on the cost has further dented their competitiveness in the global markets. This has all been reflected in the weakening financial performance during the first half of FY16 (Subscription required).

The stock price of Nalco finished the trading day up by 0.8% on the BSE.

According to a leading financial daily, the Adani Gas & Indian Oil Corporation (IOC) combine, GAIL Gas, Gujarat Gas and BPCL are among 18 companies that have bid for license to retail compressed natural gas (CNG) to automobiles in 20 cities like North Goa and Bhatinda.

Of the 34 cities that oil regulator PNGRB had offered in the sixth round of bidding, 56 bids from 18 companies were received for 20 cities. As many as 14 cities including Raebareli, Mainpuri, Etawah, Baghpat and Amethi in Uttar Pradesh, Shahdol and Rewa in Madhya Pradesh and Nainital in Uttarakhand did not receive any bid. Reportedly, Gujarat Gas bid for the most number of cities, putting in bid for all the eight cities in Gujarat on offer.

In other news, ONGC has got environmental clearance for drilling 45 development wells and other related infrastructure involving a cost of over Rs 530 billion in the Krishna-Godavari basin in Andhra Pradesh. Reportedly, the proposed development drilling and subsequent development of fields would lead to production of 51.33 billion cubic meters of gas over a period of 16 years and 26.71 million cubic meters of oil in 12 years. Also, in our recent edition of The 5 Minute WrapUp Premium, we have discussed how the share price of shipping company Global Offshore Services has tumbled from Rs 864 to Rs 300 (Subscription Required) due to the decline in oil prices.

Oil & gas sector finished the day on a mixed note with Cairn India and Gulf Oil Lubricants leading the gains. The combination of plunging crude oil and fears over the Chinese economy have been attributed to the stock market's decline in 2016. In this, the market decline has been the worst for small cap stocks (Subscription Required).

Metal Stocks Favored the Most
01:30 pm

After opening the day on a positive note, the Indian indices continued their rally during the post noon trading session. Sectoral indices are trading on a positive note with stocks from the metal and pharma sectors leading the gains.

The BSE Sensex is trading up 115 points (up 0.5%) and the NSE Nifty is trading up 31 points (up 0.4%). The BSE Mid Cap index is trading up 0.9% while the BSE Small Cap index is trading up by 1.5%. Gold prices, per 10 grams, are trading at Rs 26,331 levels. Silver price, per kilogram is trading at Rs 34,450 levels. Crude oil is trading at Rs 2,177 per barrel. The rupee is trading at 67.72 to the US$.

Stocks in the power space are trading on a positive note with PYC India and Adani Power leading the gains. As per a leading financial daily, Tata Power's 100% subsidiary- Tata Power Renewable Energy (TPREL), has issued and allotted unsecured, non-convertible debentures (NCDs) for an amount of Rs 4.3 billion. The NCDs have been issued on a private placement basis.

As per the company, the proceeds from these NCDs will be primarily used to prepay existing high cost debt in TPREL.

The NCDs will carry a spread of 0.13% above base rate of State Bank of India (fully floating) payable annually and are guaranteed by the company. The NCDs have been rated AA (SO) by CARE.

Furthermore, on a separate note, Tata Power has terminated a Share Purchase Agreement (SPA) with Ideal Energy Projects for acquisition of 100% stake in a 270 megawatt (MW) thermal power project in Maharashtra.

Earlier, an agreement was reached between Tata Power and Ideal Energy for the stake sale in December 2014. As per the terms of the SPA, the acquisition was subject to fulfillment of certain conditions. The company made all efforts to arrive at a workable solution to salvage a stressed asset along with key stakeholders. However, the stakeholders could not conclude, which led to non-fulfillment of the aforesaid conditions precedent. In view of this, the company has decided not to pursue this opportunity any further and has confirmed the termination of the SPA.

Tata Power is India's largest integrated power company with a growing international presence. While the lower demand for power has weighed on the company's performance, it is optimistic about the future performance backed by plans to expand its presence overseas. The company has identified four geographies for driving its growth in the future. These geographies are Africa, South East Asia, Middle East and South Asian Association for Regional Cooperation (SAARC). To know our views on the stock of the company, you can read our result analysis report here (subscription required). Presently the stock of the company is trading up by 0.3%.

