Sensex Ends Marginally Lower; Hindustan Petroleum Tanks 6%
Closing

Indian share markets continued to trade range bound in the afternoon session amid mixed global cues. At the closing bell, the BSE Sensex closed lower by 12 points, whereas the NSE Nifty finished lower by 13 points. The S&P BSE Midcap finished down by 0.5%, while the S&P BSE Small Cap finished down by 0.6%. Losses were largely seen in auto and metal stocks.

Hindustan Petroleum Corporation Limited (HPCL) share price plunged 6% in today's trade despite reporting 53% rise in its net profit for the October-December 2016 quarter. For the December 2016 ended quarter, HPCL's net profit was at Rs 15.9 billion, 53% higher from Rs 10.41 billion. Total income for the quarter under review was at Rs 558.28 billion, 15% higher from Rs 485.26 billion.

Asian markets finished mixed as of the most recent closing prices. The Shanghai Composite gained 0.03%, while the Nikkei 225 led the losses and was down 1.1%. the Hang Seng was marginally lower today. Meanwhile, European markets are trading flat.

The rupee was trading at Rs 66.95 against the US$ in the afternoon session. Oil prices were trading at US$ 53.32 at the time of writing.

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According to a leading financial daily, India's wholesale price inflation (WPI), surged to its highest level since July 2014 in the month of January, on the back of faster increase in cost of manufactured product and a surge in cost of petrol even as food and vegetable prices contracted during the month. As per the data of Ministry of Commerce & Industry, the annual rate of inflation, based on monthly WPI, stood at 5.25% for the month of January, 2017, as compared to 3.39% for the previous month and negative 1.07% during the corresponding month of the previous year.

Build up inflation rate in the financial year so far was 5.31% compared to a buildup rate of negative 0.4% in the corresponding period of the previous year. Meanwhile, for the month of November 2016, the final WPI index was revised upward to 3.38 % from 3.15%.

Among primary articles, the index for 'Non-Food Articles' group jumped 2.5% to 231.3 from 225.6 for the previous month and the index for Minerals' group was up by 1.0% to 215.5 from 213.3 for the previous month, while the index for 'Food Articles' group declined by 1.1% to 267.2 from 270.1 for the previous month.

Fuel & Power index having weight of 14.91% rose by 4.7% to 201.2 from 192.1 for the previous month due to higher price of coking coal.

Can Inflation Come Back to Haunt the Economy?

 Can Inflation Come Back to Haunt the Economy?

Manufactured Products index having weight of 64.97% increased by 0.5% to 158.8 from 158.0 for the previous month. Among the items in the group, the index for 'Basic Metals, Alloys & Metal Products' group surged 2.3% to 161.2 from 157.6 for the previous.

Moving on to news from stocks in mining sector. According to an article in The Economic Times, Coal India is contemplating a major diversification as it plans to produce oil and gas from its coal in a big way as growth from its core activity is declining. It also plans to enter commercial production of coal bed methane and expand presence in thermal & solar power generation.

The proposals are to be placed before the company board soon. While Coal India is yet to take up coal to oil and coal gasification, it has already tested the waters in thermal and solar power generation and coal bed methane.

This comes at a time when the government plans to divest up to 10% in Coal India by August. If the government divests 10% of its shares, it is likely to help the Centre raise around Rs 200 billion and will allow Coal India to conform to holding norms in which a public listed company needs to have at least 25% shares listed on stock exchanges.

Coal is still fundamental to India's energy mix, but it's under growing threat from the plummeting cost of renewables. Coal India's financial performance in the December 2016 quarter was weak when compared with that in the corresponding quarter of the previous year. In the December 2016 quarter, sales volume rose by 4% year-on-year and by 23% compared with the previous quarter.

Coal India share price finished the day down by 0.3%.

And here's a note from Profit Hunter:

Being the best stock in the best sector can generate exceptional returns, obviously. In fact, in a recent note we talked about Hindustan Petroleum (HPCL) as being a shining example of that. Till date, HPCL is the best performer among its peers.

