If the Nifty holds above the day’s low, we may see a sideways move. However, the market trend is still down
A sell-off in oil & gas, power and consumer durables stocks and weak global cues led the market down today. If the Nifty holds above the day’s low, we may see a sideways move. However, the market trend is still down. The National Stock Exchange (NSE) reported a lower volume of 49.74 crore shares and advance-decline ratio of 584:793.
The market opened in the positive on support from Infosys, which continued to rally for the second day after the company’s board on Saturday reappointed NR Narayana Murthy as the executive chairman. On the other hand, the Asian pack was mostly lower on news of a contraction in Chinese HSBC Manufacturing PMI.
The Nifty opened 11 points higher at 5,997 and the Sensex started the day at 19,859, a gain of 99 points over its previous close. The gains in the IT sector helped the benchmarks hit their intraday highs in initial trade itself. The Nifty touched 6,011 and the Sensex inched up to 19,860 at their respective highs.
The benchmarks remained near their previous closing levels in the first hour of trade and trended lower on selling pressure from the auto and power sectors. The HSBC Manufacturing PMI coming in at a 50- month low of 50.1 for May also weighed on investors.
Barring IT and technology, all other sectoral gauges were in the red in late morning trade. Global cues remained weak in the noon session as markets in Asia were in the negative and the key European markets opened with sharp cuts on Chinese concerns and fears that the US Federal Reserve will taper its bond buying programme.
The market continued its southbound journey in the second session of trade on concerns about the pace of domestic economic growth. The Sensex fell to its lows shortly after 2.00pm with the index at 19,542 while the Nifty’s low came in at around 2.15pm as the index touched 5,916.
The benchmarks settled off the lows, but down for the second consecutive day. The Nifty closed 47 points (0.78%) down at 5,939 and the Sensex finished trade at 19,610, a decline of 150 points (0.76%).
The broader indices finished mixed as the BSE Mid-cap index gained 0.26% and the BSE Small-cap index fell 0.12%.
The sectoral gainers were BSE TECk (up 1.11%); BSE IT (up 1.01%); BSE Metal (up 0.38%) and BSE Realty (up 0.33%). The main losers were BSE Oil & Gas (down 1.84%); BSE Power (down 1.02%); BSE Consumer Durables, BSE Capital Goods (down 0.99% each) and BSE Auto (down 0.84%).
Out of the 30 stocks on the Sensex, 10 settled higher. The top gainers were Infosys (up 4.42%); Jindal Steel & Power (up 1.64%); GAIL India (up 1.42%) and State Bank of India (up 1.07%). The major losers were Hero MotoCorp (down 3.65%); Bajaj Auto (down 3.32%); ONGC (down 2.85%); Sun Pharmaceutical Industries (down 2.68%) and HDFC (down 2.40%).
The top two A Group gainers on the BSE were—CRISIL (up 20%) and GlaxoSmithKline Pharmaceuticals (up 6.15%).
The top two A Group losers on the BSE were—Suzlon Energy (down 9.96%) and Jaypee Infratech (down 6.99%).
The top two B Group gainers on the BSE were—Anjani Portland (down 19.89%) and Tirupati Inks (down 19.97%).
The top two B Group losers on the BSE were—Williamson Financial Services (down 19.50%) and Eskay Knit India (down 19.05%).
Of the 50 stocks on the Nifty, 17 ended in the in the green. The main gainers were Infosys (up 4%); Lupin (up 2.35%); Reliance Infrastructure (up 2.26%); JSPL (up 2.13%) and Tata Steel (up 1.97%). The key losers were ONGC (down 3.51%); Asian Paints (down Bajaj Auto (down 3.32%); Hero MotoCorp (down 3.30%) and Ranbaxy (down 3.29%).
Markets across Asia settled lower as China's HSBC’s Purchasing Manager's Index (PMI) fell to 49.2 for the month of May, below the 50-mark that separates expansion from contraction. An improvement in the growth outlook in the US re-ignited concerns of the Federal Reserve tapering its bond-buying programme, which also weighed on investors’ sentiments.
The Shanghai Composite shed 0.06%; the Hang Seng declined 0.49%; the Jakarta Composite tanked 1.92%); the KLSE Composite fell 0.16%; the Nikkei 225 tumbled 3.72%; the Straits Times dropped 0.61%; the Seoul Composite lost 0.57% and the Taiwan Weighted settled 0.65% down.
At the time of writing, two of the three the key European indices were in the red while the US stock futures were in the green, indicating a firm opening for US stocks later in the day.
