Today's Market
By Equitymaster

Sensex Closes Weak; Consumer Durables & Oil & Gas Stocks Fall

28 June 2017 (Closing)

Indian share markets continued to witness profit booking in the afternoon session amid weak global cues. At the closing bell, the BSE Sensex stood lower by 124 points, while the NSE Nifty finished down by 20 points. Meanwhile, the S&P BSE Mid Cap & the S&P BSE Small Cap finished up by 0.2% and 0.1% respectively. Losses were largely seen in consumer durables stocks, FMCG stocks, and oil & gas stocks.

Asian stock markets finished lower today with shares in Hong Kong leading the region. The Hang Seng is down 0.61% while China's Shanghai Composite is off 0.56% and Japan's Nikkei 225 is lower by 0.47%. European markets are mixed to lower. Shares in France are off as the CAC 40 drops 0.50%. The DAX is down 0.47% while the FTSE 100 in London is unchanged.

The rupee was trading at Rs 64.52 against the US$ in the afternoon session. Oil prices were trading at US$ 44.12 at the time of writing.

In news from economic sector, just few days before the implementation of GST, Finance Minister Arun Jaitley has said that people may have to face some difficulty initially during the Goods and Services Tax (GST) is rolled out, but in the long run the new indirect tax regime would help cut tax evasion and check price rise. He also said that the GST Council will look at bringing real estate within the GST net by next year and revisit taxing of petroleum products under the new regime in 1-2 years.

He added that while negotiating with the states on GST there were some tough issues like petroleum and potable alcohol on which states were unwilling to leave their taxation powers. He said "If we insisted on that, then the deal would have been broken. The Constitution amendment provides that petroleum products can be taxed under GST as and when GST Council decides. And once GST is implemented, in 1-2 years once again the Council will get opportunity to revisit it."

Finance Minister said that he was in favour of a proposal to bring real estate under GST, but few other states were not in favour. GST will be launched on July 1 and will subsume a host of indirect levies like excise, service tax and VAT. Products like kerosene, naphtha and LPG will be under GST but five items including crude oil, diesel, and petrol have been excluded.

Airlines Stocks continued to surge as InterGlobe Aviation share price and Spicejet Ltd share price finished the day up by 3.7% and 5.4% respectively.

India's aviation industry is on a high-growth trajectory. India's domestic air passenger traffic has almost doubled in the past six years. This is on the back of strong economic growth and emergence of low-fare airlines. Indian carriers have now set their sights on International traffic. Indian carriers have been slowly increasing their market share. It is important to note that foreign carriers still dominate international traffic to and from India.

Domestic Airlines Fly High in Foreign Skies

As per the report by rating agency ICRA, the share of domestic airlines in India's international traffic increased from 30.1% in FY14 to 35.1% in FY17. In the coming years, this share is expected to increase as the government replaced the 5/20 rule with 0/20 rule. The 5/20 rule mandates that airlines need to fly at least 5 years domestically and should possess 20 aircraft. The new 0/20 rule does away with the five-year requirement, but carriers will still need to demonstrate a fleet of 20 aircraft.

It is important to note that certain industries have relatively dull economics compared to others. And investors would do well to keep this in mind, particularly in the case of aviation. Investors need to understand the industry dynamics before buying up aviation stocks.

Moving on to news from bank stocks. ICICI bank share price finished the trading day on an encouraging note (up 1%) after it was reported that the bank has received an approval and allotted 21,470 senior unsecured redeemable long-term bonds in the nature of debentures aggregating Rs 21.47 billion on private placement basis.

The notes were issued in two tranches - Rs 4 billion maturing in 7 years at a coupon of 7.42% payable annually and Rs 17.47 billion maturing in 10 years at a coupon of 7.47% payable annually. The notes were issued at par.

The bonds would be listed in the Wholesale Debt Market segment of BSE and/or National Stock Exchange of India. The bonds are rated CARE AAA/Stable by Credit Analysis & Research and AAA/Stable by ICRA.

Meanwhile, the Government of India is looking to reduce its stake in two state-owned banks namely Andhra Bank and Dena Bank through share sale in a move to support their capital requirement.

Both Andhra Bank and Dena Bank are seeking merchant bankers for managing fund raising proposals through sale of shares.

Dena Bank is planning to raise up to Rs 18 billion through a qualified institutional placement (QIP). The bank may raise the capital within a period of one year upon getting shareholders' approval.

Dena Bank stated that this will be done in such manner that the Central Government shall at all times hold not less than 52% of the paid-up equity share capital of the bank.

Presently, government holds 68.55% stake in Dena Bank and 61.3% stake in Andhra Bank as on March 2017. The indicative allocation of capital is expected to Rs 11 billion for Andhra Bank.

