Sensex Finish on Weak Note, Pharma Stocks Crack on US Investigations

Indian share markets slid further in the afternoon session and finished well below the dotted line tracking a weak trend in global markets. At the closing bell, the BSE Sensex stood lower by 156 points, while the NSE Nifty finished down by 51 points. Meanwhile, the S&P BSE Mid Cap & the S&P BSE Small Cap finished down by 1.3% and 2.2% respectively. Losses were largely seen in pharma, realty and metal stocks.

Pharma sector slid 4.2% in today's trade after Bloomberg reported that US prosecutors could file charges by year-end in a criminal investigation of generic makers over suspected price collusion. Shares of Sun Pharma and Dr Reddy's fell 7.4% and 5.7% respectively.

Asian shares slipped and the dollar harbored losses in a week marked by growing uncertainty about the outcome of the U.S. presidential election. The Nikkei 225 is down 2.98% while Hong Kong's Hang Seng is off 1.27% and China's Shanghai Composite is lower by 0.12%. European stocks too fell in early trade with shares in London leading the losses. FTSE 100 is down by 1.14% while shares in Germany and France are down 0.95% and 0.73% respectively.

The rupee was trading at 66.72 against the US$ in the afternoon session. Oil prices were trading at US$ 44.67 at the time of writing.

According to an article in The Economic Times, BPCL has received green nod to set up additional facilities at its Kochi refinery to meet the BS-VI quality auto norms. The company plans to establish new MS Block which will entail an investment of Rs 33.13 billion.

As per Auto Fuel Policy 2025, the government has laid down a roadmap for complete transition to Bharat Stage (BS)-VI auto fuel by April 2020 in the country.

The Kochi refinery of BPCL is currently implementing the Integrated Refinery Expansion Project (IREP), which will enhance refinery capacity from 9.5 million metric tonne per annum (MMTPA) to 15.5 MMTPA and upgrade auto fuel quality as per BS-IV and part BS-V norms.

Post IREP, BPCL said its Kochi refinery will be able produce BS-IV quality MS and diesel along with partial production of BS-V products, and it will require additional facilities to achieve BS-VI quality specifications for MS.

Share price of BPCL finished the day down 0.3% on the BSE.

In another development, the government will levy service tax of about Rs 19.22 billion on royalties to energy firms like ONGC and Cairn India from this fiscal onwards. The oil companies will have to pay to the exchequer on oil and gas they produce.

Companies currently pay 9.09% of the price they realize on oil and gas produced from on land or onshore fields and 16.67% on the same from offshore areas.

As per the reports, following the clarification, the Service Tax department has sent letters to companies like ONGC, Cairn India Ltd and Reliance Industries seeking information on royalty payments.

These companies had paid a total of Rs 48.85 billion royalty on oil and gas produced in 2015-16 to the Centre and another Rs 79.32 billion to states.

Reportedly, energy companies through their association have taken up the matter with the Oil Ministry saying their profitability has been severely impacted by slump in oil and gas prices to multi-year low and the additional levy would erode it further.

Moving on to news from stocks in mining sector. According to a leading financial daily, the present stock positions of coal could spiral into a national shortage if power plants raised their capacity utilization even by 6-7%.

Nevertheless, coal secretary Anil Swarup recently stated that coal imports by all state-owned power generation companies would stop from April 1, 2017. However, spot and forward e-auctions are an effort to supply as much coal as possible without disrupting supplies.

As per the reports, NTPC is by far the largest public sector coal importer and it has reduced imports drastically from a peak of about 16 million tonnes a few years ago to a couple million tonnes this year. The company has not placed fresh import orders this year and all its coal imports in 2016-17 have been delivery of orders placed in previous years.

While coal stocks at power plants receiving coal from Coal India have an average stock of 15 days, there are some 57,000 mw of thermal units starved for coal since they do not have any supply contract from Coal India.

The National Coal Distribution Policy (NCDP) formulated in October of 2007 stipulated that Coal India cannot supply to power plants without signing any fuel supply agreement. NCDP was framed at a time when the nation was faced with acute coal production shortage.

After much deliberation and delay, the Mines and Minerals (Development and Regulation) Act, 1957 had been recently revised and Rajya Sabha approved the amended Mines and Minerals Development and Regulation (MMDR) Bill, 2016. In a recent edition of The 5 Minute Wrap Up Premium, we looked at the impact of the Act on various mining and metal companies (Subscription Required).