Today, however, we will review this stock because it closed down by 6% just after it announced its third quarter results.

Events like quarterly results can cause short-term volatility in a stock. But when you keep the big picture in mind, you see that this is not the first time the stock has fallen on result day. During Q2FY17 results, the stock made an intraday low of 10%, and during Q1FY17 results, the stock fell by 2%. But these were only temporary dips. Afterwards, the stock went on to outperform its peers as well as the market by a huge margin. You can see this in the chart below.

After today's Q3FY17 results the stock tanked but the momentum in the last few days remained positive. Let's see if the stock continues to outperform or the results will impact it adversely.

HPCL a True Outperformer
 HPCL a True Outperformer 


Sensex Trades on a Weak Note; PSU Stocks Drag
01:30 pm

After opening the day on a flat note, the Indian share markets have remained range bound and are currently trading flat with a negative bias. Sectoral indices are trading negative, with stocks in the PSU sector and the metal sector witnessing maximum selling pressure.

The BSE Sensex is trading down by 30 points (down 0.1%) and the NSE Nifty is trading down by 14 points (down 0.2%). Meanwhile, the BSE Mid Cap index is trading down by 0.7%, while the BSE Small Cap index is trading down by 0.5%. The rupee is trading at 66.95 to the US$.

Cash may still reign supreme post-demonetisation in India. According to an article in the Economic Times, cash payments at retail stores are now near pre-note ban levels, as consumers are increasingly opting for cash payments as liquidity improves in the market.

According to the article, retailers Shoppers Stop, Future Group, Lifestyle International, Spencer's and Max said 20-30% of their total sales in January were paid for in cash, a significant jump from a meagre 5-8% cash transactions in November-December when the high denomination notes of 500 and 1,000 were demonetised.

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Some of these retailers now expect cash transactions to return to pre-demonetisation levels of 40-50% after the cap on cash withdrawn is completely removed on March 13, somewhat negating the government's efforts to push digital payment.

For online fashion retailers Jabong and Myntra, cash transactions, or 'cash on delivery', is already back to normal at 60-70% after falling to about 10% in the aftermath of demonetisation.

India Remains a Cash Based Economy

India Remains a Cash Based Economy

This shows that Indians prefer cash over any other mode of transaction. In the premium edition of The 5 Minute WrapUp on 11 November, Rahul Shah wrote about the reasons why India is a cash based economy. Trust in online payments, security risks, identity and privacy issues, as well as old habits of paying in cash, are just some of things that he mentioned.

The bottomline is that India still has a long way to go to even come close to a cashless economy. Many nations are way ahead of us. India trails many developing as well as developed economies (except Japan) when it comes to the use of cash.

Moving on to news from the pharma sector. In a move to boost domestic manufacturing of pharmaceuticals and medical devices in India, the government has announced setting up of a pharma and med tech zone in Bengaluru.

The move is set to give a shot in the arm for the Indian pharma sector, which achieved a Compounded Annual Growth Rate (CAGR) of over 15%, would be worth US$ 55 billion by 2020 from the present US$ 32 billion.

India accounts for around 20% of the world's generic medicine supply chain, exporting to over 250 countries globally, and the country's pharma industry provides over 60% of global vaccines.

The sector has received Foreign Direct Investment (FDI) close to US$ 14 billion and has generated employment for over 2.5 million people across India this fiscal.

The recent approval of the Pharma and Med Tech zone in Andhra Pradesh has attracted over 30 investment proposals from domestic and international pharma companies.

The Bengaluru pharma zone will go a long way in helping the Indian pharma industry to recover from its current predicament.

Bhavita Nagrani, our pharma sector analyst has explained the current predicament of Indian pharma companies in one of the premium editions of the 5 Minute WrapUp:

  • Over the past few years, risk in the US markets has increased. The US Food and Drug Administration (FDA) has become stricter on products entering US borders. Surprise inspections have increased and companies are being issued warning letters. This has impacted the business and earnings of Indian pharma players, causing major volatility for the sector.

