Markets Plummet on Surgical Strikes across LOC

Indian equity markets plunged and finished deep in the red following an announcement that the Indian Army conducted surgical strikes on terror launch pads last night across the Line of Control (LoC) in PoK. At the closing bell, the BSE Sensex stood lower by 465 points, while the NSE Nifty finished down by 154 points. Mid-Caps and Small Caps performed the worst. The S&P BSE Mid Cap & the S&P BSE Small Cap finished down by 3.6% and 4.2% respectively. Losses were largely seen in power and realty stocks.

Asian markets finished broadly higher with shares in Japan leading the region. The Nikkei 225 was up 1.39%, while Hong Kong's Hang Seng was up 0.51% and China's Shanghai Composite was up 0.36%. European markets are also trading higher today with shares in France leading the region. The CAC 40 was up 1.39%, while London's FTSE 100 was up 1.03% and Germany's DAX was up 0.68%.

The rupee was trading at 66.55 against the US$ in the afternoon session. Oil prices were trading at US$ 46.85 at the time of writing.

According to a leading financial daily, the government has asked state controlled National Aluminum Company Ltd (Nalco) to rethink its expansion plan in Iran. This includes a proposal to set up a US$ 2 billion smelter unit in Iran. The state government has asked Nalco to expand its domestic capacity.

According to mines secretary Balvinder Kumar, value addition should happen in India and the companies should be self-sufficient in aluminum instead of importing by setting up plants overseas . However, the final decision would be taken by Nalco's board on the Iran project.

Earlier in May, the state-owned company had entered into an initial agreement with Iran's mining development body to supply alumina from its refinery in India to set up an aluminum smelter in Iran. NALCO had also explored setting up a 500,000-tonnes-per-year smelter and an associated power plant in the Middle East.

This comes at a time when the Indian government has ruled out imposing minimum import price on aluminum, the total estimated consumption of the metal has increased considerably in the past two financial years. While the domestic metal sale was steady in financial year 2015-16, aluminum imports witnessed an increase of over 20%. Nalco finished the day down by 2.1% on the BSE.

Moving on to news from the automobile sector. According to an article in The Economic Times, manufacturers of electric vehicles have written to the government seeking exemption for their products from goods and services tax (GST). The auto manufacturers fear the new tax system will nullify the benefits that they are now getting.

The manufacturers are concerned that even if electric vehicles are brought into the lowest tax slab, prices would rise and come closer to those of petrol or diesel vehicles, affecting the demand in the market. The finance ministry has indicated that it doesn't favor giving incentives under GST, which combines most indirect taxes into one and is expected to come into effect in April next year.

As per the reports, the tax incentives wouldn't hurt the government since the market for electric cars is still small. SMEV Secretary Sohinder Gill wrote in the letter, highlighting the environmental benefits that faster adoption of electric vehicles could bring.

Excise duty on electric vehicles currently stands at around 6%. Most state governments have put lower VAT on electric vehicles, which ranges from nil to 5%.

Sales of electric vehicles in India are minute at the moment with lack of awareness, financing options and charging infrastructure deterring widespread use. In the first six months of the year, 10,000 electric two-wheelers have been sold in the country. The government has an ambitious target to put on road 6-7 million electric vehicles by 2020 to clamp down on pollution.

Automobile stocks languished in the red with Ashok Leyland and Escorts Limited leading the losses.

And here's a view from our team at DailyProfit Hunter,

Will Nifty Breach Its Seven Month Long Uptrend?

Nifty was trading in a rising channel for the last seven months. It has traded religiously within the upper and lower edges of this channel but now it seems like it's on the verge of a breakdown. Markets also clocked its highest ever turnover today which suggests mass exit of the bulls. Bears would be enthused if they see the index trading below today's low. Now whether the index breaches this rising channel or not remains to be seen. If you want to keep a track of it on a regular basis, then you can read the weekly market commentary by the team at Daily Profit Hunter.

Markets Tank after Surgical Strike on PoK
01:30 pm

After trading on a positive note in the morning session, Indian equity markets plummeted 500 points in a knee jerk reaction after Indian army claimed that it has carried out surgical strikes along the Line of Control into Pakistan Occupied Kashmir. The operation is likely to affect the market in the near future. Defense stocks such as BEML, Bharat Forge & Bharat Electronics plunged the most.

Major sectoral indices are trading on negative note with stocks from healthcare & realty leading the losses.

The BSE Sensex is trading lower by 301 points (down 1.1%) while the NSE Nifty is trading lower by 111 points (down 1.3%). The BSE Mid Cap index is trading down by 2.7% and BSE Small Cap index is trading down by 3.3%. Gold prices, per 10 grams, are trading at Rs 31,071 levels. Silver price, per kilogram is trading at Rs 45,858 levels. Crude oil is trading at Rs 3,149 per barrel. The rupee is trading at 66.78 to the US$.

