Stocks
Nifty, Sensex buck the weakness, head higher – Weekly closing report
We had mentioned in last week’s closing report that Nifty, Sensex were looking weak. The major indices of the Indian stock exchanges made good gains over the week including hitting their new 52-week highs. The trends of the major indices in the course of the week’s trading are given in the table below:
 
 
Indian equity markets traded flat during the mid-afternoon session on Monday prompted by mixed global cues and lower crude oil prices. Selling pressure was witnessed in information technology (IT), healthcare and banking stocks. The BSE market breadth was tilted in favour of the bears -- with 1,465 declines and 1,216 advances. On the NSE, on Monday, there were 636 advances, 821 declines and 69 unchanged. State-run Rural Electrification Corporation (REC) on Sunday said it will seek the approval of its shareholders on September 21 for raising Rs50,000 crore through non-convertible debentures (NCDs). The company’s shares closed at Rs227.30, down 1.37% on the BSE, on Monday.
 
On Tuesday the markets were buoyed on strong buying support across sectors, coupled with positive global cues during the mid-afternoon session on Tuesday. In fact, almost the entire gain of the week came on Tuesday. Healthy buying was witnessed in automobile, banking and healthcare stocks. The BSE market breadth was skewed in favour of the bulls -- with 1,631 advances and 1,081 declines. On the NSE, on Tuesday, there were 891 advances, 491 declines and 81 unchanged. Pointing to solid growth in household spending and a strengthening job market, Yellen said the US economy is "now nearing" the Fed's statutory goals of maximum employment and price stability. Analysts said it's possible for the Fed to hike interest rates as soon as September.
 
The government in India on Tuesday announced to issue the fifth tranche of Sovereign Gold Bonds, the subscription of which will be open from September 1-9. The Bonds will be issued on September 23.  The Sovereign Gold Bond, a financial asset, was launched by the government last year as an alternative to purchasing the metal gold. Accordingly, four tranches of issuances have been undertaken during 2015-16 and 2016-17 so far.
 
On Wednesday, Nifty and Sensex hit their new 52-week highs again. The benchmark indices initially opened on a flat-to-positive note on Wednesday prompted by mixed cues from Asian and European markets. Market awaited the announcement of the gross domestic product (GDP) data for the first quarter of 2016-17, among others. The indices marginally capped gains due to a sharp up-move in the dollar index and lower crude oil prices and pulled the markets back from their morning peak levels. However, gains in the rupee's value kept the market sentiment buoyed to close with appreciable gains.
 
Following the big ticket announcement by Reliance Industries on Jio commercial launch, key Indian stock market indices were trading flat on Thursday afternoon. Most telecom stocks were trading lower. Selling pressure was seen in telecom, technology, media and entertainment (TECK) and realty sectors, while good buying was observed in auto, metal and fast moving consumer goods (FMCG) sectors. On the NSE, on Thursday, there were 479 advances, 993 declines and 50 unchanged.
 
Taking the tariff war and competition in Indian telecom a new level, Reliance Industries Chairman Mukesh Ambani on Thursday said domestic voice calls on the Jio network will be free forever, and unveiled a four-month introductory offer of free voice and data services. "The era of paying for voice calls is ending," Ambani told the Annual General Meeting of Reliance Industries (RIL) in Mumbai. "No Jio customer will ever have to pay for voice calls again," he added. Bharti Airtel shares closed at Rs310.50, down 6.43% on the BSE. Reliance Industries shares closed at Rs1,029.15, down 2.73% on the BSE.
 
On Friday, the major indices of the Indian stock markets staged a minor rally to close with small gains of around 0.40% over Thursday’s close. With NSE trading volumes on the lower side on Friday, investors were clearly cautious before the week-end and market holiday on Monday. On Friday, there was also a general strike called by the Leftists all over India; but the response to the strike call was at a minimum in most parts of the country. 

