Dull End to the Week

After trading flat during the noon session, Indian equity markets witnessed some selling pressure and finished just below the dotted line amid weak European markets. At the closing bell, the BSE Sensex stood lower by 46 points, while the NSE Nifty finished down by 6 points. Meanwhile, the S&P BSE Mid Cap and S&P BSE Small Cap finished up by 0.5% and 0.4% respectively. Sectoral indices finished mixed with metal and consumer durable stocks leading the gains. While losses were largely seen in realty & auto stocks.

Asian markets finished mixed as of the most recent closing prices. The Nikkei 225 gained 0.36% and the Shanghai Composite rose 0.13%. The Hang Seng lost 0.37%. European markets are trading lower today with shares in France off the most. The CAC 40 is down 0.86%, while Germany's DAX is off 0.62% and London's FTSE 100 is lower by 0.21%.

The rupee was trading at 66.93 against the US$ in the afternoon session. Oil prices were trading at US$ 48.23 at the time of writing.

Shares of Taj GVK Hotels and Resorts surged 20% in today's trade after it was reported that Indian Hotels Co Ltd (IHCL) is planning to merge Taj GVK Hotel & Resorts with itself as the GVK Reddy family wishes to exit the business.

Indian Hotels, which currently holds around 25.5% in Taj GVK and Reddy family which holds about 50% stake, are in the process of negotiating swap ratio for the merger. Taj GVK, which has debt of roughly Rs 3.62 billion on its books, will cease to exist as separate listed entity if the merger goes through.

In another development, IHCL recently announced plans to raise Rs 7 billion through issue of non-convertible debenture (NCDs) on private placement basis to fund renovation of its hotels, debt repayment and other operational expenses. At present, IHC has an approved borrowing limit of Rs 50 billion and as on March 31, 2016, the total debt of the company was Rs 26.1 billion. This includes NCDs of Rs 17.96 billion.

Meanwhile, IHCL's net loss in the June quarter widened to Rs 1.69 billion from Rs 723.9 million a year ago due to a loss on the sale of its US property. Revenues rose 5% to Rs 9.46 billion from Rs 8.96 billion a year ago. The company recently divested its entire stake in IHMS (Boston) LLC which owned Taj Boston, to AS Holding LLC, Boston, for US$125 million. Indian Hotels also finished the day on an encouraging note (up 2.4%) on the BSE.

Moving on to news from the power sector. According to an article in The Economic Times, Power Grid Corporation of India plans to expand its consultancy services in states but it is keener to participate in projects as a joint venture partner to different states. The company even plans to take up projects on ownership basis as a developer. The company is targeting to have projects worth Rs 150 - 200 billion in states over the next two or three years.

The power ministry recently stated that there are orders totaling Rs 3 trillion in the pipeline over the next four years for the power transmission sector. So far, the company has executed transmission projects connecting states, but now it wants to tap into the opportunity in projects within states. The company presently has a joint venture with Bihar for Rs 16 billion and the company hopes to do another project worth Rs 15 billion with the state.

Reportedly, the company commissioned projects worth Rs 300 billion and bagged 40% of the projects that came up under competitive bids, beating the private sector.

The central government has launched the Ujwal Discom Assurance Yojana or Uday to facilitate revival of distribution companies which have been struggling with losses and mounting debt. The industry expects that this will improve their ability to pay and also boost investment in transmission sector. Early signs are visible, with some states already announcing big ticket power transmission projects, which have even attracted private sector companies such as Larsen & Toubro. The states are also looking to develop projects under the build-operate-own model. Power Grid finished the day down by 0.7% on the BSE.

Power stocks finished the day on a positive note with Torrent Power Ltd and Neyveli Lignite leading the gains.

Auto & Realty Head the Losses
01:30 pm

Indian markets are trading in the red during the post-noon trading session. Sectoral indices are trading on a mixed note with stocks from the infrastructure & metal sectors witnessing buying interest whereas auto & realty stocks are bearing the maximum brunt.

The BSE Sensex is trading lower by 74 points (down 0.3%) while the NSE Nifty is trading lower by 18 points (down 0.2%). Both the BSE Mid Cap and BSE Small Cap indices are trading up by 0.2% each. Gold prices, per 10 grams, are trading at Rs 31,420 levels. Silver price, per kilogram is trading at Rs 45,811 levels. Crude oil is trading at Rs 3,285 per barrel. The rupee is trading at 66.99 to the US$.

