Dear Team member,
Murray Monday! Positive as Portugal at start
Investors have been too willing to buy stocks with strong reported earnings, even if they do not understand how earnings are produced- A Berenson
The Centre Court at Wimbledon didn't see a Brexit as Andy Murray took on Raonic to win his second Wimbledon singles title while in European Championships finals, Portugal left hosts France flummoxed. Earnings season kicks off this week and investors will hope there are no major upsets. TCS, Infosys and Reliance are set to announce their numbers. For the market, Brexit aftermath has taken a backseat as indices managed to move ahead. The outlook is a positive start. Sensex added close to 18% from its Feb lows and Indian market is technically back in the bull run. Macro data on tap this week includes CPI, WPI and May IIP numbers. L&T Infotech will hit the capital markets to raise up to Rs 1,243 crore through an IPO. June jobs data showed US economy is stable for now.
India Strategy - Q1 FY17 Results Preview
Q1FY17 profit to decline 3.3% yoy on high base and poor show by global cyclicals
Our coverage universe, representing 189 companies and ~60% of India's equity market capitalisation, is expected to report a profit degrowth of 3.3% yoy. Poor showing by global cyclicals (particularly IOC and ONGC) and a high base effect of Q1 in previous two years are the reasons for this possible drop. Profit (ex-banks and ex-energy), the PAT would be up by 5.7% yoy. In case of Nifty (ex-banks), bottomline will improve by 2.3% on a yoy basis. On a sequential basis, growth may appear high but due to low base of Q2s in the previous two years.
Global cyclicals: Both metals and oil & gas to witness profit drops
Global economy, particularly global cyclicals, are expected to be the main drag on overall growth during the quarter. The metals and mining sector is expected to report a sharp drop in earnings on account of lower commodity prices. In Q1 FY17, average base metal prices are lower by ~10-15% yoy and domestic steel prices are lower by 2.4% yoy. The sharp decline in PAT (25.6% yoy decline) for the sector is largely due to lower contribution from HZL, NMDC, Tata Steel and Vedanta and higher loss at SAIL. However, on a sequential basis, most of the companies are expected to report higher margins due to improvement in realisations and lower costs.
Oil & Gas sector is expected to see a 24.4% yoy decline in PAT on the back of 1) 21% yoy fall in crude oil prices impacting upstream companies and 2) 35% yoy decline in benchmark GRMs resulting in lower profitability of oil marketing companies.
Global economy will contribute 58% of the profit during the quarter, ex-banks. Global cyclicals will account for 34% of the total profit (ex-banks).
Gradual pick-up in domestic demand and low base catch up expected
Revenues across major sectors in the domestic economy (auto, cement, media, realty & infra, FMCG, cap goods & eng, power, telecom) are expected to rise between 7.1% and 18.4% on a yoy basis. These are encouraging signs for the economy; data related to autos, cement, domestic passenger travel, etc have been healthy in the last few months. Barring telecom and autos, all these major sectors are projected to report high double digit profit growth on yoy basis.
Domestic cyclicals to outshine
We estimate domestic cyclicals to post a 15.9% yoy growth in revenue and 14.6% rise in net profit during Q1 FY17. Even as the bottomline of the auto space, which accounts for half the profit of domestic cyclicals, will likely grow by only 3.1% yoy, other heavyweights like L&T, Ultratech, UPL, Ambuja, ACC, etc offset the impact.
Consumer staples key contributor in domestic defensives
FMCG companies are likely to report on aggregate a 11.8% and 19.5% yoy growth in sales and profits respectively. This performance will be on the back of marginal volume uptick, some pick up in rural growth, premiumisation, lower commodity prices and base effect in some cases.
Financials: Sharp growth divergence continues
Both system loan and deposit growth remains tepid and the stark loan growth divergence is likely to continue between Private and PSU space. At an aggregate level, while profit growth for Private sector is 11.3% yoy, the same for PSUs is down 40.3%. In case of NBFCs, most in our coverage are likely to see an improvement in growth; particularly HFCs, vehicle financiers and Gold loan companies.
Outlook
Q1 FY17 is likely to be impacted by high base effect of previous two years and poor show by global cyclicals. However, domestic economy looks to be gradually firming up. The subsequent quarters in FY17 are likely to report even better headline numbers. Hopes of a normal monsoon, GST passage and expected interest rate cut with new RBI Governor taking control should help matters further.
Technical Acumen
Nifty closed flat last week as it struggled to continue the recovery from the low of 7927. Also, index faced hurdle at the upper-end of the current orbit 841(0) which contributed a decline towards 8287 in previous week's trade. However, gann support of 8281 and 827(0) restricted the downfall on Friday's trade. With global markets in pink of health, we expect a gap-up opening in today's trade. Going ahead, 8410 will act as a reference point for index to continue its journey above 8530 levels. Fresh longs should be created once 8410 is held for at least 3 trading sessions.
Derivatives Insight
² SGX Nifty indicating big gap up of 100+ to 8430 levels. Fresh near term highs likely to be retested on index.