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Reliance Jio launch: Ind-Ra cuts outlook on telecom sector
India Ratings and Research (Ind-Ra) has revised its outlook for FY17 the telecommunications services sector to stable-to-negative from stable. The agency expects launch of Reliance Jio Infocomm Ltd (RJio)'s service to intensify competition, which will squeeze the market share, earnings before interest, taxes, depreciation and amortisation (EBITDA) margins and credit metrics of incumbents. Ind-Ra expects voice revenue to moderate in FY17 on stagnant minutes of usage (MoU) and further competition in call realisations.
 
"A stable sector outlook could result from a lower-than-expected moderation in industry profitability after the RJio launch so that the financial profiles remain healthy to sustain capex requirements. Highly competitive biddings to acquire spectrum in upcoming auctions thereby impacting operators’ debt profiles could lead to revising the sector outlook to negative," Ind-Ra says in a research report.
 
The ratings agency says it sees voice realisation moderating and strong competition impacting data average revenue per user (ARPU) for telecom companies post RJio launch. Ind-Ra also expects data revenue to remain stagnant on a 30%-40% decline in data realisations per megabyte (MB) in FY17 driven by RJio’s launch, while support from data consumption growth to data ARPU will be gradual. "The operators’ debt profile will deteriorate in FY17 as we expect them to incur high capex on network expansion and acquisition of additional spectrum through trading largely to compete with RJio," it added.
 
According to Ind-Ra, RJio incurred aggregate pre-launch capex of around $15 billion or Rs98,000 crore signifying the magnitude of its potential reach and capabilities. It also expects RJio to contend for market share out of the existing pie of subscribers, which are being serviced by incumbent operators.
 
In effect, the announcements from Reliance Industries Ltd (RIL) Chairman Mukesh Ambani on Thursday point to a commercial launch from 1 January 2017 even though no specific mention was made in this regard. This was also keenly awaited since Reliance Industries has invested as much as $21 billion on Jio -- its largest ever capital expenditure on a single project.
 
Taking the current tariff war and competition in India's telecom space to a new level, the RIL Chairman announced that domestic voice calls on the Jio network will be free forever. "The era of paying for voice calls is ending," Ambani told the 39th Annual General Meeting of the company, post its listing. "No Jio customer will ever have to pay for voice calls again." he added, devoting around an hour of his 90 minute speech to Jio.
 
The announcements came against the backdrop of a series of discounts and freebies offered by existing layers like Airtel, Vodafone and Idea during the past month, ostensibly to ensure customers stay with them, even after the commercial launch of Jio.
 
 
Ind-Ra says it sees voice revenue to decline in FY17 due to market maturity and competitive pricing. "MoU and voice revenue are flattish as the voice market has matured. Airtel and Idea reduced voice tariffs by 8%-10% over 2015 in order to arrest declining MoU and to counter competition. Voice also faces threat from data cannibalization; however, we expect it to be a credible risk only in the medium term," it added.
 
Data tariffs to see a major correction
Following the launch of RJio, there will be a major correction in data tariff, while the benefits from higher data volumes as well as subscriber growth will be back-ended. 
 
 
During the third quarter of FY16, data realisations per MB for the top two listed entities Bharti Airtel Ltd (Airtel) and Idea Cellular Ltd (Idea) declined by 4.5%-5.5% quarter-on-quarter (qoq). Ind-Ra says it believes this price decline was in anticipation of the RJio launch, and therefore expects a further softening of data tariffs in FY17. "An 8%-10% qoq growth in data volumes consumption shall not be sufficient to support data ARPUs which shall therefore moderate in FY17," it added.
 
Higher Capex to Subdue Credit Metrics
Ind-Ra says it expects the credit metrics of incumbent operators to stretch in FY17. 
 
 
"They are likely to increase investments in FY17 to upgrade, install and augment network capability sensing a long-term opportunity in broadband and threat from RJio. While the operators would upgrade their infrastructure to meet data requirement, they would also be required to install infrastructure to roll out newer technologies. They shall also follow debt-driven acquisitions of further spectrum to augment their holdings," the ratings agency says.
 
Spectrum-Driven Consolidation
According to Ind-Ra, spectrum will drive consolidation in the sector in line with the long-term roll-out plans of these operators. It says, "The recent guidelines allowing spectrum sharing and trading transactions within industry participants is a positive move for the sector as smaller players will be able to monetise their spectrum assets while bigger players enhance their spectrum holdings. A few spectrum trading deals were reported in FY16 which will gain momentum in FY17."
 