Mid & Small Caps Fall; ICICI Bank Up on Rate Cut
01:30 pm

Indian share markets continued to trade in red during the noon session amid continued sell off in global markets. Barring FMCG sector, all the sectoral indices are trading in red. Pharma and metal stocks witnessed majority of the selling activity.

The BSE Sensex is trading lower by 71 points and the NSE Nifty is trading lower by 34 points. Meanwhile, the BSE Mid Cap index & the BSE Small Cap index are down by 0.9% and 1.9% respectively. The rupee is trading at 66.73 to the US$.

According to a leading financial daily, ICICI Bank has cut its home loan rate by 15 basis points (bps) for new borrowers. Following this rate cut, home loans up to Rs 7.5 million for women borrowers will now attract an interest of 9.15% from the earlier rate of 9.30%. At the same time, the new rate for salaried class has been reduced to 9.20%, as against 9.35% earlier. The new rate is effective from November 2, a day after the bank lowered marginal cost of funds based lending rate (MCLR) by 0.1%. HDFC Bank too has cut its home loan rate by 0.15%.

Meanwhile, State Bank of India (SBI) also cut its home loan rates by 0.15% to 9.15% - a six-year low. The bank plans to cash in on the festival season and grow its retail loan book.

This rate cut by SBI could increase the pressure on other banks to bring down their interest rates on home loans, consumer, auto and other personal loans. The rate cut comes after the Reserve Bank of India reduced key policy rates by 0.25% to 6.25% last month.

Amid low demand for loans from big corporates, banks are focusing on growing their business from retail loans, especially home loans. As per RBI data, housing loans have shot up to Rs 7.86 trillion as of August 2016 as against Rs 6.74 trillion in August 2015, a rise of 16.7%.

Share Price of ICICI Bank was trading up by 0.2% at the time of writing.

Moving on to news from stocks in automobile sector. Share Price of Ashok Leyland is trading on an optimistic note (up 0.3%) after the company received approval from fair trade regulator Competition Commission of India (CCI) to buyout its Japanese partner Nissan Motors' stake in three Joint Ventures (Subscription Required) (JVs). The joint ventures are Ashok Leyland Nissan Vehicles (ALNVL) for making vehicles; Nissan Ashok Leyland Power Train (NALPT) for manufacturing power trains and Nissan Ashok Leyland Technologies (NALT), which is a technology joint venture.

Earlier in September, Nissan Motors had announced that it would exit the three joint ventures by selling its stake to Ashok Leyland. Post deal, the three entities would become wholly-owned subsidiaries of Ashok Leyland.

Ashok Leyland formally announced its plans to acquire all the shares of Nissan Motors in three of its JVs in September. These joint ventures focus on technology development and manufacturing of powertrains and vehicles.

The agreement will allow Ashok Leyland to continue manufacturing its flagship light commercial vehicles - Dost, Partner and Mitr - with a 1% royalty payable to Nissan.

Meanwhile, Ashok Leyland reported solid growth in sales, driven by medium & heavy commercial vehicle (M&HCV) segment. The company sold 12,533 units during the October month (the highest sales since March 2016), higher by 28% compared with 9,803 units sold in year-ago period.

M&HCV sales grew by 33% to 9,574 units while light commercial vehicle segment registered a 13% growth at 2,959 units on yearly basis.

Sensex Remains Flat; Realty Stocks Witness Selling Pressure
11:30 am

After opening the day on a flat note, the Indian share markets have continued to trade near the dotted line. Sectoral indices are trading on a mixed note with stocks in the healthcare sector, realty sector and metal sector witnessing maximum selling pressure. FMCG stocks are trading on a positive note.

The BSE Sensex is trading down 24 points (down 0.1%) and the NSE Nifty is trading down 18 points (down 0.2%). The BSE Mid Cap index is trading down 1%, while the BSE Small Cap index is trading down by 2.1%. The rupee is trading at 66.71 to the US$.

Indian stock markets saw a host of macroeconomic data releases today. One was the finalization of GST tax rates, which was announced after market hours' yesterday. The development came as GST Council decided upon a multi-layered tax rate system. The Council finalised a four-tier tax structure, with the tax rate on items of mass consumption at 5%. Other slab rates decided by the Council are 12%, 18%, and 28%. To know more on this, please read our previous stock market commentary here. Also, to get a detailed view on the Goods and Services Tax (GST), you can read Vivek Kaul's report titled GST & You: What the Media DID NOT TELL YOU About the GST.