Give it a read to form a better understanding of the current scenario in the Indian pharma sector.


Indian Indices Trade Flat; Metal 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 negative note with stocks in the metal sector and consumer durables sector witnessing maximum selling pressure.

The BSE Sensex is trading down 8 points (down 0.03%) and the NSE Nifty is trading down 9 points (down 0.1%). The BSE Mid Cap index is trading down by 0.6%, while the BSE Small Cap index is trading down by 0.3%. The rupee is trading at 66.90 to the US$.

Recent data released showed retail inflation moderated to 3.17% in January. This was noted as the lowest since India started putting out consumer inflation numbers in January 2012. The decline was led by a marked fall in food inflation.

However, the closely watched core inflation rose further. This suggested that a decline in inflation is not likely to fetch a rate cut.

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The Reserve Bank of India (RBI) last week decided not to cut interest rates while changing its monetary policy stance to 'neutral' from 'accommodative' in keeping with the 4% medium term inflation target. The RBI now projects inflation to be in the range of 4% to 4.5% for the first half of next financial year, and in the range of 4.5% to 5% in the second half.

We believe that India needs more of structural reforms rather than temporary measures such as monetary stimulus. Low inflation target for some years ahead will surely give the assurance of wellbeing. However, without structural changes, it also raises doubts regarding its longevity in the long run.

In another news, tyre manufacturers could be at the losing end of Trump's tariff threat on tyres from China. If the tariff gets implemented, one can expect dumping of tyres from Chinese manufacturers to countries other than the US. This could also mean a simultaneous surge in imports of Chinese tyres in India.

This coupled with the rise in natural rubber prices will mean pressure on margins for tyre companies.

One shall note that natural rubber price rose to a two-and-a-half-year high in January 2017. This was due to both demand and supply. Demand in China - the world's largest consumer - is robust. And there has been a disruption in supply from Thailand - the top producer of the commodity - because of flooding in the south, Thailand's major rubber-growing region. Synthetic rubber, another raw material used in tyre manufacturing, is also more expensive thanks to rising crude oil prices. All of these factors have led to a rise in rubber prices of late.

Rubber Prices Going North
Rubber Prices Going North


Sensex Opens Flat; Pharma Stocks Gain
09:30 am

Asian markets are lower today as Japanese and Hong Kong shares fall. The Nikkei 225 is off 0.16%, while the Hang Seng is down 0.01%. The Shanghai Composite is trading up by 0.33%. Stock markets in the US & Europe ended their previous session on a firm note.

Meanwhile, share markets in India too have opened the trading day on a flat note. The BSE Sensex is trading lower by 3 points while the NSE Nifty is trading lower by 12 points. The BSE Mid Cap index opened down by 0.2%, while BSE Small Cap index opened the day flat.

The rupee is trading at 66.97 to the US$. Sectoral indices have opened the day on a mixed note with auto and realty stocks trading in the red. While consumer durables and healthcare stocks are among the top gainers on the BSE.

Engineering stocks have opened the day on a mixed note with Kalpataru Power and Finolex Cables being the most active stocks in this space. As per an article in a leading financial daily, Larsen & Toubro (L&T) and MBDA, a multinational leader in missile systems, have announced an alliance to develop and supply missiles and missile systems to meet the growing demand of India's armed forces. MBDA is jointly held by Airbus Group, BAE Systems and Leonardo and has expertise in developing all kinds of missile systems.

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The Joint Venture Company, named 'L&T MBDA Missile Systems Ltd', would operate from a dedicated work centre, which will include pyrotechnical integration and final checkout facilities. The JV would focus on business opportunities in the Missiles and Missile Systems domain and target prospects under the Buy (Indian - IDDM), Buy (Indian) and Buy & Make (Indian) categories of defence procurement.

