Sensex Ends the Day in the Red; Capital Goods Stocks Lead Losses
Closing

After opening the day marginally higher, share markets in India witnessed volatile trade and ended the day in red. Losses were largely seen in the capital goods sector and metals sector, while stocks in the oil and gas sector ended the day in green.

At the closing bell, the BSE Sensex stood lower by 64 points (down 0.2%) and the NSE Nifty closed lower by 26 points (down 0.3%). The BSE Mid Cap index and the BSE Small Cap index ended the day down by 1.4% each.

In news from stocks in the auto sector. Bharat Forge share price ended the day on a positive note today after the company reported better than expected earnings in the March quarter.

The auto components major reported a 25% increase in standalone net profit at Rs 2,075 million for the fourth quarter ended March 2017, as compared to a net profit of Rs 1,655.7 million in the same quarter a year ago.

For the entire fiscal, the company reported a net profit of Rs 5850 million as compared to Rs 6976.2 million in the 2015-16 fiscal.

Revenue of the company rose 11.6% at Rs 11.8 billion versus Rs 10.6 billion. The management noted that the increase in sales was broad-based across all segments and geographies.

The operating profit (EBITDA) was up 4.9% at Rs 3,200 million, while EBITDA margin was down at 28.4%.

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Looking ahead into FY18, the company expects its performance to be better than the underlying market demand, driven by improvement in North American market across sectors.

Bharat Forge's board recommended a final dividend of Rs 5 per share for the year ended March 2017.

Bharat Forge share price closed the day up by over 4%.

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Moving on to news from the steel sector. According to data released by the International Stainless Steel Forum (ISSF), India has emerged as the second largest stainless steel producer in the world after China. India overtook Japan as the second-biggest producer in 2016.

India's stainless steel production rose to 3.32 million tonne in 2016 showing an impressive growth of about 9% over 3 million tonne it produced in 2015.

Several measures, including the government's infrastructure push, along with 'Make in India' and other initiatives are set to bode well for the sector.

However, the government has consistently resorted to protectionist measures as regards the steel sector, to protect steel companies from international competition.

Consequently, India's steel imports dropped 36% in 2016-17 to 7.4 million tonnes (MT). Meanwhile, steel exports in 2016-17 registered a growth of 102%. But, the steel makers are chasing imports out by ramping up production. In March, domestic steel output rose by 17.4% YoY, as large private steel producers such as Tata Steel and JSW Steel ramped up output.

India has become a net exporter of steel in 2016-17 as imports fell gradually.

No Takers for Domestic Steel

The quantum jump in exports comes as the government is providing extensive support to the domestic steel industry by way of trade remedial measures, including anti-dumping.

But the bigger concern is weak consumption growth. The consumption data over the past few months clearly show that there are no takers for domestic steel.

We do not think the trend is sustainable. And unless domestic consumption picks up, steel producers may have to take price cuts to utilize their capacities.

And here's a note from Profit Hunter:

The Nifty 50 Index has been trading lackluster today. But one stock has captured our attention - Voltas Ltd. It's up 9% for the day. Let's have a look at the chart.

The stock bottomed with the overall market in February 2016. It rallied strongly to hit a high of Rs 406 in October 2016. It then corrected to a low of Rs 287 as demonetisation clouded the Indian markets. But the uptrend in the stock continued.

Today, the stock opened gap up and hit a lifetime high of Rs 450, indicating strong momentum. The RSI indicator is also trading in a typical bull market range, finding support from 40 level. The volumes are also heavy indicating buying interest.

But for the past few days, the Nifty Index has been trading weak.

It will be interesting to see if Voltas can continue with this momentum or if the weak broader markets will drag the stock down.

Voltas at Lifetime High
HUL at Its Lifetime High 


Sensex Slips in the Red; Realty & Metal Stocks Lead the Losses
01:30 pm

After trading in green during the morning session, Indian share markets came under pressure in the noon session and are trading marginally lower. Barring software stocks, all the sectoral indices are trading in red. Realty stocks and metal stocks witnessed majority of the selling pressure.

The BSE Sensex is trading lower by 62 points and the NSE Nifty is trading lower by 27 points. Meanwhile, the BSE Mid Cap index & the BSE Small Cap index are down by 1.5% & 1.4% respectively. The rupee is trading at 64.78 to the US$.