While market participants were busy gauging the effect of GST rates on the economy, there came another set of positive data for the private sector activity in India. Data released showed the Nikkei India Composite Purchasing Managers Index (PMI) - a gauge of private sector activity in the country - reaching its highest level since January 2013 in the month of October. The index, which reflects the activities both in manufacturing and service sector, came in at 55.4 for October 2016. This could essentially mean that a recovery is around the corner led by good monsoon and an increase in consumption.

Taking cues from the above announcements, Indian share markets went on to trade on a volatile note. Further impact of the above factors will likely be seen during the trading day ahead.

But that was not all. Another good news in the room came as the Centre announced the imposition of an antidumping duty on imports of steel wire rods from China. The duty is levied in order to protect domestic manufacturers from cheap inbound shipments.

Reportedly, the Department of Revenue notified that an anti-dumping duty is being imposed for six months on import of wire road of alloy or non-alloy steel from China.

The above move is also in line with government's efforts to reduce the onslaught of Chinese goods entering the local market by reducing and delaying duty concessions to China.

Earlier this week, news reported India planning for a new duty cut formula to reduce trade deficit with China. While nothing is finalised as of yet, it was noted that Indian will maintain a separate negative list of items on which it will give limited or no tariff concession to Chinese imports under the Regional Comprehensive Economic Partnership (RCEP) trade agreement. The move, if implemented, will help India in containing its rising trade deficit with China.

In the news from global markets, the Bank of England (BoE) almost doubled its economic growth forecast for 2017. While doing so, it also warned that households face a sharp upturn in inflation over the next few months. As per the BoE, the rise in the cost of living is now predicted to shoot up to 2.7% next year, nearly three times its current level of 1%.

The new forecast was delivered as the BoE kept its interest rates at a record low of 0.25% and dropped plans to cut them further in the near future. However, the bank tempered the inflation warning with a projection that economic growth will be much stronger than previously forecast in the near-term.

While the short term projections made by the central bank seem favorable, there is still substantial uncertainty in the longer term as the economy is not forecast to recover its 2016 pace of growth.

One shall note that developed nations today are struggling through a period of low to no growth. The reasons are many- ranging from central bank policy measures to deleveraging and demographics. The average consumer is saddled with large debts and is looking to pay them off. This means a lower outlook for growth. This low growth scenario is one of the reasons for all the scrutiny we see over interest rates.

The global economic system is totally and utterly dependent upon more and more debt to achieve even a modest amount of growth. This is a giant Ponzi scheme, needing more debt at the base to support the apex. The cracks are starting to appear. European banks, US corporate defaults, a realisation that negative rates are not working, earnings downgrades in the US... The system is so unstable it may only take the flap of a black swan's wing to send it all crashing down. If you're interested in knowing what's really happening in the world of man and money, you can claim your free copy of Bill Bonner's latest book, Hormegeddon (just pay Rs 199 for shipping and handling).

We believe, one must be prepared to witness increasing volatility in the stock markets. Apart from the above development, several domestic factors are likely to influence the course of Indian stock markets in the coming times. Our message to investors is to not fear volatility and uncertainty. Instead, use it to your advantage as increased volatility could throw up bargain buying opportunities.

Indian Share Market Opens Flat, Pharma Stocks Under Pressure
09:30 am

Major Asian stock markets have opened the day on a negative note with the stock market in Japan is trading lower by 1.5%.

Stock markets in Europe and the US too ended their previous session on a negative note with benchmark indices in the UK ending the day lower by 0.8%.

US Presidential election uncertainty is dragging the global markets down.

The rupee is currently trading at 66.7 per US$.

Indian share markets have opened the day on a flattish note. The BSE Sensex is trading marginally lower by 30 points (down 0.1%) and NSE Nifty is trading marginally higher by 7 points (up 0.1%). Both, BSE Mid Cap and BSE Small Cap are trading higher by 0.2% and 0.3% respectively.

Stocks from pharma space are witnessing maximum selling pressure. The S&P BSE Healthcare index is trading down by 3%. Beneath pharma space, Sun pharma is witnessing immense pressure with the stock trading down by 6.1%.The antitrust investigation by the Justice Department of US, was initiated around two years ago on drug pricing. The antitrust investigation was done on two-dozen drugs made by a dozen generic drug companies. The grand jury probe is examining whether some companies agreed together to raise prices, and the first charges could emerge by the end of the year. This could result in charges against various Indian pharma companies that have taken sharp spike in key drugs in the US market.