Both the banks' gross NPAs have risen on year-on-year basis in the financial year 2016-17 (FY17). Gross NPAs of gross advances stood at 16.7% (Rs 126.18 billion) and 12.25% (Rs 176.69 billion) for Dena Bank and Andhra Bank as on March 2017 compared to 9.98% (Rs 85.60 billion) and 8.39%(Rs 114.43 billion) as on March 2016.

Andhra Bank share price finished up by 0.8% while Dena Bank share price finished the trading day down by 0.7% on the BSE.

And here's a note from Profit Hunter

Eicher Motors was one of the most actively traded stocks today. The stock has been trading in a strong uptrend since its low of Rs 135 in October 2008. It hit a life high of Rs 30,051 last month, creating enormous wealth for its shareholders over the years.

The stock has faced many corrections during its uptrend. After the Rs 30,051 high in May, it corrected to Rs 27,200. The stock then went on to re-test its life high early this month. But it found selling pressure there and declined to close below 27,200 in yesterday's session.

This formed a double top pattern, which suggests further correction on the cards.

But today, the stock is up 2% after finding support from Rs 26,500, which was the top made in October 2016.

So it will be interesting to see if the stock will continue to correct further or if it will resume its larger uptrend and negate the double top pattern.

Eicher Motors Forms Double Top Pattern

Sensex Down 103 Points in Noon Session

28 June 2017 (01:30 pm)

Indian share markets continued to trade on a negative note during the noon session amid weak global markets. Consumer durables stocks and capital goods stocks witnessed majority of the selling pressure. Metal stocks and realty stocks traded in green.

The BSE Sensex is trading lower by 103 points and the NSE Nifty is trading lower by 21 points. Meanwhile, the BSE Mid Cap index & the BSE Small Cap index is up by 0.2% & 0.1% respectively. The rupee is trading at 64.46 to the US$.

Airlines stocks continue to surge wit Interglobe Aviation share price and Spice Jet Ltd share price trading up by 2.2% and 3.1% respectively.

India's aviation industry is on a high-growth trajectory. According to International Air Transport Association (IATA), India has moved up two places to become the fourth largest aviation market in terms of passenger number. It's expected to become the third-largest by 2020.

Indian Aviation Spreading its Wings

The latest DGCA data support the growth story. Domestic air passenger traffic surged nearly 17.4% YoY to 10.2 million in May 2017. In May 2016, this figure was 8.7 million. The aviation industry has reported passenger traffic growth of 17.6% during the first five months of the current calendar year.

Interestingly, the state-run carrier Air India, which is in the news for likely privatisation, improved its market share marginally in May 2017. The carrier's share rose to 13% from 12.9% in April, though still below 14% that it had in January.

Although greater air travel is becoming a new normal, investors need to understand the industry dynamics before buying up aviation stocks.

In news from automobile sector, TVS Motor Company has entered into partnership with Abans Auto a leading distributor in Sri Lanka. Through this tie-up, TVS King, the 200 cc passenger three-wheeler, will be launched in the Sri Lankan market.

As a part of the agreement, the Company will leverage Abans Auto's network of over 200 showrooms and appointed dealers in strategic locations around Sri Lanka. Furthermore, Abans Finance will provide finance schemes to the customers of TVS Motor Company at affordable rates.

Meanwhile, TVS Motor Company and Royal Enfield have become the latest to pass on expected benefit of goods and services tax (GST) to customers by lowering prices of their vehicles.

Taxes on motorcycles are expected to reduce in most states with the implementation of GST from 1 July 2017, although benefits vary from state to state.

Under GST, most of the two-wheelers will attract a tax rate of 28%, lower than total tax incidence of around 30% at present. Motorcycles with engine capacity of over 350 cc, however, will attract an additional cess of 3%.

In news from engineering sector, BHEL has secured an order for setting up a 15 MW Solar Photovoltaic (SPV) power plant on Engineering, Procurement and Construction (EPC) basis, in Gujarat.

The order has been placed on BHEL by Gujarat Alkalies and Chemical (GACL) for setting up the SPV Power Plant at Gujarat Solar Park at Charanka in Gujarat. Significantly, this will be the company's first ground-mounted Solar PV project in the state of Gujarat.

The company is presently executing over 180 MW of ground-mounted and rooftop Solar PV projects across the country.

BHEL share price was trading up by 0.8% at the time of writing.

In another development, global ratings agency Moody's Investors Service in its latest report has said that the renewable energy market in India is likely to experience strong growth over many years, as the country is moving towards meeting its commitments under the Paris Climate Change agreement on climate change

It noted that the country is aiming to achieve 40% of cumulative installed capacity through from non-fossil fuel-based energy resources by fiscal year 2030 from a current level of 30%. Adding further, it said that the country also plans to expand its renewable energy installed capacity to the tune of 175 gigawatts (GW) by 2022 from the current capacity of 57GW. It added that such growth will be driven by the public and private sector.

