Realty, Power Stocks in Favour Today
Closing

Indian equity markets gradually increased as the day progressed to finish strong for a second consecutive session. At the closing bell, the BSE Sensex closed higher by 216 points, while the NSE Nifty finished higher by 76 points. The S&P BSE Midcap & the S&P BSE Small Cap also finished up by 1% and 1.3% respectively. Gains were largely seen in realty, power and auto stocks.

Asian markets finished broadly higher today with shares in Japan leading the region. The Nikkei 225 is up 1.59% while Hong Kong's Hang Seng is up 1.31% and China's Shanghai Composite is up 0.65%. European markets are also higher. France's CAC 40 is up 2.05% while London's FTSE 100 is up 2.01% and Germany's DAX is up 1.36%.

The rupee was trading at 67.74 against the US$ in the afternoon session. Oil prices were trading at US$ 48.37 at the time of writing.

Food and Tobacco stocks finished the day on a positive note with Ruchi Soya Industries and Golden Tobacco leading the gains. According to a leading financial daily, ITC will invest Rs 40 billion over the next 2-3 years to set up 8-9 factories across the country for manufacturing of food products. This comes at a time when the company recently expanded its new Sunfeast Farmlite biscuits portfolio catering to health conscious consumers.

The company entered into the dairy segment with ghee in October last year and launched dairy whitener in the North East this month. Last year, ITC also commissioned three company-owned manufacturing units for the packaged food business and is currently building over twenty new projects.

ITC's packaged food business has crossed (Subscription Required) the Rs 70 billion sales mark in 2015-16, a growth of 10.7% over last fiscal. With this, the company's non-cigarette FMCG brands have garnered annual consumer spend over Rs 120 billion.

The company said the FMCG industry faced another challenging year with demand conditions remaining sluggish for the third year in succession. The year also witnessed price deflationary conditions with many companies passing on the benefit of decline in input prices to consumers with a view to increase sales volumes. ITC finished the trading day down by 0.6% on the BSE.

According to an article in The Livemint, top Indian companies are likely to have an impact on their businesses as mineral dependent economies in Africa are facing a dollar crunch amid a global slowdown in commodity prices.

Reportedly, the list of affected firms include Bharti Airtel, Bajaj Auto Ltd, Hero MotoCorp Ltd, Godrej Consumer Products and Dabur India.

According to the reports, the main impact will come from Nigeria, where the local currency, Naira, is expected to depreciate 50% after the Nigerian central bank fixed the exchange rate at 197 to the US$ in 2015; but from 20 June, it was allowed to float freely which is expected to result in sharp depreciation versus the dollar.

Airtel's Nigerian operation company has dollar denominated finance lease obligations of US$500 million. Currency fluctuation in Nigeria will also impact Bajaj Auto Ltd, which exports about half a million two-wheelers to Nigeria alone. Meanwhile, at Hero MotoCorp, the firm may adopt a "go-slow policy" in expanding footprint in Africa and Latin American markets.

The other reported issue is that of some countries having stopped remittances in dollars, which has impacted trade even when there is demand for automobiles.

Consumer products firms are also expected to be impacted. About 15% of Godrej Consumer Products' revenue comes from the African region; For Dabur it is around 7%, while for Marico, it stands at about 1.3%.


Realty & Infrastructure Lead Gains
01:30 pm

Indian Indices continue to remain in positive territory during the post-noon trading session as buying continues in several front line stocks from across various sectors. Major sectoral indices are trading on a positive note note with stocks from the realty and infrastructure leading the gains. FMCG stocks are however trading in the red.

The BSE Sensex is trading higher by 124 points (up 0.5%) and the NSE Nifty is trading up by 46 points (up 0.6%). The BSE Mid Cap index is trading higher by 0.8% while the BSE Small Cap index is trading higher by 1.2%. Gold prices, per 10 grams, are trading at Rs 31,445 levels. Silver price, per kilogram, is trading at Rs 43,078 levels. Crude oil is trading at Rs 3278 per barrel. The rupee is trading at 67.74 to the US$.

Stocks in the auto sector are trading on a mixed note with Hero Motocorp Ltd and Tube Investments trading in green. As per an article in Business Standard, Ashok Leyland has made an impairment charge on its balance sheet of Rs 5.58 billion in 2015-16. It had also disposed of the shares in Ashok Leyland John Deere at a loss of Rs 2.33 billion.