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COMMENTS

ramprasath l.a

6 months ago

First I enjoy with gadgets

ramprasath l.a

6 months ago

First I enjoy with gadgets

Nanda Patel

6 months ago

moral of the story..

time to exit from all Telcom stocks if you have not already...

As savings continue to decline, does India need a rate hike?
India’s savings rate is declining. The private sector, including households and corporates are the main driver of total savings, while the public sector has been a drag. Within the private sector, households are the main source of savings. This component has, however, emerged as a key drain, with its share in total savings falling to 60% in FY2014-2015 from 70% four years earlier. 
 
In a report, DBS Bank Ltd, says, "The fall in savings needs to be arrested given India’s investment needs. Relying on foreign savings puts pressure on the current account and the returns from that investment go abroad as well. Corrective measures are underway to lift savings and investment, but a quick turnaround is unlikely."
 
There is a combination of factors are behind this slowdown, the report says adding, low incomes are one, which along with extended periods of high inflation, pushed households to set aside a bigger proportion of incomes for consumption, thus impinging on savings. Not surprisingly, household savings now make less than a quarter of their disposable incomes, from above 30% earlier, it added.
 
 
DBS says, besides incomes, interest rates, inflation and demographics also drive household savings. Even though India’s demographics are amongst the most favourable in the region, years of high inflation and negative real rates have dented savings.
 
While interest rates were raised in response to high inflation in 2011-13, real deposit rates were still negative (see chart below). Back then, wholesale price index (WPI) inflation was a policy target, rather than a much elevated consumer price index (CPI) inflation, which meant real deposit rates were deeper in red and for longer, than earlier understood.
 
 
In addition to falling households’ savings, DBS says, its composition is imbalanced. In 2012-13, two-thirds of household savings comprised of physical assets like gold and property. This was driven by a need to offset inflation, though it led to a ballooning current account deficit (CAD) driven by gold imports. Not only did this hurt the current account, it lowered investment into the real economy. 
 
"More recently, some of this imbalance has corrected, but physical assets continue to dominate the savings mix. The marginal increase in financial savings has also been concentrated in shares and debentures, insurance and retirement funds rather than bank deposits," the report says. (See chart below)
 
 
According to the research note, India's savings rate is caught in a cyclical rather than structural slowdown. It says, "Unlike much of Asia where rising incomes have been accompanied by a fall in savings, India’s per capita gross domestic product (GDP) is still amongst the lowest in the region. Despite this level of incomes, savings have been falling (See chart below).
 
 
"We reckon this is more a function of low incomes, tough economic conditions, falling real returns and high inflation, rather than structural impediments of a rising dependency ratio or a fall in working age population," DBS Bank says.
 
The report endorses demographics as one of India's key strengths. It says, "While Japan, China and many Western countries grapple with ageing populations, India’s dependency ratio is declining. The working age group (15-64 years) makes up close to two-thirds of the overall population. Growth in the working age population will exceed overall population growth for at least two more decades, pointing to a sustained fall in the dependency ratio. Although structural tailwinds are in place, the savings rate continues to stagnate, pointing to cyclical hurdles."
 
 
In the near-term, DBS says, Indian authorities need to continue encouraging households’ to shift from physical savings to financial avenues. "This is important not only to meet investment spending needs, but also ensure efficient savings for growth and limit external imbalances," it added.
 
On policy, the report says, further significant rate cuts are thereby unlikely in the interest of maintaining positive real and nominal deposit rates. IT says, "We look for 25 basis points (bps) cut in December, before rates plateau, contingent on sharp disinflation to or below 5% and dovish monetary policy committee."
 
"Further out, concerted efforts to lift incomes and job creation are crucial structural tailwinds to lift the savings rate. Work is in progress on this front, under the government’s ‘Make in India’ initiative, skills development, ensuring education access and improving the ease of doing business. Until the domestic private sector is able to pick the baton, we expect public sector and foreign direct investments to drive the initial part of the capex cycle," the report from DBS concluded.

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