Sensex Finishes Flat; Idea Zooms 26% on Merger Talks
Closing

Share markets in India finished the trading day on a flat note after four straight sessions of gains due to caution ahead of the budget.

At the closing bell, the BSE Sensex closed lower by 33 points, whereas the NSE Nifty finished lower by 9 points. The S&P BSE Midcap finished up by 0.3%, while the S&P BSE Small Cap finished down by 0.3%. Losses were largely seen in auto and bank stocks.

Idea Cellular share price surged 26% in the afternoon session after Vodafone India confirmed that the company was in discussion with the Aditya Birla Group for an all-share merger of Vodafone India and Idea Cellular.

Asian markets finished mixed as of the most recent closing prices. The Shanghai Composite gained 0.31%, while the Nikkei 225 & the Hang Seng fell 0.51% and 0.06% respectively. European markets are lower today with shares in France off the most. The CAC 40 is down 0.95% while London's FTSE 100 is off 0.74% and Germany's DAX is lower by 0.61%.

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The rupee was trading at Rs 68.04 against the US$ in the afternoon session. Oil prices were trading at US$ 53.07 at the time of writing.

According to a leading financial daily, Rural Electrification Corporation (REC) has signed three Memorandum of Understandings (MoUs) for extending financial assistance to the tune of Rs 600 billion for next 5 years.

The company has signed the MoUs with Andhra Pradesh Power Generation Corporation (APGENCO) for financial assistance upto Rs 400 billion; Transmission Corporation of Andhra Pradesh (APTRANSCO) for financial assistance upto Rs 100 billion; and AP DISCOMs for financial assistance up to Rs 100 billion.

Apart from financial assistance, power utilities have agreed for availing Consultancy and Management Services from wholly owned subsidiaries of REC i.e REC Power Distribution Company (RECPDCL) and REC Transmission Projects Company (RECTPCL), for their various activities/projects for next 5 years.

REC share price finished the trading day down by 1.5% on the BSE.

In another development, Housing Development Finance Corporation (HDFC) reported a 12.8% increase in consolidated net profit at Rs 27.28 billion for the third quarter ended December. Profit for October-December in the previous fiscal stood at Rs 24.19 billion.

Its total income has gone up to Rs 149.81 billion for the quarter ended December from Rs 122.53 billion for the quarter ended December 2015.

The company's gross non-performing loans stood at Rs 23.41 billion at the end of December quarter, which was 0.81% of its loan portfolio. Non-performing loans of the individual portfolio stood at 0.65%, while the non-individual portfolio stood at 1.16%.

HDFC share price finished down by 0.4% on the BSE after the company

Moving on to news from economic sector. According to a leading financial daily, Union Finance Minister Arun Jaitley has expressed his confidence that the implementation of the Goods and Services Tax (GST), along with demonetisation will bring more revenues as far as states and the central government are concerned and enlarge the size as far as the formal economy is concerned.

Talking about the impact of demonetisation, Jaitley has said that the move shook the system for some time but is now gradually increasing the process of integrating India's shadow economy with the formal economy. He also said that the size of the formal economy is growing, so are the transactions in the banking system and through the digital mode.

On the GST front, Jaitley said that most of the contentious issues have been sorted out between the Centre and states. He also said that national indirect levy-Goods and Services Tax (GST)-is all set to become a reality by July 1 and further noted that GST will make India one single market, eliminate multiple assessments, check evasion and bring more revenues into the system.

Meanwhile, India's Debt to GDP ratio has been at elevated levels for the last decade or so. The final number for FY16 is expected to be around 66%. The Indian government spends about 30% of its revenue on interest payments. This doesn't leave any room for the government to spend on productive purposes.

High Debt is a Constraint to Growth

Unless this structural issue is addressed, the debt will be a big overhang on growth and India's credit rating won't improve.

And here's a note from Profit Hunter:

Idea Cellular is in news today as the company's stock price surged a whopping 25% on merger talks with Vodafone India.

But we are least concerned with that. For us 'Price is everything. In our earlier commentary, we had mentioned Rs 70 acting as a rock solid support for the stock. The bears tried to push the price below this level thrice but failed on every attempt. In the most recent attempt the prices closed below this 70 level but immediately recovered with healthy volumes.

The 70 levels proved to be a turning point for Idea cellular.

In today's session, Idea cellular broke above its resistances in one go. And now, it is trading near its next resistance zone of Rs 100. The RSI indicator is also at its 4-year high.

