Dull End to the Day; PSU Stocks Fall for Second Consecutive Day

Karan Janani

Indian share markets continued to trade range bound in the afternoon session and finished marginally lower amid mixed international markets and North Korean missile test.

At the closing bell, the BSE Sensex closed lower by 16 points and the NSE Niftyfinished lower by 9 points. The S&P BSE Mid Cap finished down by 0.2% while S&P BSE Small Cap finished flat. Losses were largely seen in metal sector, banking sector and PSU sector.

Asian stock markets finished mixed as of the most recent closing prices. The Nikkei 225 gained 0.49% and the Shanghai Composite rose 0.13%. The Hang Seng lost 0.19%. European markets are mixed today. The DAX is up 0.72% while the CAC 40 gains 0.51%. The FTSE 100 is off 0.52%.

Rupee was trading at Rs 64.41 against the US$ in the afternoon session. Oil prices were trading at US$ 57.63 at the time of writing.

Global rating agency, Moody's Investors Service in its first report on the domestic insurance sector has stated that Indian non-life insurance sector is expected to maintain its double-digit growth over the next three to four years, on the back of higher economic expansion and increased household spending.

Besides, it projected that gross domestic product (GDP) of the country will grow by 6.7% in the fiscal year ending March 2018, making it one of the fastest growing economies in the world. However, it noted that annual insurance penetration remains comparatively low in India at just 3.5% of GDP, but is likely to increase in line with household spending.

The rating agency further indicated that in 2016-17 fiscal, the top 10 non-life insurers, recorded 30% growth in gross direct premium to Rs 1 trillion, while their top five life counterparts reported a 14% rise in gross premium to Rs 3 trillion. It also pointed out that the large private insurers have benefited the most, growing premia by 42% year-on-year in the year to March 2017. It added that these insurers are well placed for continued expansion, given their strong brands and market positions.

The report also welcomed the liberalization in the reinsurance space, which is evident from eight private reinsurers, Munich Re, Swiss Re, Scor and RGA, entering the market this year.

Insurance stocks finished the day on a mixed note with ICICI prudential Life Insurance share price and HDFC Standard Life insurance share price leading the losses.

Nestle share price finished the day down by 0.2% after the district administration in Uttar Pradesh's Shahjahanpur has slapped a fine on Nestle India and its distributors after popular noodles brand Maggi allegedly failed to pass a lab test.

The district administration had imposed a fine of Rs 4.5 million on the company, Rs 1.5 million on its three distributors and Rs 1.1 million on its two sellers.

Moving on to news from airline stocks. As per an article in The Livemint, Jet Airways has entered into an agreement with Air France-KLM on India-Europe routes, providing a boost to its long-haul operations.

The agreement, which has been struck 20 months after Jet Airways shifted its European hub from Brussels to Amsterdam, signals its alignment with Air France-KLM and their partner airlines, Delta and Virgin Atlantic.

The agreement, referred to as a joint venture, involves the airlines sharing passenger traffic revenue on the India-Amsterdam and India-Paris routes. Cargo revenue will not be shared.

Jet Airways Group currently operates a fleet of 115 aircraft, while Air France-KLM has a fleet of 534 planes. The cooperation between the two airlines comes at a time when more airlines are looking at tapping the international market.

The aviation industry has been on a high the past year. Warren Buffett invested upwards of US$2 billion a piece into the four largest US airline stocks - American Airlines Group Inc, Delta Air Lines Inc, Southwest Airlines Co, and United Continental Holdings Inc. When crude prices crashed, the lower cost of air turbine fuel suddenly changed the economics of the aviation business.

Despite recent positives, the airlines industry back home is plagued by cutthroat competition and rock-bottom fares. As a result, Indigo has been the only profitable airline in India in the recent past.

It'll take more than Buffett's endorsement of the US airlines to see a clear runway for the Indian aviation industry.

Jet airways share price finished the day up by 1.9%.

Moving on to news from engineering sector. Bharat Heavy Electricals (BHEL) has successfully commissioned the second unit of the 2x30 MW Tuirial Hydro Electric Project (HEP) in the state of Mizoram. Significantly, the unit has been commissioned by BHEL in less than a hundred days of the commissioning of the first unit.

Power generation from Tuirial HEP will contribute significantly to reduction of greenhouse gas emissions and contribute towards achieving a low carbon development path for the nation.

In another development, BHEL has won an order for setting up six decentralised sewage treatment plants (STPs) in Raipur, Chhattisgarh as part of its strategy to diversify into new areas.

Worth over Rs 640 million, the order for the STPs with a cumulative capacity of 25.4 Million Liters per Day has been placed by Raipur Development Authority (an Urban Development Authority under the Govt of Chhattisgarh).