Auto stocks are trading on mixed note with Ashok Leyland and Escorts leading the losses. As per an article in Business Standard, Tata Motors has collaborated with Hindustan Petroleum Corporation Limited (HPCL) to launch the high performance range of HP Tata Motors Genuine Oil (HP TMGO). The lubricant will be used for Tata Motors passenger vehicles in the Indian market.

According to the company, HP TMGO range includes engine oils, gear oils, steering and transmission fluids, coolants, brake fluids and greases. These lubricants will be available all over the country, which will ensure splendid performance of the vehicles for a longer time.

The auto industry is one of the many indicators of the health of the Indian economy. The next best performer after commercial vehicles was passenger vehicles. The growth for this segment was largely attributed to new product launches by many players. Moreover, in its passenger vehicles space, new products and mid-cycle enhancements really drive its growth in the near will be the key thing to watch out for going forward.

Further, these oils have been developed as per regulations and specifications necessary for the international passenger vehicles market. Moreover, these lubricants will be made available through HPCL's retail and bazaar network and Tata Motors service stations across India.

Also, recently Tata Motors has taken an entry into Bolivia through a distribution agreement with local partner Bolivian Auto Motors in the Latin American country. It is a part of Salvatierra, a business conglomerate involved in distribution of motor vehicles and motor cycles.

With the help of this partnership, Tata Motors has launched three new commercial vehicles in the Bolivian market - Tata SuperAce Petrol, Tata Xenon Petrol and Tata LPT 613 truck.

Moving on to the news from engineering sector. As per an article in a leading financial daily, Larsen & Tubro Ltd's (L&T) construction arm announced that it has won orders worth Rs 20.5 billion across its power, civil infrastructure and construction verticals.

Reportedly, its power transmission & distribution business has won engineering, procurement and construction orders worth Rs 8.3 billion. This includes construction of projects for rural electrification under the Integrated Power Development Scheme, extra high voltage substations and overhead transmission lines across various locations in India.

In Heavy Civil Infrastructure Business, it has secured an order worth Rs 6.75 billion in the metro sector. The scope of the work includes the construction of elevated viaducts and elevated stations.

Meanwhile, its Building & Factories Business has bagged a residential project worth Rs 4.3 billion and under Transportation Infrastructure Business, it has secured additional orders worth Rs 1.1 billion in its various ongoing projects.

Diversification continues to help L&T (Subscription Required) negotiate and get better terms and margins for projects. Apparently, this is because it is less desperate to win orders as compared to a company which are present in only a couple of sectors. Its reputation, extensive technical prowess, and large skilled workforce have enabled L&T to command a certain premium from customers and vendors alike. Whether, further addition to these new projects provide a cushion to its profitability will be an interesting thing to watch out for going forward.

Indian Indices Trade Marginally Higher
11:30 am

After opening the day on a positive note, the Indian indices registered slight losses and went on to trade marginally higher. Majority of the sectoral indices are trading on a positive note with stocks from the energy and auto sector witnessing maximum buying interest. FMCG stocks are, however, trading in the red.

The BSE Sensex is trading up 61 points (up 0.2%) and the NSE Nifty is trading up 25 points (up 0.3%). The BSE Mid Cap index is trading up by 0.2%, while the BSE Small Cap index is trading up by 0.6%. The rupee is trading at 66.57 to the US$.

ICICI Prudential Life Insurance today became the first Indian insurer to get listed on stock exchanges. The scrip of insurer got listed at Rs 329 on the Bombay Stock Exchange. This was a 1.5% discount to its offer price of Rs 334. Further, on the National Stock Exchange (NSE), the stock got listed at Rs 330.

Moreover, the stock witnessed selling pressure as the day's session progressed. At the time of writing, the stock was trading at Rs 311, down by around 6.9% from its open price.

At opening trade, the market capitalisation of the insurer was at about Rs 480 billion - putting it in the list of top 50 firms in terms of market capitalisation on the BSE.

The IPO, which ran between September 19-21, was the biggest since the Coal India issue in 2010. The IPO was sold in the price band of Rs 300-334 and got over-subscribed 10 times.

IPOs have kept the Indian markets busy of late. Listing gains and over subscription of the issues have caught the eye of market participants. With this euphoria, there are many more IPOs lined up in the coming days. This begs the question: What should be one's approach towards IPOs?

As far as our views are concerned, one should not get swayed away by the buoyancy surrounding IPOs. Instead, what one should look for in IPOs is the fundamentals of the business and the attractiveness of valuations.

We at Equitymaster have always recommended IPOs cautiously. If you ask us, every IPO needs to be evaluated on its own merit. When there is a need to go through a checklist for buying stocks, why not so in the case of IPOs?

There are several big IPOs in the pipeline in the last few months of 2016. In case you wish to run them through a handy checklist, we have something for you.

Download our Handbook of IPOs to be able to pick only the right ones for you.

In another news update, the International Monetary Fund (IMF) head Christine Lagarde has renewed warnings against protectionism and trade restrictions. This, as per Christine Lagarde, is because the global economy risked prolonged low growth and advanced economies faced painful inequality.