Time to Be Fearful?

The markets are touching new highs. Markets are awash with funds. Experts are justifying high valuations. The reasons are far-fetched - from GST to Make in India to a cashless economy. And retail investors seem to be falling for it.

One must note that currently, in most of the cases, it is liquidity driving the valuations, and not fundamentals. And this is exactly the time when one must allow fear to substitute greed. Also, this is precisely the time when it is most difficult to overpower greed and stay disciplined.

In news from international markets, as per an article in The Financial Express, Moody's Investors Services downgraded China's long-term local and foreign currency issuer ratings citing expectations that the financial strength of the world's second biggest economy would erode in the coming years.

The ratings agency also changed its outlook for China to stable from negative. The downgrade one notch to an A1 rating from AA3 comes at a time when the Chinese government is grappling with the challenges of slowing economic growth and soaring debt.

The report also noted that while ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.

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Meanwhile, China's potential GDP growth is likely to slow towards 5% in the coming years, but the fall is likely to be gradual due to expected fiscal stimulus, it said.

Moody's said it expects the government's direct debt burden to rise gradually towards 40% of GDP by 2018 and closer to 45% by the end of the decade.

In news from oil & gas sector, GAIL India has drawn up investment plans of Rs 300 billion for expansion out of which Rs 80 billion in the coal gasification, 15 billion in city gas and Rs 10 billion in breakwater water project.

GAIL is also currently executing gas pipelines worth Rs 200 billion and another Rs 100 billion worth of lines are under various stages of evaluation.

The pipelines under execution include Jagdishpur-Haldia line that will take the environment friendly fuel to the east. Current projects will be completed by 2019-20, taking GAIL's pipeline network to 15,000 km from the current 11,000 km.

The company has already spent capex of Rs 21.8 billion in FY17 and plans to spend Rs 42.61 billion in FY18 and Rs 77.04 billion in FY19 towards setting up of pipelines, petrochemical and process plants.

Among the other ambitious project, the company along with HPCL is setting up 1.7 million tonnes petrochemical plant in Andhra Pradesh.

The company posted a 69% fall in fourth-quarter profit. The company reported a Rs 2.6-billion net profit for the fourth quarter of the financial year 2016-2017 lower than the Rs 8.32 billion-net profit in the same quarter of 2015-2016 on account of impairment of investment in Ratnagiri Power plant.

The company provided for an impairment loss of Rs 7.83 billion out of carrying value of investment of Rs 9.74 billion in the joint venture entity of Ratnagiri Power plant. The power plant has been running lower than its 2,000 MW generation capacity. This is due to the high cost of power produced from gas-based generation facilities. The lower off take and generation were some reasons for the investment impairment, the reports noted.

GAIL share price is presently trading up by 1.3% on the BSE.

Meanwhile, Max Financial Services share price fell 12% after it was reported that the attorney general Mukul Rohatgi has returned the HDFC-Max Life merger proposal back to the Insurance Regulatory and Development Authority of India (IRDAI) without giving any opinion. The insurance regulator had sought the AG's opinion for legal validity of the proposal.

According to the three-stage deal, Max Life was to merge with Max Financial Services, which would, in turn, merge with HDFC Life. The deal would enable HDFC Life to get listed automatically on the stock exchanges since Max Financial Services is already a listed company.


Indian Indices Continue Momentum; Oil & Gas Stocks Witness Buying
11:30 am

After opening the day marginally higher, stock markets in India witnessed buying interest and continued their momentum. Sectoral indices are trading on a mixed note with stocks in the oil and gas sector and auto sector witnessing maximum buying interest. Telecom stocks are trading in the red.

The BSE Sensex is trading up 123 points (up 0.4%) and the NSE Nifty is trading up 28 points (up 0.3%). The BSE Mid Cap index is trading flat, while the BSE Small Cap index is trading up by 0.5%. The rupee is trading at 64.92 to the US$.

Indian share markets are witnessing buying interest today on the back of a host of domestic as well as global factors. Gains are seen on the back of good monsoon projections and ahead of quarterly result announcements.

As per the news, the rain disrupting El Nino still has a 50% chance of developing later this year albeit weakly. Also, the prospects of Indian Ocean Dipole (IOD) - a phenomenon that strengthens monsoon in the country-forming over the Indian Ocean are looking good.