Pharma sectors are also trading firm with Elder Pharma and J.B. Chemicals witnessing maximum buying interest. As per a leading financial daily, Cipla has announced completion of the sale of its entire holding in Hong Kong-based Biomab Holding to Biomab Brilliant for US$ 2.5 million. The company has completed the transfer formalities in relation to the divestment of its entire 25% stake in Biomab Holding Ltd.

Last year, Cipla had entered into an agreement to sell its entire 25% stake in Biomab Holding to Biomab Brilliant Ltd to focus on biological segment under its arm Cipla BioTec. Post this divestment, the company's biological business would be consolidated under Cipla BioTec that would focus on research, development, manufacturing and marketing of biosimilars, in the field of cancer, auto-immune diseases, respiratory diseases and diabetes.

Cipla focuses on development of new formulations and has a wide range of pharmaceutical products. It offers prescription drugs, bulk drugs, animal products and pesticides. Presently its stock is trading up by 0.3%.

Indian Markets Trade in the Green
11:30 am

After opening the day on a positive note, the Indian Markets have continued to trade in the green. Sectoral indices are trading on a positive note with stocks from the metal, pharma, and consumer durables sectors leading the gains.

The BSE Sensex is trading up 130 points (up 0.5%) and the NSE Nifty is trading up 37 points (up 0.5%). The BSE Mid Cap index is trading up by 1.1% while the BSE Small Cap index is trading up 1.4%. The rupee is trading at 67.64 to the US$.

Stocks in the pharma space are trading on a positive note with Elder Pharma and Piramal Enterprises witnessing maximum buying interest. As per an article in Economic Times, five Indian drug companies are in initial discussions to bid for Sagent Pharmaceuticals, a Nasdaq-listed specialty injectable maker. The five Indian companies are Torrent Pharmaceuticals, Dr Reddy's Laboratories, Aurobindo Pharma, Cipla, and Lupin. Even Sun Pharma was interested in the bid and had initiated the due diligence process, but then backed out, mainly over valuations.

This trend was seen after Sagent mandated New York based investment banker Perella Weinberg Partners to scout for potential opportunities as part of its strategic alternatives. The valuation is expected to be upwards of US$ 500 million, for which large generic drug makers and financial investors may also be interested.

Sagent recently forecasted sales of US$ 325-365 million for 2016, representing a compounded annual growth rate (CAGR) of 14% since 2013. It expects adjusted EBITDA of US$ 35-50 million for the year.

Indian drug makers are interested in Sagent because it presents an ideal opportunity for companies that have an injectables manufacturing platform with a focus on hospital-based medicines. Furthermore, for Indian drug makers, the most sought-after market is the US, where as much as 86% of the total dispensed prescriptions are for generic drugs. This has encouraged many Indian drug companies to take up M&A (mergers and acquisition) activity in the US.

Majority of the stocks in automobile space are trading on a positive note with Force Motors and Maharashtra Scooters leading the gains. As per a leading financial daily, Maruti Suzuki has maintained its leadership position in the domestic passenger vehicle (PV) market in December. This comes as six of its models have featured in the top ten brands last month.

As per the latest data from the Society of Indian Automobile Manufacturers (SIAM), in the top ten passenger vehicles, Maruti's Alto retained the top position last month, with sales of 22,589 units, as against 22,296 units in December, 2014. The company's compact hatchback Wagon R was the second best-selling model with 14,645 units compared with 12,329 units in the same month last year. Premium hatchback Swift was the third, selling 14,548 units, as against 17,410 units in the year ago month. Further, the company's compact sedan DZire was fourth with 13,176 units, as compared to 15,526 units a year ago. Newly-launched Baleno made it to the sixth rank with sale of 10,572 units. Lastly, Celerio was at eighth position, selling 8,019 units.

Going forward, Maruti Suzuki aims to reach sales volume target of 2 million units over the next five years and plans to launch 20 new models in the same period. The company has also outlined a capex of Rs 35 billion in FY16, which will be towards new product launches, R&D, marketing expenses and maintenance. If you are interested in the stock, do read our result analysis report of the company (subscription required). Presently the stock of the company is up 0.3%.

Markets Open on a Firm Note
09:30 am

Major Asian stock markets have opened the day on a positive note with stock markets in Singapore and China trading up by 1.5% and 1.1% respectively. Major indices in Europe and US ended their previous session on an encouraging note. The rupee is trading at 67.97 per US$.

