Sensex Finishes Flat; Metal & Auto Stocks Drag

Indian share markets finished the week on a flat note with positive bias amid mixed global markets. At the closing bell, the BSE Sensex stood higher by 53 points, while the NSE Nifty finished up by 15 points. Meanwhile, the S&P BSE Mid Cap & the S&P BSE Small Cap finished up by 0.2% and 0.5% respectively. Gains were largely seen in realty and banking stocks.

Asian markets finished mixed as of the most recent closing prices. The Nikkei 225 gained 1.23% and the Shanghai Composite rose 0.54%. The Hang Seng lost 0.44%. European markets too are mixed today. The CAC 40 is up 0.17% while the FTSE 100 gains 0.12%. The DAX is off 0.17%.

The rupee was trading at 67.58 against the US$ in the afternoon session. Oil prices were trading at US$ 51.19 at the time of writing.

According to a leading financial daily, the government has accepted that the US$48 billion target for textiles and garment exports for 2016-17, may be hard to achieve due to less demand in major markets like the US, EU and China. During 2015-16, the overall export of textiles and garments from India was US$40 billion, which was below the target of US$47.5 billion. Union Textiles Minister Smriti Irani conceded that despite various efforts by the government, it will be difficult to achieve the target for the fiscal.

Highlighting the measures taken by the government to attain the export goal, Textiles Minister Smriti Irani said that to promote exports in garments sector, a special package of incentives was announced in June this year which includes relaxation in certain labour laws, income tax concession, and 100% employer's contribution to EPFO by government, rebate of state levies for exports, etc.

Irani further said that the government implements various export promotion schemes to promote exports of all the segments in the sector on a sustained basis. These include, Interest Equalisation Scheme, Merchandise Exports from India Scheme, Market Access Initiative, Market Development Assistance and Duty Drawback.

The chart below shows the value of the leading 10 textile exporters worldwide in 2015, by country. In that year, China was the top ranked global textile exporter with a value of approximately 109 billion U.S. dollars, followed by European Union (Comprising 28 Countries).

Value of Leading Textile Exporters Worldwide

Moving on to news from stocks in steel sector. As per an article in The Livemint, Steel Authority of India Limited (SAIL) reported a decline in standalone net loss at Rs 7.30 billion for the quarter ended September 30, helped by a strong marketing push and cost optimization measures. The company had posted a net loss of Rs. 11.08 billion in the year-ago period.

Total standalone income of the company rose by 21% to Rs 125.77 billion in July-September quarter this fiscal from Rs 103.78 billion during the same quarter in 2015-16.

SAIL joins Tata Steel Ltd in posting a negative result for the period partly on weaker product prices and as Tata's operations in the UK remained a drag on earnings, while the nation's second-largest producer JSW Steel Ltd reported a third straight profit on record output.

India has tightened curbs on cheaper imports from countries including China as domestic mills ramp up production on expectations that Prime Minister Narendra Modi will boost spending on infrastructure, roads and power.

Indian Steel Sector contributed 2% to overall Gross Domestic Product of the country during 2015-16. India is close to acquiring the second position in crude steel production if it continues with its current growth rate. According to the latest report of World Steel Association (WSA), India's steel production during January-October 2016 grew by 6.8% to reach 79.5 million tonnes, even as global steel output saw a 0.1% contraction.

SAIL's share price finished the trading day up by 3.2% on the BSE.

Sensex Remain Range bound; ONGC Up 1.1%
01:30 pm

The Indian share markets continue to trade flat with positive bias during the noon trading session tracking mixed cues from global peers. Sectoral indices are trading on a mixed note with realty, banking and FMCG stocks leading the pack of gainers. Whereas, auto and metal stocks heading the losers.

The BSE Sensex is trading higher by 27 points while the NSE Nifty is trading higher by 1 point. The BSE Mid Cap index is trading flat while BSE Small Cap index is trading up by 0.6%. Gold prices, per 10 grams, are trading at Rs 27,764 levels. Silver price, per kilogram is trading at Rs 41,400 levels. Crude oil is trading at Rs 3,463 per barrel. The rupee is trading at 67.43 to the US$.