It will be interesting to see if the bulls can push through this centurion mark, or will the bears take the control this time around. Only time will tell...so stay tuned.

Idea Cellular Stock Price Pushed Through the Roof
Idea Cellular Stock Price Pushed Through the Roof 


Sensex Trades on a Negative Note; Realty Stocks Gain
01:30 pm

After opening the day flat, the Indian share markets have continued to trade on a dull note and are currently trading marginally below the dotted line. Sectoral indices are trading mixed, with stocks in the realty sector and the capital goods sector witnessing maximum buying interest. Stocks in the consumer durables and the auto sector are trading in the red.

Both the BSE Sensex and the NSE Nifty are trading flat with a negative bias. Meanwhile, the BSE Mid Cap index is trading up by 0.3%, while the BSE Small Cap index is trading flat. The rupee is trading at 67.99 to the US$.

Idea cellular share price is leading the gains on the Indian Indices today. As an article in The Economic Times reported that Idea Cellular may be on the verge of a merger with India's second largest telecom operator Vodafone India.

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The merger, if it goes through will create India's largest telecom company. The merged company will topple Bharti Airtel's leadership position in terms of both subscribers and revenue, as India's second and third largest telecom companies join hands.

A potential merger between Vodafone India with Idea Cellular would change the industry order. The combined entity would have 43% revenue share in the market by FY19 against 33% of Bharti Airtel and 13% for Reliance Jio.

The entry of Reliance Jio and the fierce tariff war it has triggered have set off brisk activity in the industry for fundraising and consolidation, as the incumbents look for ways and means to fend off the competition.

Jio's Data Pricing Disrupts the Telecom Apple Cart

Reliance Jio's disruptive pricing, seemingly hasn't left other market players with much of a choice but to accelerate consolidation moves to sustain the pricing wars.

Vodafone India's financial woes have lately been compounded by the bruising impact of Jio's free voice and data services launched last September that will continue till end of March.

The mix of its recent 4.4 billion Pound write-down, its till now modest on ground 4G spectrum footprint reflected in slower customer adds, and continuing price cuts in response to Jio's free services have further hit revenues and profits, which have all contributed to the consolidation overtures.

Idea Cellular share price has risen over 15% since January 18 on the back of rising speculation of such a merger, which would create India's largest telecom company.

At the time of writing Idea Cellular shares were trading up by 25%.

Moving on to news about stocks in the pharma sector. Suven Life Sciences share price surged as much as 1.5% in intraday trade as the company announced the grant of a new patent from the USA.

Leading bio-pharma company Suven, announced that it secured one product patent from the (USA 9540321) corresponding to the New Chemical Entities (NCEs) for the treatment of disorders associated with Neurodegenerative diseases. The patent is valid through 2034.

The granted claims of the patents are from the mechanism of action include the class of selective 5HT6 compounds and are being developed as therapeutic agents and are useful in the treatment of neurodegenerative disorders like Alzheimer's disease, Attention deficient hyperactivity disorder (ADHD), Huntington's disease, Major Depressive disorder (MDD), Parkinson and Schizophrenia.

With these new patents, Suven has a total of 25 granted patents from USA. These granted patents are exclusive intellectual property of Suven and are achieved through the internal discovery research efforts. Products out of these inventions may be out-licensed at various phases of clinical development like at Phase-I or Phase-II.

Talking about the healthcare sector, the ValuePro team aims to find selective stocks to its subscribers that are fundamentally strong, and are also trading at a discount to its intrinsic value. One such attractively priced stock from the healthcare industry was recently recommended by the team. If you haven't read the report already, you can read the complete report here. (Subscription Required).


Indian Indices Trade Near the Dotted Line; Auto Stocks Witness Selling
11:30 am

After opening the day on a flat note, the Indian share markets witnessed choppy trades and continued to trade near the dotted line. Sectoral indices are trading on a mixed note with stocks in the information technology sector and auto sector witnessing maximum selling pressure. Stocks in the telecom sector are trading in the green.

The BSE Sensex is trading down 14 points (down 0.1%) and the NSE Nifty is trading down 10 points (down 0.1%). The BSE Mid Cap index is trading up by 0.2%, while the BSE Small Cap index is trading flat. The rupee is trading at 68.05 to the US$.

Indian stock markets are looking forward to potential changes the Union Budget 2017 could bring. The budget comes within months of demonetisation and market participants are wondering what measures the government will take to stimulate the economy.

