Sensex, Nifty on a slippery slope: Weekly Market Report

The Nifty is likely to hit 5,950 and maybe head even lower

The market ended lower this week, mainly on macro-economic concerns and a clutch on lower-than-expected third quarter results from corporates. Although the Reserve Bank of India (RBI) announced a 25 basis point cut in repo and CRR rates on 29th January, the central bank cautioned on inflation and the fiscal deficit front. A dip in the January manufacturing output also weighed on investors. Stock specific movement is expected to drive the market in the week ahead as companies continue with the third quarter earnings reports.


The Sensex declined 322 points (1.60%) to 19,781 and the Nifty fell 76 points (1.25%) to close the week at 5,999. The market is on a slippery slope. The Nifty is likely to touch 5,950 and maybe head even lower.


The market ended flat on Monday ahead of the RBI’s quarterly monetary policy review. The central bank’s rate cut did not enthuse investors as concerns about the economy led the benchmarks lower on Tuesday. The volatile market settled higher on Wednesday on late buying in rate-sensitive sectors.


The market edged lower on Thursday as the government revised the economic growth for fiscal 2011-12 to 6.2% from the earlier estimate of 6.5% and weak global cues. The market closed lower on Friday on a fall in India’s manufacturing output in January and weak corporate results of Bharti Airtel and BHEL, among others.


BSE Consumer Durables and BSE Fast Moving Consumer Goods (up 2% each) were the top sectoral gainers while BSE Capital Goods (down 3%) and BSE Oil & Gas (down 2%) were the chief losers.


Coal India, Cipla (up 4% each), ITC, Hero MotoCorp (up 3% each) and TCS (up 1%) were the top performers on the Sensex in the week. The losers were led by Bharti Airtel (down 8%), Tata Motors, Larsen & Toubro (down 5% each), State Bank of India and Jindal Steel & Power (down 4% each).


The major gainers on the Nifty were Axis Bank (up 9%), Coal India (up 5%), Cipla (up 4%), ITC and DLF (up 3% each). The main laggards on the index were Bharti Airtel (down 9%), Tata Motors (down 6%), L&T (down 5%), Reliance Infrastructure and UltraTech Cement (down 4% each).


Shedding its nine-month long hawkish monetary policy stance, the Reserve Bank of India (RBI) on Tuesday cut the short-term lending (repo) by 0.25% to 7.75% and cash reserve ratio (CRR) by similar margin to 4%, releasing Rs18,000 crore primary liquidity into the system. The RBI, however, reduced the growth projections for the current fiscal to 5.5% from its earlier estimate of 5.8% and moderated the inflation rate to 6.8% for March-end from earlier projection of 7.5%.


The HSBC manufacturing PMI, an indicator of the country’s manufacturing output growth, eased to 53.2 in January 2013, from 54.7 in December 2012. While the overall rate of growth remained firm, the growth slipped to a three-month low.


Among corporates, Bharti Airtel, India’s leading telecom services operator, posted a lower than expected third quarter net profit of Rs284 crore. The profit which fell for the twelfth quarter in a row is down a whopping 72% compared Rs1,011 crore same period last year.


BHEL’s net profit declined 17.5% to Rs 1181.85 crore on 3.17% decline in total income to Rs10,552.09 crore in Q3 December 2012 over the corresponding previous quarter. The company’s total order book position fell to Rs113,700 crore at the end of the December quarter from Rs122,300 crore in the previous quarter.


A series of freak trades in Tata Motors and UltraTech Cement towards the end of the trading session on Friday saw the two scrips tumbling around 10% before making a recovery. Tata Motors’ shares tumbled 9.98% to Rs 268.25 per shares before recovering to close at Rs 281.65, down 5.4%. The UltraTech scrip dropped 10% to Rs 1,712.35 apiece. The share pared its losses to close at Rs 1,837.75, down 3.4%.


An NSE (National Stock Exchange) official said the orders were within the exchange’s limits and came from a single broker. The official clarified these were not freak trades, but added the exchange would look into the matter.


On the international front, US gross domestic product (GDP) unexpectedly fell at a 0.1% annual rate in the December quarter, its first decline since the 2007-09 recession. Meanwhile, payrolls in the world’s largest economy increased by 157,000 workers in January following a revised 196,000 gain in the previous month and a 247,000 jump in November.


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Cummins India shows remarkable ability to control costs during times of revenue slowdown, says Nomura

The Cummins India stock has already priced in medium-term growth potential. Nomura Equity Research recommends investors to wait for a better entry point to enter the stock and remains ‘Neutral’ for now

Cummins India posted strong results for the third quarter of the current fiscal driven by a positive margin surprise, which in turn continues to benefit from the company’s strong cost control initiatives. Key result takeaways, according to Nomura Equity Research include:

  1. Net sales of Cummins India in the third quarter of FY13 stood at Rs10.9 billion (+9% year-on-year);
  2. EBITDA margin of Cummins India was at 19.2%, the highest level in over two years;
  3. Higher other income and extra-ordinary gains (Rs475 million) from the sale of Cummins India’s stake in KPIT Cummins also helped drive a 66% year-on-year net profit growth to Rs2.341 billion;

Cummins India has a remarkable ability to control costs during times of revenue slowdown, in Nomura’s view. This has been evident time and again and 3QFY13 numbers further confirm the belief. For the nine months FY13 EBITDA margin has expanded by 240 basis points (bps), led primarily by control in other operating expenses and also by raw material costs. This reinforces strong management capability in controlling costs in a challenging macro-environment.


The positive quarterly performance being in EBITDA margins, Nomura forecasts, “While our revenue estimates are declining modestly for FY14F-15F (as we build in slightly lower growth in the export business), we raise our margin expectations on the back of strong cost control and price hike that the company has been able to deliver even in the current challenging environment. On account of this, we now build in 75 bps and 125 bps increase in margin over FY14F and FY15F, respectively.”


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Cummins India is now close to its peak margins and accordingly Nomura has assigned mid-cycle multiple of 16x one year forward earnings. Nomura’s target price for the company’s share is thus increased to Rs499 on the back of 5%-10% earnings upgrade over FY14/15F. Given about 2% potential upside to the stock, Nomura has maintained its ‘Neutral’ rating. The brokerage has a positive outlook on the company and its long-term competitive advantages in the business.


Pick-up in the exports market and implementation of emission norms are positive triggers, while incoming competition from new players and exports shock are negative triggers, in Nomura’s view of the business prospects of Cummins India. 


Nomura concludes the company analysis with the argument, “Despite a solid long-term business story and near-term potential upside on the back of strong results, we think the stock is already pricing in medium-term growth potential. We would thus wait for a better entry point to enter the stock and remain neutral for now.”


It may be added that India’s industrial sector offers the unfolding of a substantial opportunity over the coming years. Potential opportunities are there in niche segments.


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