Energy stocks are trading on a mixed note with Indraprastha Gas and Gujarat Gas Ltd leading the gains. According to an article in The Economic Times, Praj Industries said it had entered into agreements with Indian Oil Corporation (IOC) and Bharat Petroleum Corporation Ltd (BPCL) to set up bio-ethanol plants that will convert agricultural waste into fuel. The company said it signed a binding agreement of cost sharing with IOC to set up one plant each at Panipat, Haryana and Dahej, Gujarat.

Reportedly, these second-generation (2G) bio-ethanol plants will have capacity to produce 100 Kilo litres of ethanol per day. This is a milestone in progress as per MoU signed earlier this year. Wherein IOC selected Praj Industries as its technology partner for setting up multiple 2G bio-ethanol plants based on its indigenously developed technology.

These agreements were executed on the side-lines of recently concluded Petrotech 2016. Second Generation bio-ethanol technology uses ligno-cellulosic biomass (agri-residue) as feedstock. Farming community is expected to be benefited from additional revenues from agri-waste. Moreover, 2G bio-ethanol also helps reduce dependency on the imported crude oil, thereby saving foreign exchange.

Moving on to the news from stocks in power sector. In spite of tepid sales and revenue, shares of most power utilities rose after the September quarter results.

Following the demand slowdown, power generation growth slowed from 9% in June quarter to around 1% in September quarter. Moreover, compared with the BSE 500 index's loss of 4%, the BSE utilities index gained 5% in the earnings season of October and November.

After strong growth in the first half of 2016, power generation growth has slowed down in recent months.

Power Generation Growth Losing Steam

Notably, power generation in the country recorded a growth of 6.5% in September quarter this fiscal at 632.11 billion units (BU) compared to year ago period.

The effect of same can be seen on major power utilities. Generation at NTPC is up just 1%. Volumes at Adani Power Ltd are flat. Generation at Reliance Power Ltd was hit by coal feeding problems. Also, Tata Power Co. Ltd, JSW Energy Ltd and hydro power producer NHPC Ltd registered good volume growth.

Reportedly, the subdued power generation, along with changes in accounting norms, weighed on revenue. Besides the generation space, Power Grid Corp. of India Ltd did well. Revenue rose 28.5% on strong performance across divisions.

Overall, barring one or two firms, the performances were largely in line with Street estimates, the reports noted. Vivek Kaul has explained the anomaly in the power sector in an in interesting piece in his Diary - In Power-Surplus India, Why Power-Cuts are Still the Norm

Power stocks are trading mixed with CESC Ltd and Tata Power leading the gains.

Sensex Remains Flat; FMCG Stocks Witness Buying Interest
11:30 am

After opening the day on a flat note, the Indian share markets registered marginal gains and continued to trade near the dotted line. Sectoral indices are trading on a mixed note with stocks in the FMCG sector and IT sector witnessing maximum buying interest. Metal sector stocks are trading in the red.

The BSE Sensex is trading up 59 points (up 0.2%) and the NSE Nifty is trading up 13 points (up 0.2%). 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 67.62 to the US$.

The European Central Bank (ECB) caught attention of global financial markets yesterday by announcing that it would trim asset buys from April next year. The central bank, in its latest monetary policy, said that it would cut its asset purchases to 60 billion euros per month from April. This compares against 80 billion euros' worth of bonds it buys every month at present.

The decision came as a surprise and dashed hopes of an extension of the stimulus at the present pace of 80 billion euros for the next six months.

However, the ECB reserved the right to increase asset purchases again if the euro zone's recovery faltered. Also, ECB president Mario Draghi said that he is not offering an outright winding-down of the programme.

Apart from the above, the ECB kept its interest rates unchanged. By that, the deposit rate stands deep in the negative territory.

The bank also maintained its inflation forecast at 0.2% this year. It raised it slightly to 1.3% next year and said it saw inflation at 1.5% in 2018.

The ECB, in its Financial Stability Review last month, warned of more near-term volatility in global markets. As per the ECB, the risk of an abrupt global market correction has intensified on the back of widespread political uncertainty that poses a threat to banks, stability, and economic growth.

The report stated that elevated geopolitical tensions and heightened political uncertainty amid busy electoral calendars in major advanced economies have the potential to reignite global risk aversion and trigger a major confidence shock.

