Oil & Gas Stocks Bear the Brunt Again

The Indian equity markets continued to languish in the red towards the final hours of trade, thus closing on a weak note. At the closing bell, the BSE Sensex stood lower by 310 points, while the NSE Nifty finished down by 103 points. The S&P BSE Mid Cap and S&P BSE Small Cap indices too closed the day lower by 1.1% and 1.2% respectively. Losses were largely seen in oil & gas, auto and healthcare stocks.

Asian markets finished mixed as of the most recent closing prices. The Hang Seng gained 0.12%, while the Shanghai Composite led the Nikkei 225 lower. They fell 0.23% and 0.18% respectively. European markets are trading lower today with shares in Germany off the most. The DAX is down 0.49%, while France's CAC 40 is off 0.28% and London's FTSE 100 is lower by 0.2%.

The rupee was trading at 66.74 against the US$ in the afternoon session. Oil prices were trading at US$ 42.23 at the time of writing.

Automobile stocks witnessed heavy selling activity today with Hero Motocorp and Maharashtra Scooters leading the losses. Car sales rose 9.62% in India last month, while overall passenger vehicles grew 16.78%. The growth was driven mainly by robust sales of utility vehicles. According to Society of Indian Automobile Manufacturers (SIAM), domestic passenger vehicle (PV) sales stood at 259,685 units in July as against 222,368 units in the same month last year. Sentiments remained optimistic due to new models in UV segment, better rains and coming of the 7th Pay Commission.

Growth in overall PV sales was driven by UVs, which saw a jump of 41.85% to 64,105 units as against 45,191 units in the same month last year. The PV sales have grown at the fastest pace since October 2015 when it had posted a growth of 21.46%. The sales growth comes after two months of decline. But still the cumulative sales during the year remain sluggish.

In another development, Mahindra & Mahindra reported a 12.35% rise in net profit for the fiscal first quarter helped by strong sales of its sport utility vehicles and trucks. Net sales at India's largest utility vehicle maker rose 14%. Mahindra's total vehicle sales rose 11% to 121,530 units during the three-month period.

Sales of several carmakers including Mahindra, Tata Motors and Toyota Motor Corp have been impacted because of a temporary ban by India's top court on the sale of large diesel cars in the capital Delhi. Mahindra said it will introduce a petrol and diesel engine for all its major models over the next three to four years, and will launch hybrid cars by 2022.

Moving on to news from the telecom sector. According to an article in The Livemint, Idea Cellular Ltd and Vodafone India Ltd will look to outbid their rivals in the spectrum auction scheduled on 29th September. The current market leader Bharti Airtel holds 769.9 megahertz (MHz) of spectrum across the 22 circles into which India's telecom geography is divided. Reliance Jio, which is yet to launch its operations commercially, is also comfortably placed with 595.8MHz of spectrum across India. In contrast, Vodafone has 301.8MHz and Idea 270.7MHz.

Spectrum worth Rs 5.63 trillion at the base price and 2,354.55MHz of spectrum will go under the hammer in India's largest auction of mobile airwaves. The government expects telecom companies to bid aggressively in the auction as they seek to improve the quality of their service.

The telcos themselves are likely to be cautious on account of the debt on their books. As per the reports, Airtel and Idea had net debt of Rs 834.9 billion and Rs 376.57 billion, respectively, on their books as of the quarter ended 30 June.

Meanwhile, Idea's consolidated net profit during the quarter fell to Rs 2.17 billion down 62.29%. Total revenues remained stagnant at Rs 94.8 billion. The company's financials were hurt by higher costs and pressure on data growth.

During the quarter, Idea Cellular's realization per MB at 21.1 paise was the lowest in the last eight quarters. The same for Bharti at 22.31 paise. The slowing data growth does not indicate well for telecom companies as it could lead to a rise in customer acquisition. Further, with Reliance Jio's launch around the corner, there's the risk of an even further decline in realizations unless demand does not pick up dramatically (Subscription required). Idea Cellular finished the day down by 4.3%, while Bharti Airtel fell by 0.9% on the BSE.

Oil & Gas Stocks Bleed
01:30 pm

Following a negative trend since morning, the Indian indices have continued to remain under pressure in the post noon trading session. Sectoral indices are trading on a negative note with stocks from the consumer durables, oil & gas sectors bearing the maximum brunt.

The BSE Sensex is trading lower by 227 points (down 0.8%) and the NSE Nifty is trading lower by 76 points (down 0.9%). The BSE Mid Cap index & BSE Small Cap index are both trading up 0.8%. Gold prices, per 10 grams, are trading at Rs 31,492 levels. Silver price, per kilogram is trading at Rs 47,168 levels. Crude oil is trading at Rs 2,836 per barrel. The rupee is trading at 66.72 to the US$.

Environment Minister Anil Madhav Dave recently announced that India will launch extensive research into solar power use with the vision of ending the burning of wood forever.

