Stocks
Nifty, Sensex looking weak – Weekly closing report

We had mentioned in last week’s closing report that Nifty, Sensex were stalling on lower volumes. The major indices of the Indian stock markets were trading through the week on a flat-to-bearish note and closed the week with losses of around 1% over last Friday’s close. The trends of the major indices in the course of the week’s trading are given in the table below:

On Monday, key equity indices traded in the red, as selling pressure was witnessed in automobile, information technology (IT) and healthcare stocks. The BSE market breadth was slightly tilted in favour of the bears -- with 1,463 declines and 1,254 advances and 202 unchanged. On the NSE, on Monday, there were 702 advances, 889 declines and 264 unchanged. The indices opened on a flat note with a slightly negative bias following cues from negative Asian markets. The markets also traded with apprehension as caution prevailed ahead of a speech by Federal Reserve Chair Janet Yellen later in the week. Further, investors were seen cautious after government's decision on Saturday to appoint economist and banker Urjit R Patel as the next Governor of the Reserve Bank of India (RBI). Moreover, a weak rupee and lower crude oil prices also dented investors' sentiments.
 
The benchmarks traded lower during the mid-afternoon session on Tuesday as mixed global cues and lower crude oil prices subdued investors' sentiments. Selling pressure was witnessed in capital goods and oil and gas stocks. The BSE market breadth was minimally tilted in favour of the bears -- with 1,358 declines and 1,313 advances. On the NSE, on Tuesday, there were 678 advances, 785 declines and 77 unchanged.
 
On Tuesday, the benchmark the indices opened on a flat-to-negative note on the back of lower Asian and US markets, although the European markets closed higher. The markets also traded with apprehension as caution prevailed ahead of a speech by Federal Reserve Chair Janet Yellen later in the week. Investors were vigilant of a possible interest rate hike in the US as this can potentially lead FPIs (Foreign Portfolio Investors) away from emerging markets such as India. In addition, lower crude oil prices led the key indices to cap gains. Also, the foreign institutional investors were net sellers for the first time in August.
 
Mixed global cues and lower crude oil prices led the key Indian indices to trade on a flat note during the mid-afternoon session on Wednesday. Selling pressure was seen in capital goods, banking and metal stocks. The BSE market breadth was marginally tilted in favour of the bulls -- with 1,540 advances and 1,171 declines and 202 unchanged. On the NSE, on Wednesday, there were 929 advances, 648 declines and 276 unchanged.
 
On Wednesday, the benchmark indices opened on a flat note on the back of negative Asian and European markets, and slightly positive US markets. Investors were also watchful of the negotiations for amendments in a tax treaty between India and Singapore. In addition, caution prevailed in the markets ahead of futures and options (F&O) expiry on Thursday and hampered the upward trajectory. Moreover, apprehension of a possible interest rate hike in the US following Fed Reserve Chair Janet Yellen's speech later during the week, and lower crude oil prices led the key indices to cap gains. The foreign institutional investors (FII) continue to be net sellers during the week.
 
The markets were subdued during the mid-afternoon session on Thursday as volatility was induced by futures and options (F&O) expiry, coupled with negative global cues and the Jackson Hole Summit, where US Fed Chairman Janet Yellen was due to speak. Consequently, the key indices traded in the red, as selling pressure was seen in information technology (IT), automobile and metal stocks. The BSE market breadth was tilted in favour of the bears -- with 1,467 declines and 1,233 advances. On the NSE, on Thursday, there were 543 advances, 835 declines and 57 unchanged. 
 
On Friday, the indices were range-bound and closed with small losses over Thursday’s close, ahead of US Fed Reserve Chair's speech, coupled with lower crude oil prices. Selling pressure was seen in capital goods, banking and information technology (IT) stocks.
 

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Is MHCV sales cycle headed lower?
The decline in the year on year sales growth in the medium and heavy commercial vehicles (MHCV) segment in June-July 2016 is a digression of the trend observed previously, says India Ratings and Research (Ind-Ra). The agency says it believes that persistence in the slowdown in MHCV volumes in the next two to three months could point towards a change in the MHCV cycle.  
 
It said, "Historically, MHCV sales display a high degree of seasonality, with weak sales in the month of December due to the preference of buyers to purchase vehicles bearing the registration number of the next year (for better pricing in the second hand market), followed by a steady uptick in volumes in the following three months, namely January-March. Sales tend to peak around the month of March every year, as fleet owners increase purchases in fourth quarter to avail of depreciation benefits and use up their budgets and auto original equipment manufacturers (OEMs) push sales to their dealers to achieve annual sales targets."
 
Naturally, the month of April each year registers the lowest sales due to sales peaking in March. However in May, June and July sales volume start their upward trend again. "It may be noted that in 2016, the sales volume growth from June onwards has been muted. For June 2016, on a year on year basis, the volume growth slowed to 1.9% compared to the growth of 21% in June 2015, while for July 2016 volumes contracted by 7.6% compared to growth of 30% in July 2015."
 