It may be noted that in May 2008, Ashok Leyland and Nissan had formed three JVs for combined investment of Rs 10 billion. (Subscription Required). These companies are Ashok Leyland Nissan Vehicles Ltd (ALNVL), Nissan Ashok Leyland Power Train Ltd (NALPT) and Nissan Ashok Leyland Technologies Ltd (NALT). In 2014-15, Leyland said it had made an impairment provision of Rs 2.14 billion in the three Nissan JV entities.

The loss at ALNVL came down to Rs 619 million in 2015-16 from Rs 7.9 billion a year ago. NALPT's profit was Rs 719 million in 2015-16 as compared to a Rs 31 million loss a year before. NALT made a profit of Rs 50.5 million, as compared to a Rs 98 million loss a year before. Thus in all it contributed to a Rs 5.58 billion provision for diminution. In our recent edition of The 5 Minute WrapUp we have highlighted the disputes between Ashok Leyland and Nissan.

Ashok Leyland, in a letter to shareholders stated that it would progressively exit from non-core and non-performing businesses and focus on the core business. To know our view on Ashok Leyland, you can read our result analysis (subscription required).

The scrip of Ashok Leyland was trading up by 1% while writing.

Moving on to the news from pharmaceuticals sector. According to a leading financial daily, Piramal Enterprises has allotted 1,050 secured redeemable non-convertible debentures (NCDs) to raise Rs 1.05 billion under the second such tranche of fund raising. These NCDs shall be listed on the National Stock Exchange of India on a Wholesale Debt market segment.

The company also stated that it will raise up to Rs 10 billion through issuance of NCDs on a private placement basis in one or more tranches from time to time. The stock of Piramal is up 2.4%.

Piramal Enterprise Ltd is a conglomerate. The company's healthcare business contributes 54% to overall revenues. Financial services and information management contribute the 46% balance.


Auto and Power Stocks in Demand
11:30 am

After opening the day on a firm note, Indian indices have lost some of its early gains. Sectoral indices are trading on a positive note with stocks from automobile, power and realty sector witnessing maximum buying interest.

The BSE Sensex is trading higher by 103 points (up 0.3%) and NSE Nifty is trading higher by 33 points (up 0.4%). While, BSE Midcap and BSE Smallcap is trading higher by 0.7% and 1% respectively. The rupee is trading at 67.79 to the US$.

As per an article in Livemint, ICICI Prudential Life Insurance is likely to launch its Rs 60 billion initial public offering by September.

The company is a joint venture between ICICI Bank and Prudential Corporation Holdings Ltd. As of 31 March, ICICI Bank held 67.6% stake in the life insurance firm, while its foreign partner Prudential held the rest.

Earlier in December, ICICI Bank had already sold a 6% stake in this company in a transaction that valued the life insurance firm at Rs 325 billion.

The IPO will be the first public offering of a life insurer in India. Reportedly, as at 31 March the life insurer had asset under management worth Rs 1,010 billion.

The IPO will help ICICI Bank to unlock the value of their shareholding. However, the bank will continue to hold a majority stake in the company. The stock of ICICI Bank is trading up by 1%.

In another news update, the Indian Meteorological Department stated that half of India has received normal rainfall as the first month of monsoon nears an end.

As of Tuesday, 49% of the country had received normal rainfall, 17% had received excess rainfall and 34% had got deficient or scanty rainfall.

Rainfall deficiency has narrowed to 13% from the earlier 25% as of 28 June. However, parts of Central India are still facing a deficit. Though, IMD estimates that these parts would receive normal rainfall in early July.

A normal monsoon will lead to higher disposable income in the hands of farmers, which in-turn will boost the rural consumption. To add to this, a normal monsoon will also help to keep the inflation at low levels. The possibility of a good monsoon would also increase the chances of the country's central bank retaining its easy money policy. However, there have been many instances in the past wherein the forecasts have gone wrong. Provided, they are accurate it will help to revive the rural sentiments.


Markets Open on a Positive Note
09:30 am

Major Asian stock markets have opened the day on a positive note. The stock markets in Hong Kong and Japan are trading higher by 0.71% and 1.89%, respectively. Major indices in Europe ended their session in the green. US markets also ended their previous session on an encouraging note. The rupee is trading at 67.83 per US$.

Indian stock markets have opened the day on a firm note. The BSE Sensex is trading higher by 141 points (up 0.5%) and NSE Nifty is trading up by 41 points (up 0.5%). The BSE Mid Cap and the BSE Small Cap indices are also trading in the green, up by 0.7% and 1%, respectively. Sectoral indices have opened the day on a positive note with stocks from realty, auto and consumer durables sector leading the gains.