The company is also setting up a 5 MW grid interactive Solar PV power plant near its 132 KV sub-station to encourage the use of sustainable energy through non-conventional resources. Once commissioned, this plant would generate about 92 lack units of electricity in a year which will meet about 20% of electricity demand of HEEP unit of BHEL Hardwar, resulting in a reduction in its annual electricity bill by approximately Rs 47.5 million.

BHEL share price finished the day down by 0.5% on the BSE.

Sensex Finishes on a Weak Note; NTPC & Bharti Airtel Major Losers

Karan Janani

Indian share markets continued to trade below the dotted line in the afternoon session ahead of the September-quarter GDP data, due on Thursday. At the closing bell, the BSE Sensex closed lower by 106 points and the NSE Niftyfinished lower by 29 points. The S&P BSE Mid Cap finished up by 0.1% while S&P BSE Small Cap finished up by 0.3%. Losses were largely seen in software sector, consumer durables sector and PSU sector.

Small caps have comfortably outperformed the Large caps and how. The BSE Small Cap Index has returned 21.7% in FY18 compared to 12.5% by BSE 100 and 11.7% by the Sensex.

Expectedly, valuations of certain Small cap companies have gone through the roof. It is important to understand the highly volatile nature of these stocks. In a downturn, these stocks tend to move in the opposite direction much faster as well.

While there, undoubtedly, lies hidden opportunities in the small cap space, it is important to focus on fundamentals of these stocks. Next, assess if they have the potential to move on to the 'Safe stock' category in the future.

Asian stock markets finished mixed as of the most recent closing prices. The Shanghai Composite gained 0.34%, while the Nikkei 225 & the Hang Seng fell 0.04% and 0.02% respectively. European markets are higher today with shares in France leading the region. The CAC 40 is up 0.43% while London's FTSE 100 is up 0.38% and Germany's DAX is up 0.26%.

Rupee was trading at Rs 64.42 against the US$ in the afternoon session. Oil prices were trading at US$ 57.62 at the time of writing.

In the news from the economy. Credit ratings agency, ICRA in its latest report said that the overall credit provisioning for banks is expected to surge to Rs 2.4-2.6 trillion in the financial year 2018 as compared to Rs 2 trillion in the previous year. This comes mainly on the back of provisioning for Insolvency and Bankruptcy Code (IBC) accounts and ageing of Non-performing assets (NPAs).

Besides, it pointed out that increase in provisioning would lead to higher losses for public sector banks (PSBs) during the year.

The rating agency indicated that during July-September quarter (Q2FY18), bank's provisions jumped to Rs 645 billion, up by 40% on a sequential basis and 30% on a year-on-year basis.

Further, it also said that with the recent amendments in IBC, the likelihood of the higher losses and a further increase in credit provisions appears to be a possibility. It expects that the asset quality pain is likely to continue in the near-term with nearly Rs 1.7 trillion of standard restructured advances.

It also expects that the gross non-performing assets (GNPA) of Rs 8.8-9 trillion or 10-10.2% to peak out by end of FY18 as against GNPAs of Rs 7.65 trillion or 9.5% as on 31 March 2017.

As per the report, PSBs are positioned weakly on their capital ratios with seven PSBs (out of 21) and 12 PSBs below the regulatory minimum capital level required for March 2017 and March 2018 respectively. It stated that with the challenges of meeting capital levels, the PSBs continue to refrain from growing advances, which is reflected in a year-on-year growth of less than 1% in advances of PSBs even as the private sector banks continue to achieve a higher year-on-year growth of 17.2% as on 30 September 2017.

It also expects the scope of a further cut in deposit rates to be limited, even as the cost of deposits will continue to decline upon re-pricing of fixed deposits, which, coupled with competitive pressure, may drive a marginal cut in lending rates.

Moving on to the news from engineering sector. As per an article in a leading financial daily, Bharat Heavy Electricals (BHEL) has won an order for setting up six decentralized sewage treatment plants (STPs) in Raipur, Chhattisgarh.

Reportedly, the order valued at Rs 640 million for the STPs with a cumulative capacity of 25.4 MLD (Million Liters per Day), has been placed by Raipur Development Authority (an Urban Development Authority under the Government of Chhattisgarh).

Further, the project for construction of the decentralized STPs shall be based on Sequential Batch Reactor (SBR) technology.

The company's scope of work in the contract broadly includes construction, testing and commissioning of six numbers STPs with Raw Sewage Pumping Station, Treated Sewage Effluent Pumping System, Bio filter, HT Substations, Transformers and control room building for PLC/SCADA based Automation System along with Operation & maintenance (O&M) for ten years.

BHEL share price ended up by 2.1%.