As per the IMF, the current global recovery was still fragile following the Great Recession of 2008-2009. Further, it was noted that populist political currents rising in the developed world threatened to undo the progress made.

Apart from the above, the IMF has also signaled to downgrade its forecasts for the US growth due to sub-par performance in the first half of 2016.

The global economy is plagued by low inflation, low interest rates, and easy money policies by the central banks. As Bill Bonner writes in the Vivek Kaul's Diary: Sooner or later, the recovery myth for the global economy will explode and the 2017 recession will kick in.

And India will be no exception to this. Several macroeconomic indicators pose a threat and expose the bleak picture of India's economy. To stay on top of big macro trends in India, we recommend the Vivek Kaul Letter (subscription required). Vivek addresses a range of big issues in this unique newsletter - the government's handling of oil prices, the mess in public sector banks, the current state of India's real estate bubble...and a lot more!

In fact, as you read this, Vivek has come out with a video that details all...including how these macro trends could impact you. Click here to watch the whole 58-minute video.

Positive Start to the Day
09:30 am

Major Asian stock markets have opened the day on a positive note with the stock market in Japan and China are trading higher by 1.3% and 0.6% respectively. Stock Markets in Europe and the US ended their previous session in green with benchmark indices in US ending the day higher by 0.6%.

The rupee is trading at 66.44 per US$.

Indian stock markets have opened the day on a positive note. The BSE Sensex is trading higher by 162 points (up 0.6%) and NSE Nifty is trading higher by 50 points (up 0.6%). Both, BSE Mid Cap and BSE Small Cap are trading higher by 0.6% each.

Major sectoral indices have opened in green with stocks from real estate and oil & gas sector are witnessing buying interest.

As per an article in Livemint, India's ranking in the Global Competitive Index jumped by 16 places. This index signifies India's competitiveness vis-a-vis other economies. India is now ranked 39 among 138 countries surveyed this year.

Encouraged by this, the government expects their rankings in the Ease of Doing Business to improve by at least 10 places this year. The government claims to have carried out 200 reforms in the preceding two years. Few of the important reforms among these are the Goods and Service Tax (GST), Bankruptcy Code, Real Estate Act.

However, it is imperative to note that while preparing the rankings the World Bank considers reforms carried out by countries only till 31 May 2016. Hence, the institution will not take into consideration important bills such as GST and Bankruptcy Code. Thus, there is a high probability that the ranking will improve significantly in the next year as well.

The improvement in the Ease of Doing Business will help attract foreign direct investments and will emerge an attractive destination for global businesses.

In another news update, The Organization of the Petroleum Countries (OPEC) has agreed to modest price cuts. Countries under OPEC would reduce output to a range of 32.5-33 million barrels per day (bpd) from the current output at 33.24 million bpd.

This deal to cut oil output is the first such deal since the year 2008. Iran too has decided to decrease the production by around 0.7 million bpd.

Post this decision, oil prices jumped by more than 5% to trade above US$ 48 per barrel. Despite the production cuts being modest, this move could possibly help recover the oil prices.

Don't Let This Corporate Action Fool You

Corporate actions like dividends, bonuses, stock splits etc. are closely watched by all the analysts and investors alike. According to a Business standard report, in the current financial year, about 45 companies have already announced their stock split.

In simple words, a stock split is when a company announces an increase its number of shares outstanding by issuing more shares to its existing shareholders. Such actions by the company increases the number of shares outstanding thus effectively reducing the price of each share. The overall market capitalization of the shares however, remains the same. The rationale behind such sub-division is primarily to improve liquidity and affordability among the general public.

Corporate actions like a bonus or a stock split in the form of sub-division in the the face value are looked upon favorably by the retail public. Is it okay to buy the stock only if the price falls only due to splits without any change in fundamentals? These stock splits usually happen in a bull market, interestingly some managements perceive that giving out bonuses and splits is just another way of creating wealth in the hands of the shareholders.

We think that the people wrongly anchor themselves on the price per share metric. While price of a share is important, however the most important metric that must be noted is the underlying fundamentals. A stock must not be viewed as a ticker symbol with a number, it must be understood that there is an underlying business that drives the company. It is of utmost importance that one understands how this business functions.

Bonuses and splits provide the speculators and those with a short time horizon with some market action. Note that the stock split has no fundamental effect on a company or its valuations, one must not base his decision on the basis of these corporate actions. However, in the long run, it is the drive towards fundamentals that decides the value of the stock. What really creates wealth for the shareholders are not bonuses and splits, per se. Improving fundamentals is what matters in the end. Fundamentals factors like the growth prospects of the company, management quality, business model, etc. should continue to remain the deciding factors while making an investment decision.

The father of value investing, Benjamin Graham knew this fickle crowd behavior all too well, in the long run he also believed, it is the fundamentals that count.

"In the short run, the market is a voting machine but in the long run, it is a weighing machine."