Notably, India is amongst the top 122 fortunate countries where sunlight is available 10 months of the year. The onset of this research initiative by India would bring about a revolution in this field, he added.

Rahul Shah, Co-head of Research, pointed out that a few of the solar projects are already running into financial troubles. Can we rule out a similar fate for the other solar projects? Click Here to read more.

The Minister also said that India was leading on the commitment given during the Paris meet on carbon emission. Under the Paris agreement, the developed countries have committed to mobilize US$100 billion per year and increase it beyond US$100 billion per year post 2020.

Speaking of solar industry, we have compared the power generation costs from solar versus the other sources (Subscription Required) in one of the premium editions of The 5 Minute Wrap Up.

Moving on to the news from chemical & fertilizers sector. According to an article in a leading financial daily, Tata Chemicals Limited sold off its business of sale and distribution of urea and customized fertilizers to Europe-based Yara for Rs 26.7 billion.

The plant located in Uttar Pradesh has an annual production of 0.7 million tonnes ammonia and 1.2 million tonnes urea.

Reportedly, the agreement will be subject to regulatory approvals and sanctions by the relevant courts in India.

Further, this process of divestment by Tata Chemicals is in line with the strategic direction of the company to continue to strengthen the fertilizer businesses (Subscription Required) by partnerships with world class companies. It will allow the urea business to have the benefit of International network of Yara and its global expertise, the reports noted.

Going forward, whether this acquisition unleashes the potential to improve agricultural productivity further will be the key thing to watch out for.

In view of Tata Chemicals' financials, Radhika Pandit, Managing Editor of ValuePro has spoken about Tata Chemicals' performance recently (Subscription Required).

Subscribers can also access to latest result analysis on our website.

Tata Chemicals was trading up by 8% at the time of writing.

Indian Indices Extend Downtrend
11:30 am

After opening the day marginally lower, the Indian indices registered further losses and are trading well below the dotted line. Sectoral indices are trading on a negative note with stocks from the realty, banking, energy and consumer durables sector witnessing maximum selling pressure.

The BSE Sensex is trading down 217 points (down 0.8%) and the NSE Nifty is trading down 75 points (down 0.9%). The BSE Mid Cap index and the BSE Small Cap index are trading in the red, both down by 0.8%. The rupee is trading at 66.72 to the US$.

While the global economy continues to remain in a mess, there are lot of good things happening in India. Some of the recent happenings are the developments in the passage of GST Bill, talks regarding the formation of the monetary policy committee (MPC), and setting the inflation target at 4%, plus or minus 2%, that has to be maintained up until March 2021. And what can be music to ears for the Finance Minister Arun Jaitley, there's one more news to cheer for the Indian economy. As reported in a leading financial daily, tax collections have grown up at a robust pace in the first four months of the current fiscal.

Notably, India's direct tax collection for the June quarter of FY17 grew 24%, while indirect tax collection rose 30%.

This was seen as net direct taxes collections added up to Rs 1, 590 billion during April-July. Gross corporate tax and personal income tax collections were up 11.65% and 31.47%, respectively. After adjusting for refunds, the net growth in corporate tax collections stood at 2.84% while that for personal income tax stood at 46.55%.

On the indirect tax front, collections during April-July were pegged at Rs 2,710 billion, 29.9% more than the corresponding period last year. Central excise collections during the first four months totaled Rs 1, 230 billion. This recorded almost 51% growth over the same period last year. Service tax collections stood at Rs 766 billion against Rs 609 billion a year ago, a 25.8% increase. Total customs collections for the first four months stood at Rs 717 billion, 7.9% more than Rs 664 billion posted a year ago.

The development bodes well for the finance ministry's full-year revenue target. The only concern, we believe, is the utilisation of these funds by the government. The funds shall be spent towards productive areas and not on loss making public sector companies.

Moving on to the news from the commodities space, crude oil is witnessing selling pressure. The sell-off is seen on the back of many factors that has made market participants to reduce their exposure towards the commodity.

One is that the American Petroleum Institute (API) reported a significant increase in its weekly US crude inventory this week. Second is the shock that came from government forecasters as they raised their US domestic production outlook. Traders are also concerned that the Organization of the Petroleum Exporting Countries (OPEC) would consider production caps next month.

Amid these worries, the downtrend in crude oil extended after it was reported that imports in China - the world's second largest consumer of oil - waned as the country imported less oil in July. It was noted that oil imports declined as China shipped in just 7.35 million barrels a day last month, lower than what it had been importing in the previous six months.

To keep a tab on the movements in crude oil and other commodities, you can read weekly market commentary from the Daily Profit Hunter team. Their weekly commentary tracks the developments in the global economy as well as stock, currency and commodity markets.

Indian Indices Open Flat
09:30 am

Barring China, major Asian stock markets have opened the day on a positive note. The stock markets in Singapore and Japan are trading higher by 0.5% and 0.2% respectively. Benchmark indices in Europe and the US ended their previous session on a positive note with stock markets in Germany ending the day higher by 2.5%. The rupee is trading at 66.84 per US$.