In another development, Rallis India share price surged 5.5% in today's trade after Franklin Templeton Mutual Fund had on Monday bought 17,81,405 shares or 0.9% stake in Rallis India at Rs. 230 on the BSE.

Meanwhile, our team of Equitymaster analysts have been working on a project to track the smartest minds in value investing. They have compiled a special report on them, called The Superinvestors of India.

Now, because of insights from these interactions, the team has glued their eyes on insider activity and bulk and block deals...

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Sensex Ends Marginally Higher; NTPC & Axis Bank Top Gainers

Indian share markets pared losses to turn positive in the afternoon session. At the closing bell, the BSE Sensex closed higher by 45 points. While, the NSE Nifty finished higher by 10 points. Meanwhile, the S&P BSE Midcap Index and S&P BSE Small CapIndex ended up by 0.4% & 0.8% respectively.

Among the sectoral indices, metal stocks and information technology stocks finished in red. While, power stocks and realty stocks gained the most.

Overseas, Asian stock markets finished lower today with shares in China leading the region. The Shanghai Composite is down 0.94% while Hong Kong's Hang Seng is off 0.60% and Japan's Nikkei 225 is lower by 0.24%. European markets are higher today with shares in Germany leading the region. The DAX is up 0.38% while London's FTSE 100 is up 0.15% and France's CAC 40 is up 0.03%.

The rupee was trading at Rs 64.69 against the US$ in the afternoon session.

Ashok Leyland share price surged 4.2% after the company inked a pact with its long-standing Japanese partner Hino to jointly develop BS-VI compliant engines.

In the news from the economy. Standard & Poor's (S&P) retained its outlook on India as stable, and kept the rating unchanged at BBB-.

While the agency retained its rating on India, it also lauded the Modi-led government's fiscal consolidation drive under which multiple reforms were taken towards the path of a favorable economy including the Goods and Services Tax (GST), Insolvency and Bankruptcy Code, 2016 and others.

The report noted that despite two quarters of weaker-than expected growth, Indian economy will grow robustly in 2018-20, and foreign exchange reserves will continue to rise.

Further, it stated that over the next two years, India's growth will remain strong and fiscal deficits will remain broadly in line with the expectations.

While upward pressure on ratings could be created with an improvement of the economic reforms, downward pressure could emerge if GDP growth disappoints, fiscal deficit rises or political will to maintain the reform agenda loses momentum, the reports noted.

It states that confidence and GDP growth in 2017 were shaken by the demonetisationexercise, and the new taxation scheme, which resulted in dampening of growth.

However, the report noted that growth in the medium term will be supported by the bank recapitalisation plan and public-sector-led infrastructure investment, which is expected to stimulate economic activity along with robust private consumption.

Against the backdrop of the planned ramp-up in public-sector-led infrastructure investments, as well as persistent deficits at the state level, the company noted that the large general government debt load and India's overall weak public finances continue to constrain the ratings.

The ratings on India reflect the country's strong GDP growth, sound external profile, and improving monetary credibility. These strengths are balanced against vulnerabilities stemming from the country's low per capita income and relatively high general government debt stock, net of liquid assets.

Moreover, bond yields too rose 3 basis points to 7.03% on the back of the S&P rating review, though investors are now awaiting key macrodata due later this week for cues.

It's pertinent to note that India's public debt is mostly funded internally. While scheduled commercial banks, insurance companies, provident funds, and RBI invest in 85% of the government bonds, there is a miniscule 4% participation by the overseas investors.

What is ironical is that despite a benign business environment, the bond yields in India have been ascending. Since the global financial crisis, India's bond yields have firmed up by a whopping 1.7%, putting it in line with countries like South Africa and Russia whose economies are in a state of mess.

In the short term, India's fiscal deficit is likely to remain high given the initial revenue losses due to GST, higher public spending on infrastructure, and the recapitalisation program for state-run banks. But in the long run, the economic reforms are likely to strengthen the economy and drive growth.

Moving on to the news from pharma sector. As per an article in a leading financial daily, Cadila Healthcare's subsidiary, Zydus Cadila has received the final approval from the United States Food and Drug Administration (USFDA)to market Topiramate Extended-Release Capsules in the strengths of 25 mg, 50 mg, and 100 mg.

The drug is indicated for the treatment of seizures and migraine headaches.

Reportedly, the drug will be manufactured at the group's formulations manufacturing facility at Moraiya, Ahmedabad.

The group now has more than 170 approvals and has so far filed over 310 ANDAs since the commencement of the filing process in FY 2003-04.

Cadila Healthcare share price ended down by 0.6%.

In recent times, pharma companies were bogged down by mounting pressure from US Food and Drug Administration (USFDA) to adhere to quality standards at their manufacturing plants.