As per an article in The Economic Times, Tata Consultancy Services (TCS) and American low-cost airline JetBlue Airways Corporation have signed an agreement to expand the outsourcing services offered by the IT services provider.

Reportedly, the move is intended at ramping up the relationship to strategically optimize the key business channels and enhance digital customer touchpoints.

Under the deal, TCS will be involved in building new platforms, ensuring quality assurance and managing infrastructure services. Besides that, TCS will also focus on improving the carrier's data analytics and developing new tools for crew members as well as customers.

Moreover, TCS will also expand its Pune innovation centre over the next two years to support JetBlue's digital initiatives. Also, as part of the expanded relationship, JetBlue can have access to TCS' Airline and Digital Innovation Labs.

One must note that TCS also caters to the domestic airlines Vistara's IT services requirement and it was recently selected for similar transformational initiatives with leading airlines in North America, Asia Pacific and Europe.

Going forward, whether TCS emerges as a clear partner of choice for airline companies looking to reinvent themselves in this new digital age will be an interesting thing to watch out for.

Moving on to the news from auto sector. According to an article in a leading financial daily, Tata Motors has delivered 241 buses to the Karnataka State Road Transport Corporation (KSRTC), under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM).

Reportedly, the buses are equipped with the new-age technology. The buses have an acceleration of 0.8 m/sec2, which would cut down travel time. The buses are well connected with GPRS permitting the bus to be connected with Control room for Live monitoring. Further, the bus is also enabled for smart ticketing options. Moreover, the driver's seat has been designed ergonomically with four-way adjustable mechanism to maintain the health of drivers.

Notably, there are more than 13000 Tata Motors buses operating in Karnataka.

With large auto makers already investing in these emerging technologies, it is clear that Tata Motors need to make the move quickly to avoid losing out the race particularly when technologically assisted driving can soon become a reality.

Indian Indices Trade Marginally Lower
11:30 am

After opening the day marginally higher, the Indian indices registered losses and went on to trade in the red. Sectoral indices are trading on a mixed note with stocks from the telecom and energy sector witnessing maximum selling pressure. Consumer durables stocks are trading in the green.

The BSE Sensex is trading down 17 points (down 0.1%) and the NSE Nifty is trading down 3 points (down 0.01%). The BSE Mid Cap index is trading up by 0.6%, while the BSE Small Cap index is trading up by 0.5%. The rupee is trading at 66.92 to the US$.

As per an article in the Economic Times, the government is going to disburse Rs 346 billion to its employees in August salary as arrears because of implementation of the 7th pay panel recommendations. This comes as the government has last month announced that it will pay its employees arrears arising out of implementation of the 7th Pay Commission award at one go in August.

One must note that the government has already notified the 2.57-time hike in basic salary for 1 crore government employees and pensioners as per the 7th Pay Commission recommendations. The pay hike has been made effective January 1, 2016.

As an effect of this, an aggregate outflow of Rs 1,020 billion would flow from the government's kitty to 10 million central government employees and pensioners in the current fiscal year. Furthermore, the increase will take place retrospectively from January 2016.

The wage hike is expected to deliver a potential boost to the consumer economy. Not only that, but the recommendation will have a trickledown effect across various sectors too.

Apart from the above, there are many implications that the 7th Pay Commission would have on the Indian economy.

However, the broader question that we have is how long will this momentum last? Will the economic stimulus help improve GDP growth over the long-term?

We believe that the development will reap short-term benefits. However, the same could not be said for the long-term. This, in our view, is because the private sector is typically a better and more efficient user of capital than the government. As a result, the momentum led by the 7th Pay Commission may be short-lived. The quality of demand would have been better if it were a result of genuine job creation and an actual rise in productivity. One of the recent editions of The 5 Minute WrapUp titled 'Will Babu Culture Be the Downfall of Sarkari Companies?' explains how public sector has paid the price of being inefficient for too long.

Moving on to the news from commodity space... Crude oil witnessed buying interest this week. The uptrend was seen on the back of higher demand in the US and possibility of an accord by the OPEC on output freeze.

The commodity surged on comments from the Saudi oil minister about potential action to stabilize prices. Further, the forecasts by International Energy Agency (IEA) that crude oil markets would rebalance in the next few months aided the rally in crude oil.

Recently Saudi energy minister Khalid al-Falih lent more credibility to the idea of controlling the downtrend on oil prices. He stated that the OPEC might consider taking action if oil prices remained low.