Indian stock markets have opened the day on a flattish note. The BSE Sensex is trading marginally higher by 24 points (up 0.1%) and the NSE Nifty is trading marginally higher by 5 points (up 0.05%). While BSE Mid Cap and BSE Small Cap are trading marginally higher by 0.1% and 0.2% respectively.

Major sectoral indices have opened the day on a mixed note with stocks from fast moving consumer goods (FMCG) witnessing maximum selling pressure. However, stocks from oil & gas sector are witnessing buying interest.

Lupin reported its results for the quarter ended June 2016. The consolidated net profits of the company grew by 55% YoY to Rs 8.8 billion during the quarter. Further, revenues grew by 41% YoY to Rs 44.3 billion during the quarter.

The sales grew on the back of strong performance from the generics business in North American geography, which contributes to more than half of the Lupin's revenues. The revenues from this geography grew by 83% YoY to Rs 21.8 billion during the quarter.

The strong performance was largely due to the significant contribution of two diabetic drugs Glumetza and Fortamet. The company had 180 days marketing exclusivity rights for Glumetza, which expired in the month of July. Further, Fortamet too attracts limited competition, with Lupin holding a 60% market share.

The business from India, which contributes to a fifth of its revenues, grew marginally by 5.2% YoY during the quarter. The subdued growth was due to increasing drugs, getting covered under the price control mechanism. While, the company's revenues from Japanese business grew by 30.9% YoY to Rs 4.2 billion during the quarter.

The company has completed a significant portion of work with regards to its Goa facility which was under the scanner of the US Food and Drug Administration (USFDA) for non-compliance with certain manufacturing standards.

Lupin has built a lucrative pipeline, some key products like Azithromycin, Glumetza, Aripiprazole Wellbutrin, Nexium, Welchol and Sevelamer will offer decent opportunities to the company going forward. Over and above, Lupin also expects to ramp up the sales of products from the recently acquired business Gavis. The stock is trading down by 0.1%.

In another news update, the situation pertaining to bad loans of public sector banks is worsening. Recently, Indian Overseas Bank reported its results for the quarter ended June 2016.

Reportedly, a fifth of its gross loans have turned bad. Gross NPAs as a ratio of gross advances were 20.48% at the end of June, higher than the 17.4% reported for the March quarter. The bank's capital adequacy ratio- a measure of banks financial strength has fallen to 9.47%, below the limit of 9.62% set by the Reserve Bank of India (RBI).

Further, UCO and United Bank of India too reported Gross NPAs of 17.19% and 14.29% during the June quarter. Vivek Kaul is of the opinion that despite the cleanup of the public sector banks, the basic problem will still remain. Here is his take on the same.

  • "The bigger problem is the fact that the public sector banks continue to remain government owned. As Ruchir Sharma writes in The Rise and Fall of Nations-Ten Rules of Change in the Post Crisis World: "Spend a lot of time in the field, and it is all too easy to find evidence that the state is not a competent banker."

    The Indian public sector banks have ended up in trouble more than a few times before. One of the reasons for this is the politicians forcing these banks to lend to crony capitalists. And as long as these banks continue to remain government owned, that risk remains, especially given that it is crony capitalists who ultimately finance the electoral ambitions of India's politicians."

State Governments Push for Reforms

After washout of two consecutive parliament sessions, much hope was laid on the passage of goods and service tax (GST) in this monsoon session. After years of discussion, GST was finally given a clearance in the Rajya Sabha. Implementation of GST is expected to add 1-2% to gross domestic product (GDP) growth every year on a sustainable basis.

Recent clearance of Real Estate Bill, The Insolvency and Bankruptcy Code and now GST indicates that reforms are gradually taking place at the central level. However, for those reforms which aren't seeing the light of the day such as Land Acquisition and Labour Laws, the state governments are undertaking the same.

Recently, Gujarat state government amended its Land Acquisition and Rehabilitation Act. The government eliminated the requirement of a social impact assessment and consent clause for certain types of development projects. Further, the government also issued the IT and Electronics Start-up Policy. Beneath the policy, the government intends to fund 50% of the cost of establishing an incubator. The policy also offers various types of direct financial assistance to start-ups.

The government of Uttar Pradesh too approved the Uttar Pradesh Information Technology & Start-Up Policy 2016. The policy aims to waive taxes on land purchased for office use and on built-up offices, as well as electricity dues for five years.

Not only this, the government of Karnataka relaxed its labour laws and announced a new retail trade policy that allowed establishments to be open longer and allowed women to work at night.

Lots of developments are taking place at the state level in order to attract investments in their respective states. Further, NITI Aayog is expected to come out with an exhaustive survey of state business regulations.

As the states wants to attract higher investments for their enrichment, it will be interesting to see how states enact the sensible pro-business regulations going forward.