This, along with the result announcement from over 100 companies today, has led Indian share markets trade on a volatile note. The market is expecting depressed earnings for the third quarter (Oct-Dec 2016).

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This begs the question: What can one do to sail safely through these volatile times?

As Buffett-heads who take his advice like fish to water, we think the best way to counter volatility is to follow a long-term value investing approach.

It's also important to have a set process in place, as Rahul Shah, co-head of research at Equitymaster, showed us at the Equitymaster Conference 2017. Many of you have already tasted the fruits of one of Rahul's processes with his Microcap Millionaires service.

But at the Conference, Rahul asked attendees to mark 10 February 2017 on their calendars. The reason? He will send out his first Profit Velocity report to subscribers.

As you may have guessed, Profit Velocity is a system-based investing approach.

With Profit Velocity, Rahul believes that the system could help subscribers fetch gains several times those of the benchmark index.

US President Donald Trump's protectionist moves are making the news in global financial markets. The president is determined to wall off America's border with Mexico. Apart from that, there's also a proposal of 20% tax on imports from Mexico.

The above developments have triggered a fresh fight over trade between Mexico and the US. Also, this follows Trump's fight over multinational trade as he pulled the US out of the 12 nation Trans-Pacific Partnership (TPP) trade deal last week.

Trump also aims to renegotiate the North American Free Trade Agreement (NAFTA) at an appropriate time. NAFTA enacts a free trade zone between the US, Canada, and Mexico. Trump said that he would move to withdraw from the agreement if no 'fair deal' is forthcoming, pledging to stop trade deals that harm American workers.

In order to bring down US imports, Trump is planning to direct the Secretary of Commerce to identify every violation of trade agreements a foreign country is currently using to harm the US workers. Currently, US imports more than it exports to other nations. This can be seen in the chart below:

American Imports Exceed Exports

The withdrawal from the NAFTA will not impact India directly, but the resulting adverse currency movements could hurt us. For example, the Mexican peso is under pressure. The falling currency boosts Mexican exports, which could lead to a decline of India's global export market share.

All we can do for now is wait and see how the above developments pan out.

For investors, this is a reminder that geopolitical equations and their changing nature deserve attention, especially when evaluating an industry's growth prospects. Investors could do well to favour companies that are better geared to withstand a variety of geopolitical developments.


Sensex Opens Flat; FMCG Stocks Top Gainers on BSE
09:30 am

The majority of Asian markets are closed. Stock markets in the US ended their previous session on a firm note. Meanwhile, share markets in India have opened the trading day on a flattish note. The BSE Sensex is trading up by 4 points while the NSE Nifty is trading lower by 13 points. The BSE Mid Cap index and BSE Small Cap index both have opened the day up by 0.2%.

The rupee is trading at 68.20 to the US$. Sectoral indices have opened the day on a mixed note with IT and metal stocks witnessing maximum selling pressure. While FMCG and healthcare stocks are among the top gainers on the BSE.

FMCG stocks have opened the day on a mixed note. Huhtamaki PPL Ltd and Archies Ltd are the most active stocks in this space. According to an article in The Economic Times, ITC Ltd is planning to enter healthcare business in India and has sought shareholder approval for the same.

Reportedly, the board of directors of the company at its meeting recommended an alteration of the objects of the clause of its Memorandum of Association to include Healthcare. The move comes on the back of company's ambition to position itself as one of India's most valuable corporations.

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One must note that, Healthcare is a lucrative business in India and is likely to witness a significant growth in the coming years. Going forward, whether the decision to change the clause will prove to be a game changer and further reduce ITC's dependence on tobacco business will be the key thing to watch out for.

Meanwhile, ITC reported quarterly results for the December quarter. ITC's standalone net profit grew 5.71% year-on-year to Rs 26.4 billion for the third quarter of FY16 as its revenue from operations rose by 4.52% y-o-y amid lower consumer offtake and reduction in trade pipelines due to cash crunch post the government's demonetisation move. Total income from operations was up 4.7% at Rs 135.7 billion.

Cigarette Contributes 43% of Net Sales

Cigarette sales accounted for more than half of ITC's total income, which rose to Rs 82.9 billion from Rs 81.1 billion in the year-ago period. The performance of the cigarette business during the quarter was subdued on account of tight liquidity conditions prevailing in the market and continued regulatory and taxation pressures on the legal cigarette industry in India (Subscription required), the reports noted.