Indian stock markets too have opened the day on a strong note. The BSE Sensex is trading higher by 91 points (up 0.4%) and NSE Nifty is trading higher by 45 points (up 0.6%). Both BSE Mid Cap and BSE Small Cap are trading higher by 0.7% and 0.8% respectively. Major sectoral indices have opened the day in green with stocks from banking and pharmaceutical sector witnessing maximum buying interest.

ITC reported its results for the quarter ended December 2015. The revenues of the company declined 2.6% YoY to Rs 91.7 billion. The pressure on cigarette volumes coupled with sluggish demand environment in the fast moving consumer goods segment (FMCG) dragged down the revenues. Further, exports were impacted on the count of weak demand for wheat, soya, coffee and Indian tobacco leaf. The management stated that the taxation and regulatory headwinds facing the cigarette business impacted its sales growth.

However gross margins improved across segments backed by falling input costs and a better product mix. The net profits of the company grew marginally by 0.68% to Rs 89.4 billion. The stock is trading down by 0.6%.

Biocon Ltd too has reported its results for the quarter ended December 2015. The revenues of the company grew by 9% YoY to Rs 8.3 billion. Sales of bio-pharmaceutical which comprises of small molecules, active pharmaceutical ingredients, generic formulations and branded formulations grew by 3.3% YoY to Rs 5.58 billion.

Further, net profits of the company grew 13% to Rs 1.03 billion on the back of improved sales of its contract research arm Syngene International Ltd (SIL). The company has been successful in increasing its net profits despite of a 45% jump in research and development (R&D) expense. SIL's net profits rose 31.3% YoY to Rs 588 million. The stock is trading up by 1%.

Will Rupee Breach the 70 Level?

The rupee is on a declining trend, depreciating by around 6% since the levels seen in August 2015. As I am writing, rupee has breached the levels of Rs 68. The huge foreign outflows have been a driving force for a weakening rupee. Foreign Portfolio Investors (FPIs) have withdrawn a mammoth sum of Rs 356.09 billion from the local equity market since August 2015. The withdrawal of capital from FPI leads to increasing demand for the dollar, thereby putting significant pressure on the rupee.

To add to the woes, China depreciated yuan by around 6% since 10 August 2015. Now, how this affects India? Depreciation of yuan makes China's exports less expensive as compared to India. Thus, global demand for Indian manufactured products reduces considerably. Assuming, Indian domestic manufacturers will be shattered by the depreciating yuan, FPIs are withdrawing even more capital. This puts further downward pressure on the rupee.

Recent fall in the rupee has induced many experts to write about it. If the so-called experts are to be believed, namely Barclays, UBS, Morgan Stanley, Royal Bank of Scotland, the rupee could breach the 70 mark to the US$ this year. It is also surprising to note that even at current levels, the rupee is overvalued as per Real Effective Exchange Rate (REER) index. As per the index, the rupee could depreciate further from current levels.

Who will feel the pain of the weakening rupee? Companies who have taken foreign loans from abroad will be impacted. The repayment obligations in terms of principal and interest will rise, leading to a dent in the cash flows and financials. Further, companies who import a majority of their raw material requirements will get impacted provided they have not hedged their foreign currency exposure. RBI gave repeated warnings to corporates to hedge their foreign currency exposure. However, according to data available, huge chunk of corporates have yet not hedged their foreign exposure, thus exposing themselves to the falling rupee.

Further, India imports more than 80% of its oil requirements. A rise in the dollar also leads to a consequent rise in the import bill. Currently, oil price is hovering around their record lows and thus a rise in the dollar won't contribute much to the import bill.

Looking at the brighter side, rupee depreciation brings a cheer on the exports front. India's exports have contracted for the 13th month in a row. A depreciating rupee will provide a much needed cushion to falling exports. However, a falling rupee will not be the only factor to boost exports. There are certain structural issues too; the government needs to address to get the exports back on track. Presently, currencies of majority of emerging markets are falling. During such time, if India's currency does not depreciate, it could make the Indian exports uncompetitive as compared to the other countries.

Going forward, we won't be surprised at all if the rupee breaches the 70 levels. Provided the depreciation comes at a measured pace, long-term investors should not fret about the same. The RBI has enough foreign exchange reserves to stabilize the rupee in case of a freefall. Thus, we believe investors should not worry much into the falling rupee. We agree with a recent article in Livemint that states we should think of 70 as the new 60 for the exchange rate and move on.