Ind-Ra says it will be closely monitoring MHCV domestic sales volumes for the next few months, as it believes that a steadily declining trend would possible indicate a reversal of the sales trend in this segment.  
 
Ind-Ra had earlier highlighted that auto sales in FY17 will be driven by the MHCV segment. In January 2016, Ind-Ra had estimated MHCV volumes to grow by 12%-15% year-on-year (yoy) in FY17 driven by demand for high tonnage vehicles to achieve cost efficiency in operations and replacement demand of old vehicles. 
 
The ratings agency says, the upturn in the MHCV cycle began around January 2014. The yoy growth was very strong at 30% in FY16 and 16% in FY15. "As per our assessment, the growth is attributed to pent up demand, some pre-emptive purchases in August-September 2015 (due to new safety features being made compulsory from October 2015 - which increased prices) and improved cash flows of fleet operators due to the decline in diesel prices and the entire decrease not being passed on to clients. Another factor possibly supporting MHCV sales is the uptick in mining and the increase in infrastructure spending by the government in FY16/FY17, compared with previous years," it said.
 
According to Ind-Ra, consistent demand had been witnessed in FY15 and FY16 in the higher tonnage segment of MHCVs (above 25T) typically used for long haul - fleet owners seem to be intent on reducing their per ton transportation costs by taking advantage of better road infrastructure in the country. The data compiled by Society of Indian Automotive Manufacturers (SIAM) for June and July 2016 indicates a decline of 9.2% and 24.9% respectively, in this segment in these two months.  
 
The surge in the demand for MHCVs witnessed in the past two years is not corroborated by the Index of Industrial Production (IIP), which has displayed an inconsistent trend in this period. Growth figures for MHCVs is also not supported by data on foreign direct investments in the country, with the major proportion of investments by foreign institutional investors (FIIs) in FY16 having been in the services sector, rather than in manufacturing. 
 
In addition, growth in the gross fixed capital formation, which is an indicator of an uptick in economic activity, has been tapering down in the past three years (FY16:3.3%, FY15: 7.9%, FY14: 13.6%). Further, capacity utilisations across industries have not improved, even growth in exports while positive, continue to be tepid. In addition, freight rates after declining towards the end of FY15 have remained flat in FY16, with a slight increase in certain sectors in the current financial year, the ratings agency added.
 

 

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Masala bonds can spice up banks' access to capital: Fitch, Moody's
The Reserve Bank of India's (RBI) proposal to allow banks to raise additional tier-1 and -2 capital by issuing masala bonds would ease access to capital, global credit rating agencies Fitch Ratings and Moody's Investor Service said on Friday.
 
Masala bonds are rupee-denominated bonds issued in offshore capital markets.
 
According to Fitch Ratings, the masala bonds would widen the investor pool as the domestic investor pool is limited in size given the scale of capital needed by the banks.
 
"Fitch estimates a capital shortfall of $90 billion over the next several years as Basel-III regulatory requirements build from the financial year 2017 (FY17) to FY19," the rating agency said in a statement.
 
Moody's said the rupee-denominated bonds overseas was a credit-positive measure for the Indian banks as it will help create an alternative funding source.
 
Moody's expected only well-rated and well-managed banks will be able to tap the international market for such issuance while relatively weaker banks will have to depend on the Indian government for their capital needs.
 
The RBI's proposal came as part of a series of measures pertaining to India's fixed-income and currency markets announced on Thursday.
 
According to Fitch, Indian banks would find it challenging to raise sufficient additional tier-1 capital through the domestic markets.
 
This is the case even as most of the capital needed will be required to be denominated in rupee owing to the currency structure of most banks' balance sheets, the rating agency said.
 
"As such, enabling banks to issue masala bonds opens a window to a much larger investment pool while simultaneously addressing the problem of currency mismatches which had existed with previous international bond issues," Fitch said.
 
According to the rating agency, the masala bonds market remains in its infancy and corporates like HDFC and NTPC raised funds issuing such bonds this year.
 
"As such, the extent to which banks will be able to use the masala bonds channel to raise capital remains to be seen, and will depend to a large extent on the foreign investors' risk appetite and pricing," Fitch added.
 
According to Moody's, the Indian central bank's new guidelines on corporate bond issuance will enhance liquidity in the bond market though at present corporate bond market amounts to around 31 per cent of total corporate credit.
 
"Based on the financial performance of these banks for the year ended March 31, 2016, our analysis suggests that the external capital requirements for the 11 public sector banks that Moody's rates totals about Rs 1.2 trillion -- a figure which far exceeds the remaining Rs 450 billion included in the government's budget for capital distribution to the banks until 2020," Moody's said.
 
Moody's expected RBI to announce measures that would develop the bond market addressing issues like bank-dominated financial system -- investment mandates of institutional investors do not permit large investments in corporate bonds -- and the lack of functional trading systems for bonds.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  

 

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