The report however said that the key offtakers for most renewable projects are state-owned distribution companies, and these firms typically demonstrate weak financial profiles. It also said that this situation poses a key challenge for developers and while there is no history of defaults under power purchase agreements, payment delays are quite common.

Moody's report pointed out that the overall policy framework for renewable energy is still evolving and noted that adherence to renewable purchase obligations has been low till now, leading to lower demand for renewable energy.

Indian Indices Trade Marginally Lower; Energy Stocks Witness Selling

28 June 2017 (11:30 am)

Share markets in India are presently trading marginally lower. Sectoral indices are trading on a mixed note with stocks in the consumer durables sector and energy sector witnessing maximum selling pressure. Metal stocks are trading in the green.

The BSE Sensex is trading down 39 points (down 0.1%) and the NSE Nifty is trading down by 6 points (down 0.1%). The BSE Mid Cap index is trading up by 0.3%, while the BSE Small Cap index is trading up by 0.2%. The rupee is trading at 64.53 to the US$.

In the news from pharmaceutical sector, Glenmark Pharmaceuticals has received final approval from the US health regulator for its generic version of anti-inflammatory drug Indomethacin tablets.

The company's current portfolio consists of 118 products authorised for distribution in the US. It also includes 67 abbreviated new drug applications (ANDA) pending approval with the US Food and Drug Administration (USFDA).

Glenmark Pharmaceuticals Limited is a global pharmaceutical company engaged in the development of new chemical entities (NCEs) and new biological entities (NBEs). Its segments are India, the US, Latin America, Europe and Rest of the World (ROW).

It focuses on manufacturing products across therapeutic areas of dermatology, respiratory and oncology. Its active pharmaceuticals ingredients (API) business spans over 80 countries, including regulated markets of the United States, Europe, Japan and Canada.

Speaking of pharma sector, the Indian pharmaceutical industry has come under a lot of regulatory pressure in the past few years.

We had written about the current predicament of Indian pharma companies in one of the premium editions of the 5 Minute WrapUp:

Over the past few years, risk in the US markets has increased. The US Food and Drug Administration has become stricter on products entering US borders. Surprise inspections have increased and companies are being issued warning letters. This has impacted the business and earnings of Indian pharma players, causing major volatility for the sector.

The list of pharma sector woes is long. So, is there light at the end of the tunnel? Girish Shetty, our research analyst thinks there is.

Is the Worst Over for all the Pharma Stocks?

Facing pricing pressures in the domestic and export markets, currency fluctuations, as well as manufacturing issues related to their plant, there is a transformation happening in the overall sector as to how business is done and will be done in the future.

But do all these above developments suggest it's time for a contra buy call on Indian pharma stocks? The latest edition of The Equitymaster Research Digest (requires subscription) answers this question.

In the news from commodity markets, crude oil is witnessing selling pressure today. Losses are seen on the back of a report which showed a rise in US fuel inventories.

Note that crude oil output is still increasing in the US, and the US is not a part of the OPEC production agreement. Also, oil stocks in Europe's Amsterdam-Rotterdam-Antwerp hub hit 64.2 million barrels in the week to June 16. This was the highest in a year.

Apart from the above losses, crude oil has also been witnessing volatility recently over Donald Trump's proposal to sell half of the country's strategic oil reserves.

Owing to the supply glut, crude oil prices have been remarkably silent over the last two years. Prices have remained within a tight range, rarely dropping below US$40 or rising above US$60. Volatility has crashed. And if you are trading crude oil, it's critical to understand why this has occurred.

One of the issues of Vivek Kaul's Inner Circle (requires subscription) explains what has triggered the above taming in crude oil prices.

To keep a tab on the movements in crude oil and other commodities, you can read the stock market commentary from the Daily Profit Hunter team. Their commentary tracks the developments in the global economy as well as stock, currency and commodity markets.

Sensex Opens Lower; Consumer Durables Stocks Drag

28 June 2017 (09:30 am)

Asian stock markets traded mostly lower in morning trade after the softer lead from Wall Street, with the vote on a bill to replace Obamacare in the U.S. delayed. The Nikkei 225 is off 0.29% while the Hang Seng is down 0.57%. The Shanghai Composite is down 0.13%. Stock markets in Europe too closed their previous session in red.

Meanwhile, share markets in India have opened the day on a negative note. The BSE Sensex is trading lower by 24 points while the NSE Nifty is trading lower by 31 points. The BSE Mid Cap Index and BSE Small Cap index opened the day down by 0.4% & 0.6% respectively.

Sectoral indices have opened the day on a mixed note with information technology stocks and energy stocks leading the gains. While consumer durables stocks and capital goods stocks have opened the day in red. The rupee is trading at 64.46 to the US$.