² Global cues extremely positive, reaction to upbeat US jobs report, strong up-move seen on US markets trading near its life highs.
² Options front, maximum build-up continues at 8200 puts and 8500 calls on index with chances of 8500 to be tested in July series.
² FII's mildly added short futures positions to tune of 4k contracts, index futures long to short ratio now stands at 3.97x vs 4.35x.
² High beta mid cap stocks likely to be in focus from traders.
Fixed Income Market Overview
The Indian bond market traded range bound throughout the day, and the bond yield closed flat at 7.38%. The traders kept a close eye on the upcoming CPI inflation data which is going to be released on July 12, 2016. The Gsec volume for the day stood at ~ Rs923 Bn.
The demand at the fixed Repo window was Rs.199.94Bn, whereas supply from fixed Reverse Repo stood at Rs.26Bn. The RBI had set a cutoff of 7.22% on the 7.80, 2021 bond, 7.54% on the 7.59, 2029 bond, 7.65% on the 7.73, 2034 bond and 7.70% on the 8.13, 2045 bond. The Call WAR closed higher at 6.44% vs. 6.27%.
The benchmark five-year OIS and one-year OIS closed lower, with the one-year OIS closing at 6.51% vs. previous day's close of 6.52%; the five-year OIS closed at 6.56% vs. previous day's close of 6.56%.
Commodity & Currency Cues
Gold prices initially moved lower till US$1,336/oz in the wake of strong US employment numbers for June. However, the yellow metal later pared losses as the overall trend in the employment markets this year has not been as good when compared with the last year. US economy has added an average 168,000 jobs per month during the first half of this year, when compared with an average of 229,000 jobs during last year. In fact, last two months average has been worst at 149,000 jobs, with May reading downwardly revised further to 11,000. Gold prices have now reclaimed US$1,370/oz level and the trajectory looks well poised to clear the hurdle of US$1,400/oz in relatively short order. Broader markets are pricing in the fact (rightly so) that US Fed will stand pat on the policy for the next few months, given the uncertain global economic backdrop. Tomorrow, market focus will be accentuated on BOE policy meeting, where the central bank is strongly expected to ease in order to combat adverse economic repercussions of Brexit. In this regard, IMF has slightly downgraded Eurozone growth forecasts, wherein the economy is expected to grow 1.6% during 2016 and 1.4% in 2017. Considering such landscape, the precious pack is well placed as the global easing campaign will overcome any potential headwinds including strong US dollar and surging global equities.
In the non-ferrous pack, Nickel prices moved lower despite suspension of operations at two mines by Filipino government on the ground of environmental violations.
Crude oil prices remained under pressure, as US rig counts rose further, indicating early signs of bottoming US oil production.
GBP and JPY continue to dominate market action, where both currencies are witnessing substantial action, albeit in a divergent direction.
Corporate snippets
² Bharti Airtel is set to extend its 4G footprint to 19 circles in next 3-4 months as it will be launching services in six circles where it acquired spectrum from Videocon Telecommunications. (BS)
² Cipla is investing 1.3bn South African Rand (about Rs6bn) in a biotech plant in South Africa as it aims to make cancer drugs affordable and grow its presence in the market. (BS)
² DLF has shortlisted six potential buyers for 40% stake of the promoters in its rental arm DLF Cyber City Developers that is expected to sell for about Rs 130bn. (ET)
² Cadila Healthcare has received Establishment Inspection Report (EIR) from the US health regulator for its manufacturing facility in Moraiya. (BL)
² Scepticism over the Rs48bn acquisition of Reliance Cement shrouded Birla Corporation's annual general meeting as shareholders raised questions about the feasibility of the deal as well as its financing. (BL)
² Lupin said US health regulator has voiced minor concerns after completing the inspection of its Dabhasa facility in Gujarat. (ET)
² Cadila Healthcare sees big growth opportunity in US and Latin American formulation markets and plans to enhance share in the US generics market by launching complex, oral solids and formulations.
² Telecom Ministry is learnt to have cleared the Rs35bn 4G spectrum trading deal between service providers Bharti Airtel and Aircel. (BS)
² Dishman Pharmaceuticals and Chemicals Ltd has completely moved away from Vitamin D3 production and has instead entered a high-margin, low volume category of analogs and cholesterol. (BS)
² The Odisha Pollution Control Board has extended the validity of the consent to establish order issued to DLF by five years. (BS)
Economy snippets
² The Finance Ministry has imposed definitive anti-dumping duty on purified terephthalic acid (PTA) imports from China, Iran, Taiwan and Indonesia. (BL)
² Jharkhand has received 27 investment proposals of Rs1trn in mining, power, agriculture, food processing, health, education and tourism. (BS)
² The Telecom Regulatory Authority of India (TRAI) extended the deadline for comments on the consultation paper on 'Review of Voice Mail/Audiotex/Unified Messaging Services Licence' to July 25 and counter comments to August 8 from the previous deadline of July 11 and counter-comments of July 25. (ET)
Happy Investing!
Amar Ambani
Head of Research
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