Back home, foreign institutional investors were net sellers of equities totalling Rs504.02 crore on Friday whereas domestic institutional investors were net buyers of stocks worth Rs203.11 crore.
Pharmaceutical major Dr Reddy’s Laboratories and Fujifilm Corporation today said they have decided to terminate the memorandum of understanding (MoU) to enter into an exclusive partnership in the generic drugs business for the Japanese market and to establish a joint venture in Japan. Though the MoU for generic drugs has been cancelled, both the companies will explore partnerships in other related areas, said a statement issued by DRL. The stock gained 1.10% to close at Rs2,115 on the NSE.
Speciality steel and wire rope maker Usha Martin has signed a technical assistance agreement with Aichi Steel Corporation (ASC), a leading speciality steel and forging company of Japan. The deal aims to improve Usha Martin’s production efficiencies and utilise its facilities to produce higher value steel products. The stock surged 2.16% to close at Rs23.60 on the NSE.
Mumbai-based Welspun Corp today said it has demerged Welspun Infra Enterprises from Welspun Corp and renamed it as Welspun Enterprises. The demerged firm will focus on steel, infrastructure, oil and gas exploration and energy. The existing company Welspun Corp will solely focus on pipes and plates business in India and globally, it said in a release. Welspun Corp advanced 4.07% to close at Rs47.30 on the NSE.
Investors' faith in several richly valued stocks in the banking, consumer staples and pharmaceutical sectors will be tested, says Kotak Securities in a research note, since it foresees weak economic growth, weak investment cycle and anaemic job creation
Notwithstanding decent results in the March quarter, valuations of good-quality companies have become quite expensive, propelled by the market's view of low cost of capital in perpetuity. While potential withdrawal of monetary stimulus programs by global banks may coincide with potentially higher political uncertainty closer to India's general elections in early 2014, the market may react earlier as global currency and bond markets are flashing some warning signs, says Kotak Institutional Equities Research.
According the report, 4Q FY13 adjusted net profits of the BSE-30 Index grew 8.2% year-on-year (y-o-y) with automobiles, metals and mining stocks surprising positively. Coal India, Hero MotoCorp, ITC, Maruti Suzuki India, Mahindra and Mahindra (M&M), ONGC, Tata Motors and Tata Steel surprised while cement, consumer and telecom sectors disappointed significantly at the net income level during the March quarter.
However, according to Kotak research, the market's view on cost of equity over the next few months will determine whether valuations of fancied stocks sustain at elevated levels or not. The biggest issue for global equity markets and in turn, for Indian equity market is the potential exit of central banks from their quantitative easing (QE) programs. Low yields and the quest for yields everywhere have resulted in a compression of the required rate of return for investors, resulting in a decline in the acceptable cost of capital or equity, the research report said.
India has benefitted from the large global liquidity and the ensuing global yield compression, which has resulted in the equity market and all types of investors rationalizing much higher multiples for favoured sectors and stocks compared with normal level. “We note that valuations in the Indian market are largely determined by global investors like foreign institutional investors (FIIs) and foreign direct investment (FDI) given large inflows from FIIs and aggressive open offers by multi-national companies (MNCs) to increase their stake in their Indian unit. Even FDI investors have participated in the process with cheap money perhaps fuelling their decisions to increase their shareholding in their Indian subsidiaries at inflated valuations of borrow low and buy moderately higher earnings yield,” the research note added.
Kotak said,”"We do not see the on-going improvement in macro-economic parameters translating into strong economic growth; a weak investment cycle and anaemic job creation will pose challenges for consumption and GDP growth over the next 12-18 months. At 15.5X FY2014E and 13.8X FY2015E ‘EPS’ (free-float basis), the Indian market looks fully valued.”
According to the brokerage, the quality of earnings in Q4 was not very good, once again. This has been the case over the past few quarters and the market seems to be ignoring some of the issues that can be no longer be treated as one-off items. Here are the areas of concern...
Low underlying growth in consumer staples
Volume growth moderated to low-to-high single digits over the past few quarters from mid-to-high- teens growth previously.
High share of other income in the profits of several companies
This is particularly true in the case of consumer staples companies. This raises a rather uncomfortable fact that consumer staples stocks on core earnings are trading at even higher multiples compared with their overall optical multiple.
“We think financial other income should get a multiple of around 15x (inverse of post-tax return on cash) and operating other income a similar 12-15x multiple,” Kotak said.
