Metal stocks out of favor today

After trading in the negative territory during the post noon trading session, the Indian equity markets failed to recoup losses and closed in the red. While the BSE Sensex today closed lower by 151 points, the NSE-Nifty closed lower by 43 points. Midcaps and Smallcaps too closed on a weak note. While the BSE Mid Cap index ended down by 0.8%, the BSE Small Cap index was down by 0.6%. Metal and capital goods stocks were the biggest losers today.

Asian markets finished mixed as of the most recent closing prices. The Nikkei 225 gained 0.34%, while the Shanghai Composite led the Hang Seng lower. They fell 3.52% and 0.55% respectively. European markets are lower today with shares in France off the most. The rupee depreciated further from its initial losses by 10 paise to 66.43 against the US currency in the afternoon session.

According to a leading financial daily, Tech Mahindra has been included in Dow Jones Sustainability Indices under both Emerging Markets and DJSI World category for the first time. Tech Mahindra is one amongst the only three Indian companies to make it to the DJSI World Index and one amongst nine companies which have made it to the DJSI Emerging markets category that comprises 92 companies from Asian economies such as China, Taiwan, and Singapore. DJSI World Index comprises of 317 companies globally picked across geographies based on their performance.

Selling pressure was witnessed across majority of the with Suzlon Energy and ABB India leading the pack of losers. Shares of Crompton Greaves surged more than 1.5% in intraday trading today after it was reported that the company bagged a 3-year contract from the French distribution network operator Electricite Reseau Distribution France (ERDF), which manages 95% of the electricity distribution network in France, to provide maintenance and repair services to 4,500 high power transformers. These transformers of ERDF, a subsidiary of EDF, are credited with supplying energy to 35 million households in France. As part of this contract, CG will provide preventive and corrective maintenance of the ERDF on- load tap changers (OLTC) through speedy turnaround services.

Markets trade in the negative
01:30 pm

Indian Indices are trading on a negative note in the post noon trading session. Sectoral indices are trading mixed with stocks from the power sector leading the gains and steel sector leading the losses.

The BSE-Sensex is trading down by 58 (down 0.2%) and the NSE-Nifty is trading down by 25 points (down 0.3%). The S&P BSE Midcap index and the S&P BSE Smallcap index are trading down by 0.4% and 0.3% respectively. Gold prices, per 10 grams, are trading at Rs 26,041 levels. Silver price, per kilogram, is trading at Rs 34,595 levels. Crude oil is trading at Rs 2,954 per barrel. The rupee is trading at 66.41 to the US dollar.

Automobile stocks are trading on a mixed note with Maharashtra Scooters and Escorts leading the gains. As per an article in Economic Times, Mahindra & Mahindra (M&M) is eyeing a good response from the markets to its recently launched compact SUV TUV300 on the back of growing demand in the utility vehicle segment. The vehicle already meets the safety features which are going to come in play for the manufacturers from October 2017. On a separate note, M&M's forte has also been in the bigger Utility Vehicles Segment with models such as the Scorpio and XUV500. Scrip of Mahindra & Mahindra is presently trading down by nearly 0.7%.

Stocks in the steel sector are also trading mixed with Tata Steel and JSW Steel witnessing maximum selling pressure. According to a leading financial daily, Tata Steel and Nava Bharat Ventures have entered into an agreement for conversion of chrome ore into ferro chrome. The agreement will be commence upon the receipt of ore and reductant from Tata Steel during this month. Further, the agreement is initially up to the end of March 2016 and extendable on mutually agreed terms for a further period of 4 years. Stock of Tata Steel is trading down by 4.2% on the BSE.

Indian markets face downside
11:30 am

After opening the day weak, Indian stock markets have continued to witness downside. Among the sectoral indices, mining and steel stocks are witnessing maximum selling pressure.

The BSE-Sensex is down by 123 points (0.5%) and the NSE-Nifty is trading down by 43 points (0.5%). The BSE Mid Cap & BSE Small Cap indices are also trading in the red, down by 0.5% and 0.2% respectively. The rupee is trading at 66.44 to the US dollar.

Stocks in the automobile space are trading mixed with Tata Motors and Hero Motocorp leading the losses. As per an article in Livemint, the Reserve Bank of India (RBI) has allowed foreign investors to invest up to 40% of the paid-up capital in Maruti Suzuki India Ltd. This was allowed by the RBI under the portfolio investment scheme. The company has passed resolutions at its board of directors' levels and a special resolution by shareholders for the agreement of enhancing the limits for purchase of its equity shares and convertible debentures by FIIs/RFPIs. The purchases could be made through the primary market and the stock exchanges. Presently the stock of Maruti Suzuki is trading up by 0.7%.