The news comes as Australian Bureau of Meteorology in its latest outlook reported that five of eight international climate models suggest the tropical Pacific Ocean is likely to warm above El Nino thresholds during the second half of 2017.

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The Australian Bureau of Meteorology has predicted the arrival of southwest monsoons in India in the first week of June, deviating slightly from IMD's predicted date of 30th May.

On a separate note, Bharat Forge, Adani Ports, Adani Enterprises, Indian Bank, Dish TV, Gujarat Gas, Lupin, Religare Enterprises, etc. are some of the BSE-listed companies scheduled to report their quarterly earnings today.

One must note that there's much hoopla surrounding the ongoing earnings season. However, if one has to go by the year-on-year performance, there's nothing to cheer.

As an article in Business Standard suggests, the earnings growth has slid from 15.6% in FY16 to just 7.2% in FY17, making it the worst in three years. This is despite the lower tax outgo and other income boost in FY15. Domestic market focused companies too have slowed down due to notebandi.

This trend can be seen clearly in the chart below:

Earnings in Contrast with Market Trends

One must note that the actual performance for the last quarter of FY17 has been much below brokerage estimates.

All of this brings us to the question of how can one make money in a rising market, with little support from earning trends and with brokerages getting it all wrong?

We believe a few super investors could provide the clue. These are the guys who've beaten the markets black and blue and have an eye for multi bagger stocks irrespective of the macro environment.

With respect to which super investors to follow, my colleague Kunal and Rohan have could be of great help courtesy their project, The Superinvestors of India.

To know more about these superinvestors and their stock picking approach, download a free copy of - The Super Investors Of India.


Sensex Opens Marginally Higher; Tata Motors Gains 4%
09:30 am

Asian equity markets are lower today ahead of US Federal Reserve views on interest rate hike prospects and await an upcoming OPEC meeting. The Shanghai Composite is off 0.48%, while the Hang Seng is down 0.07%. The Nikkei 225 is trading higher by 0.48%. US stocks registered their 4th straight session of gains on Tuesday as banks led the charge and following the White House's release of its 2018 budget proposal.

Meanwhile, share markets in India have opened the day marginally lower. The BSE Sensex is trading higher by 51 points while the NSE Nifty is trading higher by 18 points. The BSE Mid Cap index opened down by 0.2%. while BSE Small Cap index has opened the day flat.

Barring healthcare stocks, consumer durables stocks and FMCG stocks, all sectoral indices have opened the day in green with automobile stocks and capital goods stocks leading the gains. The rupee is trading at 64.78 to the US$.

Tata Motors share price jumped as much as 5% to Rs 473, the most since 8 November 2016. Tata Motors reported a 16.79% drop in consolidated profit at Rs 43.36 billion in the quarter ended 31 March 2017. The company had posted a net profit of Rs 51.76 billion during the same period last year.

For the quarter under review, Tata Motors posted consolidated revenues of Rs 772.72 billion, down from Rs 795.49 billion recorded in the corresponding quarter last year. Consolidated revenues during the quarter were lower by Rs 90.32 billion due to the translation impact of the GBP (British pound) to the Indian rupee.

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Meanwhile, the company's luxury brand Jaguar Land Rover (JLR) posted an 18% increase in profit after tax to 557 million pounds (US$722.87 million) compared with the year-ago quarter.

Further, for the year 2017-18, JLR has an investment plan of 4 billion, which includes the investment at the under-construction plant in Slovakia, the reports noted.

To know more about the company's financial performance, subscribers can access to Tata Motor's latest result analysis and Tata Motors stock analysis on our website.

Moving on to the news from the stocks in bank sector. In the latest development, domestic rating agency ICRA Ltd downgraded various debt instruments of IDBI Bank due to sustained weakness in the bank's earnings over the last two years. The rating agency downgraded securities worth Rs 825.38 billion.

The downgrade comes on the back of weak profitability and deteriorating asset quality, which have resulted in the erosion of its capital. The agency has also kept the lender's ratings under watch with negative implications.

In addition to long term securities such as infrastructure bonds and additional tier-1 (AT-I) bonds, ICRA also downgraded IDBI Bank's fixed deposit programme. The rating agency has also downgraded the short-term rating on the bank's Rs 350 billion certificates of deposit programme.