Subscribers can access to ITC's latest result analysis (subscription required) and ITC stock analysis on our website.

Moving on to the news from stocks in energy sector, Oil and Natural Gas Corporation (ONGC) has signed a memorandum of understanding (MoU) with the Andhra Pradesh government for investing US$5.1 billion in developing oil and gas finds off the state's coast by 2019-20.

Reportedly, the project envisages bringing to production 10 oil and gas discoveries in the Bay of Bengal block KG-DWN-98/2 (KG-D5). First gas production will take off by June 2019 and oil would start flowing from March 2020. Gas from the offshore field will be brought via sub-sea pipeline to the State before being transported to end users. Further, gas output is slated to peak to 16.7 million standard cubic meters per day by the end of 2021.

In the meanwhile, ONGC is investing Rs 780 billion in the Krishna Godavari basin for producing hydrocarbons and has signed an agreement with the Andhra Pradesh government for smooth execution of the projects.

ONGC is very aggressively pursuing to put the huge gas reserves it has discovered in KG basin, to production. It plans to invest about Rs 100 billion for exploration and production activities in onland blocks and about Rs 680 billion in offshore assets in the KG Basin.

As per the deal, the state government will assist ONGC in taking over land and in obtaining other statutory clearances. The agreement with Andhra Pradesh to take forward all critical exploration and production activities in the state was signed on the sidelines of the Partnership Summit, 2017 jointly organized by the state government and industry chamber Confederation of Indian Industry (CII) in Visakhapatnam, the reports noted.

ONGC share price opened the day up by 0.3%.


Software Challenges Will Persist in 2017
Pre-Open

Through nearly two decades of stellar growth, India's export-driven software and services sector has both given a boost to exports and, perhaps more importantly, changed global perceptions about India.

But the future of this dream run of Indian software companies now faces a perfect storm as growth slows, profits take a beating, and many are loaded with a workforce running into hundreds of thousands.

So, is it all over for the outsourcing sector? Will an Infosys Ltd or a Wipro Ltd go the Kodak or Blackberry way, and fizzle out in the coming years?

The challenge is two-fold. The first being that US President elect Donald Trump has threatened to change visa rules so that import of cheap technical manpower does not take away jobs from Americans. The US has carefully set up an elaborate regime of importing skills through the issue of H1B visas because US corporations want these cheap imports.

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Localization of workforce is another major step Indian IT companies may take to overcome the likely visa woes during Mr. Trump's presidency.

While the second challenge is from the wider hold of artificial intelligence. According to an article in The Hindu Business Line, Indian companies traditionally offered development and maintenance services through time and material contracts. This was delivered both offshore and onshore but a lot of these jobs are now being automated. So IT firms have to offer clients something more. This means the largest Fortune 500 companies do not need to rely on engineers to do mundane repeatable tasks such as providing customer support.

This has been accompanied by a slowdown in hiring. In the September quarter, the top four Indian IT companies cut their hiring by as much as 43%.

The rise of cloud computing is another cause of worry. Most customers are pressing their technology vendors to offer solutions beyond just rolling out enterprise resource planning applications or testing software. Meanwhile, Indian companies are also constantly looking at their own numbers to see how much of their revenue is generated form digital work.

Plus, Indian companies are lacking in innovation. This has even motivated companies like Infosys and Wipro to create dedicated corporate VC funds to invest in start-ups. Excluding the impact of acquisitions, Wipro's revenue fell by about 30 basis points sequentially in the December quarter. Worse still, the company has guided for 1-2% growth for the March quarter.

In 2017, more such strategic investments, acquisition, hiring strategy and skill trainings are expected from the Indian IT majors. In spite of all the uncertainties, India's market share continues to be at 7% of the global software and IT services spend, and 57% of global IT services is outsourced to India.

Also, the slowdown in growth during financial 2016-17 can in good part be attributed to the global IT spending scenario. Global IT spending contracted for two successive years, by -5.8% in 2015 and -0.3% in 2016.

Certainly, the road ahead won't be easy for the outsourcing sector. The sector, which is staring at a less than 10% growth in the current year, may struggle at a slower clip in fiscal 2018, on account of macroeconomic uncertainties. However one should look into longer term growth prospects. The stronger companies that have a proven track record will be able to adapt with new challenges and sail through these tough times. Our StockSelect service have recommended such stocks which one could consider buying at the current levels.