Amidst growing uncertainty over consumer demand and economic signals, the banking sector continues to grow. While the credit offtake did not grow as expected, earnings too disappointed during the March quarter, says Kotak
The banking sector continues to grow, amidst growing uncertainty over consumer demand and economic signals. Despite the Reserve Bank of India’s (RBI) decision to cut repo rates in January, credit offtake did not grow as anticipated. Most importantly, earnings disappointed too. It grew only 6% year-on-year (y-o-y) according to Kotak Institutional Equities (Kotak) research report.
Kotak said, “Our cautious outlook remains on the (banking) sector. While growth moderates, buoyant net interest margins (NIMs) due to a sharp decline in interest rates will drive NBFC earnings.”
The earnings growth has disappointed this season, which prompted many investors to take a cautious approach to investing in the financial sector, especially banking. Earnings grew just 6% y-o-y, which meant Kotak has taken a subdued forecast of banking. One of the pertinent issues, which Moneylife has talked about in the past (Public sector banks - Loans turning bad), is the issue of non-performing assets (NPAs) that could endanger the financial system and spill over to the real economy. Kotak said, “Earnings growth is likely to be subdued at 10% CAGR over FY2013-15E due to slower revenue growth (less than15% CAGR), increase in cost-structure and elevated provisioning costs for dynamic provisions, improvement in coverage ratio and NPL/restructured loans.”
The integrity of banks balance sheet is felt more in public sector banks than private banks. “The divergence in operating performance (earnings, revenue and loan impairment) continued between public and private banks,” Kotak said in its report. According to the report, overall cost-income ratio increased to 48% from 45% in 4QFY13 for public banks while private banks reported a modest increase to 44% from 43% in December 2012.
More important is how bad loans have affected the balance sheet of banks. Kotak said, “The next leg of loan impairment being likely to emerge in the large corporate portfolio as balance sheets of these companies show a high degree of stress.” Most private banks reported slippages of between 0.9% and 1.5% of loans. Indian Overseas Bank saw 5% in slippages, while Punjab National Bank (4%), Andhra Bank (4%) and Oriental Bank of Commerce (3%). “Overall slippages were marginally lower at 2.6% of loans with slippages primarily from the SME and large corporate portfolio. Most banks continue to report better performance in the agriculture and retail portfolios—a key comfort,” said Kotak. It is pertinent to keep an eye on how the monsoon is this year even if forecasts remain optimistic, as agriculture sector largely depends on it.
When a loan is likely, or is estimated, to go bad, banks usually restructure it. When the incidence of restructuring is high, it is time to worry. The Kotak report said, “Credit costs were at elevated levels to factor the revised restructured guidelines and write-offs. Fresh restructuring was high but the new guidelines helped to show a decline in outstanding restructured loans.” Even though restructuring can be negative over the short run, it could prove beneficial in the long run as balance sheet is gradually rid of toxic loans.|
More worryingly, the overall banks’ deposit base is found to be shrinking. One of the important parts of a bank’s business model is the deposit base. This is because this is the source of income for banks to lend to others (albeit at a higher rate) and make profit on the differential. When it is shrinking, they have less to loan out. Despite the Reserve Bank of India’s (RBI) cut in repo rate in January (and subsequently again in May) credit off take did not take off as anticipated.
However, on the brighter side, Kotak is optimistic on the prospects of some NBFCs, mainly because of increased credit off take and decline in interest rates. The report said, “We believe a sharp decline in interest rates in the bond markets over the past two months will drive earnings over the next few quarters even as loan growth will moderate and NPLs rise. We raise our target price by 1%-3% to roll over to June 2014 (rolling 12 months).” Credit off take in this sector is, surprisingly, strong, growing between 16%-37%. However, an auto and infrastructure slowdown could stymie NBFC growth, according to Kotak. Bad loans continue to be an issue for NBFCs though, with Kotak stating: “With improvement in collections in 4QFY13, several NBFCs reported a sequential decline in NPAs. However, on a yoy basis, NPL increased for several players.” Amongst NBFCs, Kotak is optimistic on IDFC, LIC Housing Finance, Magma Fincorp and Bajaj Finserv.
Amongst non-NBFCs, it likes ICICI Bank and SBI. The report said, “Among private banks, we like ICICI Bank (steady growth, strong CASA and high tier-1 ratio) and maintain our negative view on HDFC Bank (expensive valuation). Among public banks, we like SBI but note that earnings/growth performance in the current quarter is discomforting.”