Mining stocks opened the day on a mixed note with Ashapura Minechem & Gujarat Mineral Development leading the losses. As per an article in a leading financial daily, the government's policy think-tank Niti Ayog proposed that India should split the seven units of state-controlled Coal India Ltd into independent companies to make it more competitive.

About 70% of India's power generation is fired by coal. The country is the world's third-largest producer and third-biggest importer of coal, which the government wants to change by boosting local coal production.

Fresh coal production should come from private sector mines, the government think-tank NITI Aayog said, adding that the move called for reforms in allocating coal blocks to independent companies specialised in coal mining.

NITI Aayog has hence batted for comprehensive reforms in allocating coal blocks on commercial lines to independent companies specialised in coal mining.

While the Centre has been successful in auctioning coal mines to private companies for captive usage, commercial mining is yet to see the light of the day, mostly owning to subdued demand. In the past, similar suggestions have been shot down by the Centre citing efficient operations of Coal India and all its subsidiaries.

Coal India share price opened up by 0.4%.

Moving on the news from the IPO space. AU Small Finance Bank is all set to hit the market with an initial public offering (IPO) today. On offer are 53.42 million shares in the price band of Rs 355-358 apiece. The issue will close on 30 June 2017.

The Jaipur-based company, which has got RBI licence to engage in small finance banking, has already commenced operations.

With a network of 300 branches spread across Gujarat, Maharashtra, Rajasthan, Delhi, Punjab, Haryana, Himachal Pradesh, Madhya Pradesh, Goa and Chhattisgarh, the lender used to serve across 10 states as a non-banking finance company (NBFC) - AU Financiers - before foraying into the small finance bank space.

Should you consider participating in this IPO?

Here's our view on the AU Small Finance Bank IPO.

Speaking of IPOs, primary markets have caught the frenzy of investors. Looking at the performance of IPOs listed in 2017, one could see the reason why. Almost 75% of the IPOs listed in 2017 till date have given positive returns. Although we are nowhere near the euphoria of 2007, we are slowly but surely getting there.

However, according to Hindu Business Line, till June 2016, only 40% of the IPOs launched between 2004 and 2011 were trading above their issue price, as can be seen from the chart below.

Are IPOs a Sure Shot Way to Make Money?

We, at Equitymaster, have always recommended IPOs cautiously. Here's Rahul Shah, co-head of research at Equitymaster, explaining our rationale behind the approach:

'We know what a dirty game the IPO business is. We've seen it over and over again: It's a game where the odds are stacked against investors. So for us, the equation is simple. We'd rather face criticism in the short run than see our subscribers lose money over the longer term. We weren't afraid to do this during the hot IPO days of 2007, and we're not afraid to do it today.'

The Bottomline: You need to evaluate each IPO on its merits by considering its fundamentals, and most importantly, the valuations. And this is particularly important when the hype surrounding IPOs is at its peak.

We have reviewed each of them and have released their recommendation notes. You can check the same on their IPO page.

Decoding the Impact of Farm Loan Waivers on the Economy

28 June 2017 (Pre-Open)

The states including the likes of Uttar Pradesh, Maharashtra, Punjab and Karnataka have decided to waive agricultural loans worth Rs 1,000 billion. Haryana and Tamil Nadu too are likely to follow suit. Soon it might happen that all the remaining states give in to peer pressures from other states and waive off famers loans.

Why has this situation arisen despite a normal rainfall in the preceding financial year?

There were no loan waivers in the fiscal year of 2013-14 and 2014-15 when the country faced a drought situation for two consecutive years. Then why now?

The larger impact seems to have come from demonetization. The farmers usually deal in cash. Notebandi led to a huge liquidity crunch. This in-turn led to a crash in the prices of crops like onions, tomatoes and potatoes, which dented farmers income.

In a farm loan waiver, state government bears the brunt of the loans lent by the farmers. It is the state government who makes the payment to the banks.

As the state government, would have to borrow to repay these massive loans, their balance sheets are set to come under pressure. This will create fiscal challenges, leading to lower public expenditure which could hamper economic growth.

The balance sheet of state governments are already under some pressure as they took over the loans of the power distribution companies under the Ujwal Discom Assurance Yojana (UDAY). This additional burden of loan waivers could lead to the states not adhering to their fiscal deficit targets.

We believe that the farm loan waivers will not be of much help to the farmers, as the farmers still rely on traditional sources of financing such as lending from moneylenders rather than from banks. Moreover, in our recent The 5 Minute WrapUp we have highlighted the inefficacy of the farm loan waivers.

To resolve the issues pertaining to agriculture sector, more structural reforms are required such as making investments in areas such as irrigation, water conservation, better storage facility, market connectivity. Unless such structural reforms are undertaken, there won't be much respite for the farmers.

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