Upmove on the BSE Sensex, Nifty has two more days to break out higher: Monday Closing Report

The Nifty must close decisively above 5,720 to head to a new yearly high

The market closed flat in the absence of any local triggers and weak global cues. On Friday we had mentioned that if the Nifty manages to make a higher high and close above 5,710, we may see the upmove continuing. Today although the index couldn’t make a higher high, it reached almost the level of resistance and ended in the positive for the fourth consecutive day. From here even if the index manages to close in the positive tomorrow, we may see the upmove continuing only for a day or two. However, if the benchmark closes decisively above 5,720 we may see it heading to a new yearly high. The National Stock Exchange (NSE) saw a volume of 47.42 crore shares and an advance decline ratio of 779:933.


The Indian market opened flat with a negative bias, tracking its weak Asian peers on nervousness ahead of the US presidential elections on Tuesday. The Nifty opened five points down at 5,693 and the Sensex resumed trade at 18,749, a cut of six points over its previous close.


Range-bound trade kept the benchmarks near their previous closing levels in morning trade.

The market its intraday high at around 10.30am with the Nifty rising to 5,709 and the Sensex climbing to 18,795.


Selling pressure in banking, metal and auto sectors led the indices into the negative terrain in noon-trade. The weak opening of the key European indices also added to the woes.


The benchmarks slipped to their day’s low around 2.00pm wherein the Nifty went down to 5,680 and the Sensex contracted to 18,683.


The market was directionless for almost the entire session and managed to close with a positive bias. The Nifty rose seven points to 5,704 and the Sensex also added seven points to finish trade at 18,763.


While the Sensex managed a flat close, the broader indices settled lower. The BSE Mid-cap index declined 0.26% and the BSE Small-cap index fell 0.10%.


The sectoral gainers were BSE Fast Moving Consumer Goods (up 1.08%); BSE Healthcare (up 0.37%); BSE Consumer Durables and BSE Bankex (up 0.11% each). The key losers were BSE Power (down 0.52%); BSE Metal, BSE Auto (down 0.48%); BSE IT (down 0.33%) and BSE TECk (down 0.25%).


Twelve of the 30 stocks on the Sensex closed in the positive. The chief gainers were ITC (up 1.64%); Dr Reddy’s Laboratories (up 1.36%); Maruti Suzuki (up 0.89%); Cipla (up 0.87%) and BHEL (up 0.76%). The main losers were Hindalco Industries (down 2.55%); Jindal Steel (down 2.04%); Bajaj Auto (down 2.02%); Tata Power (down 0.94%) and Tata Steel (down 0.93%).


The top two A Group gainers on the BSE were—Jet Air India (up 4.19%) and Marico (up 3.18%).

The top two A Group losers on the BSE were—Crompton Greaves (down 8.35%) and Godrej Consumer Products (down 4.94%).


The top two B Group gainers on the BSE were—Jolly Board (up 19.99%) and Span Diagnostics (up 19.97%.

The top two B Group losers on the BSE were—Koa Tools (down 18.52%) and Vadilal Industries (down 17.10%).


Out of the 50 stocks listed on the Nifty, 20 stocks settled in the positive. The key gainers were Kotak Mahindra Bank (up 2.08%); ITC (up 1.75%); ACC (up 1.72%); Asian Paints (up 1.63%) and Dr Reddy’s (up 1.26%).  The main losers were Hindalco Ind (down 2.85%); Bajaj Auto (down 2.31%); Jindal Steel (down 2.30%); Jaiprakash Associates (down 1.69%) and DLF (down 1.36%).


Markets across Asia closed with losses on cautiousness ahead of the US presidential elections and as the Chinese Communist Party set to make changes in its key leadership.


The Shanghai Composite fell 0.14%; the Hang Seng declined 0.47%; the Jakarta Composite dropped 0.83%; the KLSE Composite slipped 0.13%; the Nikkei 225 declined 0.48%; the Straits Times contracted by 0.30%; the Seoul Composite lost 0.55% and the Taiwan Weighted settled 0.35% lower.


At the time of writing, the key European benchmarks were down between 0.60% and 0.81% as investors kept their eyes on the US presidential polls. However, the US stock futures were trading marginally higher, ahead of the closely-fought elections in the world’s largest democracy.


Back home, foreign institutional investors were net buyers of shares totalling Rs382.20 crore on Friday while domestic institutional investors were net sellers of equities aggregating Rs298.57 crore.


Japan’s largest oil firm Inpex Corp has acquired 26% stake in Oil and Natural Gas Corporation’s (ONGC) Krishna Godavari basin deepsea block, KG-DWN- 2004/6 block, in the Bay of Bengal. No financial details of the transaction were provided. ONGC gained 0.28% to settle at Rs266.50 on the NSE.


Fluid management company Kirloskar Brothers has set up its first warehouse for spare parts at Kirloskarvadi. The modern facility which involves an investment of Rs1.5 crore is equipped with storage and handling equipment such as a Cardex machine (vertical storage racks) and modern packing equipment and can stock over 2,200 components. The stock climbed 1.13% to close at Rs156.85 on the NSE.