In February 2017, ICRA had highlighted the pressures being faced by the bank in meeting the minimum regulatory CET-I (including capital conservation buffer) level of 6.75% required as on 31 March 2017.

Owing to the loss absorption features of the Basel III compliant Tier-I bonds, the rating agency has rated them four notches lower than Basel III compliant Tier-II bonds, at BBB-. This rating indicates moderate credit risk, according to the ICRA scale.

In the year ended 31 March 2017, the bank posted a net loss of Rs 51.58 billion as against a net loss Rs 36.65 billion in financial year 2016. The bank's gross NPAs almost doubled to 21.25% of the gross advances in the fourth quarter of the last financial year compared to 10.98% in the corresponding period of the previous financial year.

According to ICRA, with low provision cover and high net NPAs and an expectation of further weakening in asset quality, the bank's internal capital generation will remain weak over the medium term.

However, an important thing to consider is that the mid-level PSBs account for one-third of bank credit. And to meet the Basel III requirements, they need a massive capitalization of Rs 1.6 trillion over the next four financial years. This is certainly going to be a big challenge at a time when credit is not cheap and the economy is still sluggish.

Capitalisation Of Mid-level PSBs A Worry

The chart above shows the likely credit growth under different scenarios of capital infusion. Certainly, a matter of worry not only for the banks but for credit-starved sectors of the economy as well!

IDBI Bank share price opened the day down by 2.8%.


Can the RBI's Action Plan Resolve The NPA Crisis?
Pre-Open

There is no doubt to the fact that India's banking sector has a problem. The banking sector has over Rs 10 trillion worth of stressed and non-performing assets. And it has only gotten worse in recent times.

According to an article in Livemint. The bad loans of public sector banks jumped by over Rs 1 trillion during the April-December period of 2016-17. The gross NPAs of PSU banks' in the first nine months of the current fiscal increased to Rs 6.1 trillion by December 31, 2016, from Rs 5 trillion during 2015-16.

For private sector banks, gross NPAs rose to Rs 703.2 billion by December 31, 2016, from Rs 483.8 billion as on March 31, 2016.

The government and the Reserve Bank of India (RBI) have taken cognizance of the matter and have begun measures to address the looming crisis.

Earlier this month the government through an ordinance provided the Reserve Bank of India (RBI) with greater powers to intervene in the resolution of non-performing loans (NPLs). If nothing else, the ordinance is an acknowledgement that the bad loan scenario is far more worrying than what the government and the RBI portrayed it.

The RBI, earlier this week released an action plan to implement the Banking Regulation (Amendment) Ordinance 2017, which includes the option of rating assignments being determined by the RBI and increasing the size and scope of the oversight committee (OC).

The RBI will increase the number of members in the oversight committee which presides over the restructuring proposals and also expand the scope of the committee beyond the so-called scheme for sustainable structuring of stressed assets (S4A).

At present, the OC comprises of two Members. It has been constituted by the Indian Banks Association in consultation with the RBI. However, the RBI did not say how many members the revamped OC would include.

The RBI is also planning for larger role for credit rating agencies. In order to prevent credit shopping or conflict of interest, RBI is proposing to assign cases to ratings agencies itself.

Further, the RBI is also working on setting up a framework for the disposal of cases under the Insolvency and Bankruptcy Code (IBS). The central banker has already sought information on the current status of the large stressed assets from the banks. And would be constituting a committee comprised majorly of its independent board members to advise it in this matter.

The regulator has made swift moves to start the necessary clean up in the country's banking sector.

However, The RBI has an enormous task at hand if it plans to remedy the crisis PSU banks now face. According to the Economic Survey, about 33 of the top 100 stressed debtors would need debt reductions of less than 50%, 10 would need reductions of 51-75%, and no less than 57 would need reductions of 75% or more.

Banks have been reluctant to resolve NPAs through settlement schemes or sell bad loans with hair cut to asset reconstruction companies for fear regulation and investigation.However, with the ordinance giving a wide range of powers to the RBI and the apparent will of both the regulator and the government, a path towards resolution of the NPA crisis would well be underway.

As the Economic Survey said, "the road to resolution remains littered with obstacles, even for the most ordinary of bad debt cases." It would take a coordinated effort from the RBI, the government and the banks to tide over the NPA crisis.

We will be sure to keep a track on developments in this space.