Along with the above announcement, the IEA stated that the world will consume less oil next year than previously thought. It estimated global oil demand growth to slow from 1.4 millions of barrels a day in 2016 to 1.2 million barrels a day in 2017. This was noted 100,000 barrels below its previous forecast.

At the time of writing, crude oil was trading at Rs 3,305 per barrel, up by around 0.9%. Do read what Richa Agarwal, research analyst at Equitymaster, has to say on the future prospects of crude oil prices.

To keep a regular tab on the movements in crude oil prices, 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

Major Asian stock markets have opened the day on a negative note with stock markets in China and Hong Kong are trading lower by 0.7% and 0.4% respectively. Benchmark indices in Europe and US ended their previous session in green with stock markets in Germany being leading gainer (up 0.6%). The rupee is trading at 66.79 per US$.

Indian stock markets have opened the day on a flattish note. The BSE Sensex is trading higher by 41 points (up 0.2%) and the NSE Nifty is trading higher by 10 points (up 0.1%). While both, BSE Mid Cap and BSE Small Cap are trading higher by 0.2% and 0.3% respectively.

Major sectoral indices have opened the day on a positive note with stocks from information technology and metal sector witnessing maximum buying interest.

As per an article in leading financial daily, Wipro acquired a minority stake in Israel's cybersecurity company named Insights Cyber Intelligence. Reportedly, Wipro acquired this stake for US$ 1.5 million.

This is one of the many investments the company has done in the preceding two quarters. Earlier, Wipro had acquired companies such as Health Plan Services and Cellant of Germany for US$ 460 million and US$ 77 million respectively.

Insights Cyber Intelligence was founded in 2015 and offers a threat intelligence driven security

platform employing cyber intelligence, rapid mitigation and one-click remediation.

The management stated that recent acquisitions have delivered well and cross selling has been robust. 2Q will witness the end of the integration efforts of the recent acquisitions along with the impact of wage hikes.

Further, the company's artificial intelligence platform, Holmes, is gaining momentum. The scale and scope of client engagements have expanded. Pilots projects are now converting to deals. Currently there are 35 engagements employing Holmes. This can be scaled up significantly in our opinion.

To add to this, the company's automation efforts are also improving and were expanded to 50 clients in the quarter. This is another major margin driver for the company. To get insights of detailed result analysis of Wipro's 1QFY17 results, please click here (subscription required).

In another news update, Indian Meteorological Department (IMD) stated that the south-west monsoon has been normal so far. Reportedly, since the monsoon started in June, 89% of the country has received normal to excess rainfall, while 11% of India has a deficit.

The deficit area includes states like Kerala, Gujarat, Daman, Punjab and some of the north-eastern states.

Further, the sowing of rain-fed kharif crops has been completed in 95.4 million hectares, or 90% of the normal area planted during the season.

This news comes as a relief considering that the country has faced a deficit rainfall in the preceding two years. Eleven states declared a drought in the country after last year's failed rains which have also led to depleting water levels in reservoirs.

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.

Is a Rural Recovery on the Cards?

After eleven months of continuous contraction, consumer non-durables turned positive in the month of June. If experts are to be believed, the growth was mainly on the back of a revival in the rural consumption. So is the rural consumption finally recovering?

Firms like Hindustan Unilever, Dabur, Godrej Consumer, ITC are cautiously optimistic about the future. While the reported financial performance for the June 2016 quarter was disappointing, expectations of plentiful rains and the higher pay and pension benefits from the seventh pay commission for central and defense employees are key variables to look out for.

The Indian Meteorological department had forecasted that the monsoon rainfall in the country will be 106% of the long period average, averaged across the country. With monsoon season through midway, the country looks set for normal rains this year. A better monsoon will help improve yield and increase production which in turn will benefit the farmers, increased food production will help keep inflation in check thus enabling savings which will help improve discretionary spending of the consumers

Consumption will also benefit from the implementation of the seventh pay commission and the passing of the goods and services tax legislation. . The revised pay scale will be enforced from August, with arrears from January 2016 paid in full. The transformation of the rural spending patterns over the years is an interesting phenomenon.

The rural demand has now moved beyond basic food products and while the consumption of aspirational products is comparatively lower than in cities, it is a growing market. There is an increasing demand for such products in smaller packs which is an encouraging sign for the FMCG companies.

We think, India is well placed among its global peers and there are encouraging signs of a revival in discretionary spends to help boost consumption.