The move to set up a joint venture comes in the wake of the Indian government deciding not to buy missile systems from overseas but source them domestically. The defence sector in India is a sunrise sector. India was among the top ten spenders on military expenditure, ahead of countries such as France, Japan and Germany. However, a significant share of the country's defence requirement is still imported. To encourage domestic production of defence equipment, as part of the initiative to boost manufacturing, the government has implemented a number of measures.

India Among Top Defence Spenders in the World in 2015

Moreover, the Defence Research and Development Organization (DRDO) has signed a technology transfer agreement with a private company, L&T, for the commercial production of Pilotless Target Aircraft.

Reportedly, L&T will own 51% stake in the JV and the rest 49% with the European partner. Moreover, this would not be first time where L&T and MBDA have collaborated. Both the companies together have partnered on co-development and production of major subsystems involving complex technologies and sophisticated weapon systems such as MICA missile launchers and airframe segments including control actuation units for India's defence ministry orders.

To know more about the company's financial performance, subscribers can access to L&T's latest result analysis (Subscription Required) and L&T stock analysis on our website. L&T share price began trading down by 0.3%.

Moving on to the news from stocks in pharma sector. According to an article in leading financial daily, In a major relief to lakhs of heart patients the National Pharmaceutical Pricing Authority (NPPA) reduced prices of stents by about 85%. The price of high grade drug eluting stents (DES) and bioresorbable stents has been capped at Rs 30,000, while that of bare metal stents has been fixed at Rs 7,500.

Reportedly, the cost of a drug eluting stent currently ranges between Rs 24,000 and Rs 1.5 lakh and that of a bio resorbable stent is Rs 1.7 lakh to Rs 2 lakh. Over 95% of stents used in India are drug eluting.

The prices will be effective from notification on Feb 14. This step is a boon for persons with clogged arteries. An estimated 6 lakh stents were used in 2016, the reports noted.

According to the NPPA data, that the hospitals make upto 65% profit on stents. It is because of this many hospitals were opposing price control on stents. Now, the hospitals will have to bill stents separately.

Pharma stocks began the trading day up by 0.1%.


The Demonetisation Led Value Migration...
Pre-Open

It's been four months since demonetization was announced. The government has not offered any mathematics or hard proof to show how and why it was good for the economy. One still wonders if it was ever a move against black money or a political ploy before some crucial state assembly elections. Its effects are felt far less today than in November and December 2016. Banks are flush with funds and Indian Inc has started showing signs of profitability.

An article in the Hindu Business Line suggests 1,700 listed companies recorded a healthy year on year growth in net sales during the October-December 2016 period. On an average, these companies recorded a 9.1% YoY growth in the December quarter. This showed an improvement over the 5% YoY growth witnessed in the September quarter. Also, at 29.8%, profit in the December quarter grew at a much faster clip than the 13.6% in the September quarter.

Most of the companies were able to ward off the impact of rising input prices through cost-control measures. Some companies went for a cut in advertisement spends. So listed companies, at a whole, were able to shield themselves from the impact of demonetization. And with their December quarter results, it seems that a lot of them are back with a bang.

However, this is not the case with the economy. While a lot of listed companies managed to come out relatively unaffected, many unorganised players are still bearing the brunt of demonetization. One must note that the informal sector runs mostly on cash and accounts for 48% of India's total output and 80% of employment. We have been dragged back almost by a year or two because of the move.

Anyway, as analysts, our job is to find silver lining in every dark cloud. And demonetisation is no exception.

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Earlier this year, we wrote to you about value migration and how it has benefitted many Indian companies. Simply stated, value migration is defined as a flow of economic and shareholder value away from obsolete business models to new, more effective designs that are better able to satisfy customers' most important priorities.

We believe demonetization will lead to a value migration from unorganised players to organized players. And companies with solid fundamentals and a competitive moat will capture most of this value.

Our Hidden Treasure team is already on the lookout for opportunities in such companies.

The team consciously make it a point to visit factories and meet management of companies in niche business, at obscure locations. We obviously do not expect all of them to make it to our recommendations... But the few that do are a potential goldmine of sorts in the post demonetization era.