All of this is happening in the Eurozone. And it's a mess. First came the Grexit saga. Then there was Brexit. Now it's Italexit. The Italy referendum has attracted most of the headlines. Italians voted to reject constitutional reforms. That further led Matteo Renzi to resign as the country's Prime Minister.

While the referendum wasn't about the Eurozone, could Italy be next in line after Britain to exit the Eurozone? If one has to understand the ground realities, dark days could be in store for the Eurozone. As Rahul Shah writes in one of the recent editions of The 5 Minute WrapUp Premium...

  • Youth unemployment has soared over 40% since 2013. GDP growth has been mostly negative since 2008. Even worse, per capita GDP has stagnated since the 1990s. Government debt stands at 133% of GDP (only Greece and Japan are higher). Private debt stands at 117% of GDP.

    Then there are the Italian banks. They are struggling with non-performing loans, the highest in the Eurozone. Contrary to what many believe, Deutsche Bank is not the weakest bank in Europe. It is Italy's third-largest bank, Monte dei Paschi di Siena. It needs five billion euros of new capital and has warned it may have to go out of business if it does not get it.

    Seven other regional banks are also in serious trouble. Apparently, only one bank, Unicredit, is believed to be strong enough to weather this storm.

In short, there is a big crisis brewing within the Eurozone. And this is going to have major consequences for the global financial markets, including the Indian stock markets.

The latest issue of Vivek Kaul's Inner Circle presents an intriguing insight on Italexit from our global team of experts in London and other corners of the world. We strongly recommend you to read it.

Apart from the above developments, market participants are keeping tabs on the OPEC meeting scheduled for today.

Russia and other non-OPEC producers are going to meet with OPEC today to discuss the pace of production cuts. So far, the Organisation of Petroleum Exporting Countries (OPEC) has agreed to a production cut starting January. However, the implementation depends on Russia reliably committing to cut output.

If the decision goes through, it can have negative implications for the Indian economy. Ever since June 2014, the Modi government has received a huge tailwind from falling crude prices. But as crude oil prices start rising, this trend could reverse. Rising crude oil prices will have a pass-through effect on inflation.

Apart from the above, the deal will also have major implications on crude oil producing countries. As far as the threat of oversupply from shale projects is concerned, the breakeven oil price for every US shale oil project is much higher than US$50 per barrel. Even the fiscal breakeven price of oil for major producers is above US$50 per barrel. This can be seen in the chart below:

Oil Price Implications for Major Oil Producers

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

Sensex Opens Flat; Realty Sector Up 0.5%
09:30 am

Asian markets are mixed in morning trade. The Nikkei 225 is up 1.11% while the Hang Seng is down 0.40%. The Shanghai Composite is trading up by 0.43%. Stock markets in Europe and the US closed their previous session on a positive note.

Meanwhile, Indian share markets have opened the day on a firm note. The BSE Sensex is trading higher by 26 points and the NSE Nifty is trading higher by 10 points. Meanwhile, both S&P BSE Mid Cap and S&P BSE Small Cap are trading higher by 0.1% and 0.4% respectively. The rupee is trading at 67.43 against the US$. Gains are largely seen in realty and consumer durables' stocks.

According to an article in The Livemint, government's decision to ban high-value bank notes has depressed demand for commercial vehicles and two-wheelers for the month of November as automobile sales declined for the first time in 11 months.

As per the reports, total sales fell 5.48% during the month, the steepest decline since March 2013. Overall passenger vehicle sales, which include cars, utility vehicles and vans, grew 1.82% to 240,979 units, the slowest since February. Also, medium and heavy commercial vehicle sales declined 13.1%, while sales of light commercial vehicles declined 10.59%. Three-wheeler sales plunged 26%.

In two-wheelers, where most purchases happen through cash payments, sales have taken a massive hit. The auto industry doesn't anymore expect to post double-digit sales growth that it was hoping to achieve this fiscal year.

The auto companies are suspending production for several days to correct inventory as demand is slow and their products are moving out of dealerships at a slower than normal pace.

As per an article in The Economic Times, Mahindra & Mahindra (M&M) likely to shut down all its factories in the last week of December for maintenance. Mahindra is one of the automakers worst hit by demonetisation. Rural India, where cash transactions are high, accounts for a chunk of its sales, especially for the top selling Bolero. It expects December volume to fall as much as 30% from previous expectations.