IL&FS Engineering and Construction Company has bagged contract worth Rs135.50 crore from Emaar-MGF in Gurgaon. The project involves the civil structure, finishing and low-side services works of the residential towers (G+9 to G+13 storey buildings), basements, compound wall, and other miscellaneous works. The contract has to be completed in 27 months. IL&FS Engg rose 0.33% to Rs60.70 on the NSE.


No growth recovery in sight, says Nomura

Demand remains subdued and supply-side bottlenecks, especially power shortages, remains a constraint, says Nomura Economics Research

Nomura Economics Research has observed the following trends in inflation, growth recovery and government spending based on activity, survey and fiscal data that have been released in the last week:


  • Core inflation is likely to moderate: The output price index of India’s manufacturing PMI (Purchase Manager’s Index) fell sharply to a near two-year low of 52.9 in October 2012 from 56.8 in September 2012. Since this is a good lead indicator of WPI (wholesale price index) core inflation (manufactured ex-food), it suggests that core inflation should moderate from November 2012, observes Nomura.


  • No clear growth recovery in sight: The manufacturing and services headline PMI numbers were stable in October 2012, but their output components fell further. There is no strong correlation between the quarterly PMIs and quarterly GDP, but the longer-term trends are similar. As such, demand remains subdued and supply-side bottlenecks, especially power shortages, remains a constraint, warns Nomura.


  • Government belt-tightening is on: Government spending rose by a paltry 1.4% y-o-y (year-on-year) in September 2012 compared to 20% in the April-August 2012 period. Spending has remained under control in October 2012(as suggested by rising government cash balances, based on Nomura’s estimates). This is unsurprising as tax revenues are likely to be much lower than budget estimates and the only levers available to the government are its asset sales and to contain spending. Nomura’s FY13 (year ending March 2013) fiscal deficit estimate is 5.8% of GDP against the government’s revised target of 5.3%. If this crash diet continues, the fiscal deficit could be marginally lower than Nomura’s estimates, but it is still not likely to fall below 5.5% of GDP.


Marico reports disappointing second quarter results

International business revenues were +15%, with constant currency growth of 3%, and this was disappointing, according to Nomura Equity Research

Fast moving consumer goods major Marico Industries has announced disappointing second quarter results and the key numbers from Q2FY13 have been analysed by Nomura Equity Research in its Quick Note. Net sales grew 19% y-o-y (year-on-year) and were largely in line with Nomura’s expectations. Domestic consumer business revenues were + 19% y-o-y. International business revenues were + 15%, with constant currency growth of 3%, and this was disappointing.


Overall volume growth was 14% with organic volume growth of 9% (excluding the recently acquired Paras brands). Volume growth for Parachute was 9%, value-added hair oils were 20%, and Saffola was 6%. These percentage figures have been computed by Nomura.


Kaya Business reported revenue growth of 38% in constant currency terms, which was 25%. SSSG (same store sales growth) was 10%.


Gross margins expanded 634 basis points. This was largely in line with Nomura expectations. EBITDA at Rs1.5 billion was 9% below Nomura estimates. EBITDA margins at 13% expanded 150bps y-o-y primarily due to higher gross margins. Nomura was expecting EBITDA margins of 14%. This was a key negative surprise. Net profit at Rs889 billion was 22% below Nomura estimates and 17% below street expectations.


Apart from the above figures, Nomura has obtained feedback from a conference call with Marico management. The key observations are:

  • Organic volume growth in the consumer business was 10%, where slowdown in Saffola had a significant negative impact. Parachute volumes grew by 7% during the quarter, in-line with its near-term average.
  • The slowdown in volume growth includes an impact from the slowdown in the CSD (canteen sales department) channel. The company does not expect a quick turnaround in this channel, where overall value growth was down 2% y-o-y during the quarter. Increase in A&P (advertising and promotion) spending was driven partly by increased spend on the organic domestic business, as well as on account of significant spend on Paras brands. For the full year, the company guided for an A&P-to-sales ratio of around 12.5%, in-line with previous expectations.
  • Interest cost during the quarter was up by around 60% on account of acquisition cost for Paras brands. The company guided for quarterly interest cost to be in the range of Rs150-160 million in the next few quarters.
  • Paras brands delivered revenue of Rs460 million during the quarter for growth of 28% y-o-y. The company has guided for sales of Rs150 million per month from these brands, which is a positive. There is an opportunity to gain share in the three segments of deodorants, hair gels and hair serum in the medium term. The company is also investing money to fill distribution gaps, which should have a positive impact on revenue growth.
  • Sales in rural areas have been faster than urban areas for the company. It will continue to invest behind growing its rural business, which should be a medium-term positive driver.
  • Overall, there has been some softness in volume growth particularly in the Saffola franchise, where the company is looking at a rebound back to 10% volume growth over the next couple of quarters. The input cost environment remains favourable for the company, which is a positive.


Given the slowdown in volumes and valuations at around 25 times FY14F, Nomura believes that the Marico Industries stock is fairly valued at current levels.


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