Twice a year, the Reserve Bank of India releases the Financial Stability Report (FSR). The latest report was released yesterday (i.e. June 28, 2016). As per the report, the performance of the corporate sector has improved in the past year. This is believed to be on the back of decline in the number of leveraged companies.

The report stated that the proportion of both leveraged and highly leveraged companies fell in March on a YoY basis. The number of leveraged companies, with a negative net worth or a debt-to-equity ratio of 2x or more, dropped to 14% of the RBI sample size. Further, the debt of these companies also dropped 20.6% of the total corporate debt compared to 33.8% last year.

As for stressed assets, the report pointed that three sectors viz.- infrastructure, metal and textile have contributed most to stressed loans in the banking sector. On the other hand, retail loan segment continues to be the least stressed.

The report stated that the share of gross NPAs (non-performing assets) of the top 100 large borrowers rose 22.3% in March from 3.4% six months ago. The gross NPAs for the banking system rose 79.7% as of March over the previous year (subscription required). It was noted that the sharp rise in NPAs resulted from the asset quality review (AQR) exercise undertaken by the RBI.

The above data states while the number of leveraged companies have fallen, the banking sector still remains in the mess of NPAs. The clean-up exercise undertaken in line with RBI's Asset Quality Review (AQR) will keep a check on the bad loans of banks going forward.

In another news update, imports of truck and bus radial tyres (TBR) surged 57% in the first two months of 2016-17 fiscal.

Reportedly, in April-May period of this fiscal, 2.8 lakh TBR tyres have landed in India compared with over 1.8 lakh in the corresponding period a year ago. The Automotive Tyre Manufacturers Association (ATMA) said that the imports of TBRs in May alone reached 1.5 lakh units, which is almost 40% of the replacement demand of TBR tyres in India per month. The association further said that China dominates as the source country for imports to India. It was noted that China's share in import of TBR in India has gone up to an unprecedented 95%in 2016-17, up from 90% in 2015-16, 70% in 2014-15 and 40% in 2013-14.

This rise in imports have prompted the industry body to ask the government to impose anti-dumping duty on imports of tyres from China.

The performance of major tyre companies for the quarter ended March 2016 was below consensus expectations. This was seen on the back of rising commodity prices, rising imports, and yuan's devaluation. One of our premium editions of The 5 Minute WrapUp offers some investment insights on the Indian tyre industry (subscription required).


Online Fashion Space to Get More Competitive
Pre-Open

Nowadays, e-commerce space is the topic of discussion. Whether, it is related to offering steep discounts, their business model, intense competition among e-commerce players, rounds of investments by venture capital firms, or a recent valuation mark down.

The Indian ecommerce scene has changed dramatically over the last six-seven years. The kind of goods that are now available online was absolutely unthinkable a few years back. Everything from furniture to electronics to shoes to clothes is now available online.

Traditional retail players focused more on metros and Tier 1 cities. At the same time, brick & mortar model was considered most viable. However, the trend has changed substantially in the recent years. There was a time when industry experts were of the opinion that fashion products have less potential for e-tailing due to issues such as fit and feel. However, due to the rigorous and committed efforts of the fashion e-tailing players, Indian consumers have accepted e-tailing as a convenient model for fashion purchases.

Although, this is just one side of the story. Another part should not be ignored. There is intense competition among e-commerce players, discount wars, flash sales, and cash backs.

Now, online fashion retail, an important part of e-commerce space is set to get more intense and competitive with an entry of conglomerates such as Tata group, Aditya Birla group, Reliance Industries and large retail companies such as Arvind Ltd. So far, this segment is dominated by companies such as Myntra (owned by Flipkart), Jabong.com, Yepme, Fashion and you etc. Recently, Aditya Birla Group started a website, abof.com (an acronym for all about fashion) selling products from the parent Aditya Birla Group brands. Similarly, Arvind Internet Ltd, the e-commerce division of textiles manufacturer Arvind Group runs nnnow.com. The flurry of new entrants, each coming in with its own strategy, is forcing the market to adjust quickly.

What will happen in the coming months? No doubt, there will be an intense competition among the online retailers which will lead to severe discount wars. In order to compete with other players, they would require a war-chest. For this, online retailers would require a fresh round of funding. However, it is not easy to get funding as institutional investors and VC firms are now questioning the business models of e-commerce companies. Eventually, this will lead to a shakeout in the e-commerce space. Only the fittest and those with cash will survive.

The transition from offline to online won't be easy for established big players such as Aditya Birla, Arvind, and other large conglomerates. However, they have deep pockets and know the inside out of the retail business.

Whatever happens, it will be tough for both existing online players and big conglomerates entering the online fashion space. This does not look to be a quick and bloodless affair.