Power stocks are trading on a mixed note with Torrent Power Ltd and Rattan India Power leading the gains. As per a leading financial daily, power producers including NTPC, GMR, GVK and Lanco are in the fray for second round of auction in order to bag the Rs 26 bn government subsidy for buying expensive imported LNG for their idle plants. This assistance is provided under the Power System Development Fund which is set up by the government. Under the plan, liquefied natural gas (LNG) will be imported and cash-strapped state power distribution companies will be financially supported to buy electricity from them. In the first round, 15 projects were shortlisted through a so-called reverse e-bidding process.

Indian markets open in red
09:30 am

The major Asian stock markets have opened the day on a disappointing note. Stock markets in China, Indonesia and Singapore are down by 2.3%, 1.1% and 1% respectively. The major stock indices in the Europe and in US ended their previous session in red. The rupee is trading at 66.37 per US dollar.

Indian stock markets have opened below the dotted line. BSE-Sensex is trading down by 44 points (down 0.2%) and NSE-Nifty is trading down by 23 points (down 0.3%). However S&P BSE Midcap and S&P BSE Midcap have opened in green. Both the indices are trading up by 0.3% and 0.2% respectively. Sectoral indices have opened the day on a mixed note with stocks from pharmaceutical and FMCG sector witnessing maximum buying interest. However stocks from telecommunication are the top losers in the pack

An article on a financial daily reports, close to half the country is experiencing deficient rainfall. The overall deficit has gone up by 16%. According to the data published by the Indian Meteorological Department (IMD), 44% of the country has received deficient rainfall and 50% has witnessed normal rainfall. Delhi, Haryana, Chandigarh have recorded deficiency of 40%. However the fresh spell of rains last week in parts of central India has brought down the deficiency in several parts. According to Skymet, the monsoon in India is likely to take another week to begin its withdrawal from Delhi-NCR, Punjab and other parts of northwest India.

Stocks in the pharmaceutical sector are trading on a positive note. As per an article in Economic Times, Sun Pharma is looking forward to acquire US based company Insite Vision Inc. Insite Vision is a specialty ophthalmologic product developer which are used for the treatment of the eye-related disease. Reportedly, Insite is also expecting a new drug discovery approval from the US FDA for two of its drugs namely- BromSite and DexaSite in the medium term. Sun Pharma has made a bid for Insite Vision at an equity valuation of close to Rs 3bn. Stock of Sun Pharma is trading up by 0.8%

Is India Inc ready to boost capex?

Prime Minister Narendra Modi, on Tuesday last week, had asked India Inc to take risks and pump up investments. However, if history is any indicator, the Indian stock markets view the matter altogether differently.

Fathom this. As per an article in Business Standard, Indian markets, over the past ten years, have ignored companies that have gone in for higher capital expenditure (capex). In turn, markets have favored those that have remained asset-light.

Indeed, as per data, 14 companies contributed to half of the incremental growth in India Inc's capital expenditure between FY05 and FY15. These companies, however, accounted for only 20% of the incremental rise in the BSE 500 companies' market cap during the period. To demonstrate clearly, Reliance Industries, the biggest investor during the period, accounted for 8.7% of the incremental capex. However, its contribution to the incremental market cap stood at mere 3.7%. Whereas asset light companies from sectors such as FMCG, IT and pharma in particular have seen their market cap rising faster.

In recent times, companies themselves have been cautious before committing to invest in capex. And the main reason for this has been the overall economic slowdown and the wide gap between demand and supply. This has been seen from the return on asset (RoA) ratios which have been declining. Further, asset utilization has also dropped. Subpar demand levels have led to inventory pileup.

Thus, a widening gap is being seen between the capex heavy companies and their market cap due to factors such as:
  • The global commodity downturn leading to high inventory levels
  • High cost associated with capex leading to lower profitability
  • Investments being stuck due to leveraged positions of large corporates
  • Some domestic companies being in financial stress

Typically cyclical industries tend to be asset heavy. And so in a downturn, when the capacity utilization is low, there is no incentive to invest in more capex. So the key here is revival in demand. Once that happens and the economy begins to recover, the gap between demand and supply will automatically narrow down. This is nothing new and is the inherent nature of cyclical sectors.

However, from a longer term view, if the government wants India Inc to step up investments, it needs to do a lot in terms of improving the business climate in the country and ramping up infrastructure. Only then will not only Indian companies invest in the country, but foreign direct investments (FDI) will be more forthcoming too.