After a series of discussions it seems like the center and the state have struck a consensus on the tax rate beneath Goods and Service Tax (GST). This essentially means that India has moved closer towards implementation of GST. The government aims to implement GST from 1 April 2017.

The GST council has decided upon a multi-tiered tax rate system. 50% of the items present in the consumer price index (CPI) basket, including food grains such as rice and wheat will attract zero tax rate. By including 50% of the CPI items under zero tax rate, inflation will remain in check.

The next slab will be 5%, wherein items of mass consumption like spices, tea and mustard oil will be taxed. Next will be two standard rates of 12% and 18% wherein a majority of items used by the common man will be taxed.

After that, there would be a higher slab of 28% where items currently attracting a tax of 27-31% will be taxed. Items like white goods and cars will be included in this tax bracket.

Now, the so called demerit and sin goods such as aerated drinks, luxury cars, tobacco and pan masala will also be taxed at 28%. However, on such goods a cess will be levied by the center over and above the 28% slab. Reportedly, the cess will be levied in such a manner that the final tax incidence on such demerit items and sin goods is not less than the existing tax rates. The cess in-turn will be used by the central government to compensate the states for the loss arising out of the transition to GST. The estimated loss to the states is pegged at Rs 500 billion in the first year.

The multi-tiered tax rate structure could possibly complicate GST as it will lead to classification issues. Interpretation issues could arise pertaining to classification, in turn leading to more litigation.

Having said that, GST could be a potential game changer for the economy if implemented in the correct manner. All things considered, it could add another 1-2% to GDP growth every year on a sustainable basis.

In another news update, the Nikkei India Composite Purchasing Managers Index (PMI) - a gauge of private sector activity in the country has reached its highest level since January 2013 in the month of October.

The index, which reflects the activities both in manufacturing and service sector, came in at 55.4 for October 2016. This could essentially mean that a recovery is around the corner led by good monsoon and an increase in consumption.

However, what was also surprising in October month's PMI number is that there are signs of a gradual improvement in investment demand. There was a strong inflow of new work during the month. This in-turn would bode down well with the employment scenario as well. A sustainable improvement in this index will be the key things to watch out for going forward.

What Lies Ahead for Small Caps?

Small cap companies have always held a certain fascination for investors. By virtue of their higher growth potential, they can at times generate outstanding returns...or so the story goes. So, how well have the smaller companies fared during the past one year?

Well, they have outpaced large caps and midcaps. As per an article in the Economic Times, small caps set off the fireworks during Samvat 2072. 34 companies which form part of the S&P BSE Small Cap index more than doubled investor wealth since last Diwali. Furthermore, there were many small cap stocks that rose more than 100% during the same period. Some of the names include Pricol, Borosil, Orient Paper, Gujarat Narmada, and Atlanta.

So far so good. The question, however, comes as what lies ahead for small caps?

The recent run up in the price of small cap stocks has made investors susceptible to a correction. There are also some other concerns such as the rising debt levels.

Debt levels of small cap companies has risen above the long term average during the recent years. With an average debt to equity of 1x, this number has touched as high as 1.2x in recent years. The higher debt along with the fall in profitability has meant that interest coverage ratios too have suffered drastically. From upwards of 4.5 times in FY07, this is now down to a disquieting 1.1 times in FY16.

Lastly, we have the ongoing global economic volatility that can weigh on small caps. One shall note that small caps are much less resilient than the larger peers to an adverse macroeconomic cycle. They can be quite shaky during an extended patch of cyclical downturn.

So while small caps have great return potential, they are also fraught with high risks at this juncture. But does that mean one shall avoid all small cap companies? Here's our in-house small cap expert Richa Agarwal:

  • It's true that small caps are a risky asset class. That said, many individual small caps are too small to have any significant impact of macro factors. So for small caps, the business potential and risks rather arise from very specific risk factors - management quality for example - which can be mitigated with diligent research and diversification.

    In an economy on the cusp of recovery, some small-cap businesses are poised to grow at better rates than their larger counterparts. Value investing with a bottom-up focus could give your portfolio a great boost over the long term.

So there are enough opportunities in the small cap space. Do check out our report, Steady Income Small Caps - III (subscription required), to know more about these opportunities.

Lastly, the choice is not between small caps or large caps. Smart investing means having a healthy mix of asset classes. And if you are seeking higher returns over three to five years, completely ignoring the small cap space may not be such a good idea.