In the past three years, the USFDA raised numerous regulatory concerns resulting in import bans and suspension of new drug approvals from facilities of Indian pharma companies. But what has come as a breather is a sharp pick-up in new drug approvals in 2017.

During the period January-July 2017, 129 approvals for generic drugs were made. This is 45% higher from 89 approvals made in the corresponding period last year.

However, as per our research analyst Taha Merchant, the uncertainties make it important to be stock specific in the sector. It is important to look for companies that have the competence and staying power.

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Sensex Ends Day in Green; Consumer Durables Stocks Top Gainers

After opening the day in green, share markets in India witnessed buying activity throughout the day and ended the day on a positive note. Gains were seen across most sectors with stocks in the consumer durables sector and stocks in the IT sector, leading the gains.

At the closing bell, the BSE Sensex stood higher by 91 points (up 0.3%) and the NSE Nifty closed up by 41 points (up 0.4%). The BSE Mid Cap index ended the day up by 0.6%, while the BSE Small Cap index ended the day up by 0.5%.

Asian stock markets finished in green. As of the most recent closing prices, the Hang Seng was up by 0.6% and the Shanghai Composite was flat. The Nikkei 225 was up by 0.1%. European markets mixed. The FTSE 100 was down by 0.3%. The DAX was higher by 0.1% while the CAC 40 was up by 0.3%.

The rupee was trading at Rs 64.72 against the US$ in the afternoon session. Oil prices were trading at US$ 58.59 at the time of writing.

In news from the automobile sector. As per a survey by the Society of Manufacturers of Electric Vehicles (SMEV) Gujarat, West Bengal, Uttar Pradesh, Rajasthan and Maharashtra have emerged as the top 5 states in electric vehicle sales in the last financial year.

An SMEV survey of electric vehicles (EVs) sold during the last fiscal showed that 1,926 of these were sold in Maharashtra, 2,388 in Rajasthan, 2,467 in Uttar Pradesh, 2,846 in West Bengal and 4,330 in Gujarat, which made it the to the top in bringing the maximum number of e-vehicles on road.

Of all the EVs sold, 92% were two-wheelers and only 8% were four-wheelers.

Currently, electric vehicle sales are low in India, rising 37.5% to 22,000 units in the year ended 31 March 2016 from 16,000 in 2014-15. Only 2,000 of these were cars and other four-wheelers, according to automobile lobby groupSociety of Indian Automobile Manufacturers (Siam).

The government wants to see 6 million electric and hybrid vehicles on Indian roads by 2020 under the National Electric Mobility Mission Plan 2020.

The government is targeting to have all cars propelled by electric engine by 2030. The target is more daunting than in many advanced countries.

According to the industry, the 2030 target would require eight to ten times the global stock of such vehicles. India would need to sell more than 10 million electric cars in 2030, compared to 5,000 electric vehicles India had on the road in 2016.

As you can see from the chart, India is barely visible compared to other developed countries when it comes to battery cars.

As an article in Business Standard suggests, such a big jump in scale for the auto industry in 13 years seems difficult. The basic infrastructure is missing. There are not enough charging stations. For this massive shift, the charging stations will need to be as ubiquitous as petrol pumps.

Another issue is the price of the lithium ion battery, which constitutes 30% to 40% of the cost of the car. For this plan to succeed, the price of the battery needs to come down.

The auto industry is already facing regulatory headwinds. The shift from BS-IV emission norms to BS-VI has been two years ahead of schedule without an intermediate stage. The government, if it is serious about such ambitious targets, should offer the necessary infrastructure support and do its bit for a smooth transition.

Moving on to news about the economy. Ratings agency, Crisil Ratings in its latest report has said that in India bank credit to the micro, small and medium enterprises (MSME) sector, whose current market size is estimated at around Rs trillion, is likely to expand at 11% compound annual growth rate (CAGR) over the next two financial years. It added that this is way faster than the 7% anticipated growth in bank credit to India Inc.

The rating agency said that over the past five fiscals ending 2017, non-banking finance companies recorded a four-fold increase in their credit book to MSMEs. Consequently, their cumulative market share in MSME financing rose to 18% in fiscal 2017 from 8% five years ago. It added that this will rise to over 20% in two years.

Lenders have been trying to protect their return on assets by focusing on smaller loans, where yields are higher, and on unsecured loans. For NBFCs, unsecured loans account for 20% of the MSME portfolio as of March 2017. However, the report noted that while competition has intensified and asset quality has weakened, the overall opportunity remains compelling, given the huge under-penetration of formal finance in the MSME segment. Moreover, structural changes such as the goods and services tax will increase transparency in MSME financials.

It also said the competitiveness of MSMEs would be determined by the extent of tax avoidance, their position in the value chain, labour cost arbitrage, product offering, local market knowledge and proximity to customer.