Meanwhile, sectors whose revenues have been hit the hardest by demonetisation have seen the biggest declines in their stock prices. The worst affected has been real estate.

One Month On, The Biggest Losers of Demonetisation

Its index is down a huge 13%. Consumer durables too have been decimated and is down 11.5% since demonetisation.

Moving on to news from stocks in the pharma sector. According to a leading financial daily, Cipla has received final approval from the United States Food and Drug Administration (USFDA) to market Entecavir tablets. Entecavir tablets are used for the treatment of Hepatitis B infection.

The tablets are generic versions of Bristol-Myers Suibb's Baraclude tablets of the same strength. Baraclude tablets and generic equivalents had US sales of approximately US$ 206 million for the 12-month period ending October 2016.

Cipla's share price opened the trading day up by 0.5% on the BSE.

Meanwhile, ratings agency ICRA stated that Indian pharmaceutical industry will grow at a slower pace due to sluggish growth in the US market, increased competition leading to price erosion in high single digits and generic adoption reaching saturation levels.

The report noted that growth from the US has come down to less than 9% in first half of 2016-17 despite consolidation and currency benefits and going forward, the growth momentum is likely to face further pressure.

Pharma stocks opened the trading day on a firm note with Glenmark Pharma and Strides Shasun leading the gains.

Which Factors Will Move Indian Stock Markets Now?

On Wednesday, the Reserve Bank of India (RBI) surprised everyone by leaving interest rates unchanged. This was surprising given the current state of liquidity in the Indian financial markets.

And Mr Market, who is always in a panicky state, reacted quickly to the news by falling considerably after the announcement. That's the case with him. He trends.

And there is more market drama to come. Many upcoming domestic and global economic developments are gearing up to keep the Indian markets busy in the short-term.

First, we have the OPEC meeting scheduled for today.

Russia and other non-OPEC producers are going to meet with OPEC today to discuss the pace of production cuts. So far, the Organisation of Petroleum Exporting Countries (OPEC) has agreed to a production cut starting January. However, the implementation depends on Russia reliably committing to cut output.

If the decision goes through, it can have negative implications for the Indian economy. Ever since June 2014, the Modi government has received a huge tailwind from falling crude prices. But as crude oil prices start rising, this trend could reverse. Rising crude oil prices will have a pass-through effect on inflation.

Next, we have the Federal Open Market Committee (FOMC) meeting in the upcoming week.

The central bank has signaled a possible rate hike in December as the economy picks up steam. In our view, a rate hike in December by the Fed would have no less an impact on Indian financial markets than it would have in the US. The hike, however small, will lead to a global change in the direction of interest rates. This could mean a pullback of cheap liquidity from emerging markets, including India.

The effect of Italexit can also be felt on Indian markets. The latest issue of Vivek Kaul's Inner Circle explains the fragility of the Eurozone and its impact on Indian investors in vivid detail.

Apart from the above, the cash crunch led by demonetisation can take a heavy toll on the Indian economy. So far, the protracted shortage in money supply has led to a forced slowdown in consumption impacting India Inc. This in turn has put a question mark on economic recovery and pick-up in investments.

In all, the above factors can fuel volatility in Indian stock markets during the short-term.

This begs the question: What can one do to sail safely through such times?

Being Buffett-heads and taking to his advice as fish to water, we think the best way to counter the above volatility is to follow a long-term value investing approach.

As far as our outlook over the long term is concerned, we believe that the benchmark indices can go up as much as 70% in the next two-to-three years.

And Tanushree Banerjee, Equitymaster's co-head of research, recently reaffirmed this claim and stated that the 70% earnings upside extends well beyond Sensex.

Here's a snippet of what she had written,

  • Plenty of blue-chip stocks outside of the Sensex can fetch earnings growth in excess of 15% per year over the next three years. But if earnings were to grow at 15%, and if profit margins were to rise to their ten-year average of 11% from the current 9.6%, an EPS of Rs 100 can become Rs 174 by FY19. Which means an upside of 74%.

Our StockSelect team is already on the lookout for opportunities in such blue-chips. Subscribers can expect recommendations from the StockSelect team, as and when these blue chip stocks offer opportunity to invest.