Weekly Wrap: Brexit, Fed meet trigger profit booking
It was a case of so near yet so far for bulls as they attempted to cross the hurdle of 8290-8300 mark. Recent run-up hit a bumpy road this week as global growth worries weighed on the market. Increasing uncertainty surrounding the UK-EU referendum and diminishing expectations for a rate hike by the Fed also exhausted investors' appetite for risk.
Back home, Nifty struggled to sustain above 61.8% retracement (8243) of the entire move from 6825 to 9119. Moody's Investors Service said that the weak earnings outlook for India's public sector banks highlights their high level of external capital needs and their capitalization profiles will further deteriorate unless the government provides additional capital support.
Meanwhile, dismal jobs data changed investors' calculi in the US but Fed Chair preferred not to attach too much significance to any single monthly report. Yellen's speech avoided any hints at when a rate hike could be affected. Earlier this week, RBI maintained status quo in its policy meet and hinted at progressive lowering of average ex ante liquidity deficit in the system to a position closer to neutrality. Inflation rate will be announced next week for the month of May. Monsoon has finally hit the Kerala coast; progress of monsoon rains will be watched closely. Investors will now shift their attention to the Brexit vote scheduled to take place later this month and of course the Fed meet.
Global Market Weekly Performance
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Source: Bloomberg, IIFL Wealth Research
Nifty Weekly Pullers/Draggers:
§ Nifty50 Pullers – Hindalco 9.2% Ultratech 6.1% Bhel 4.9% Sbi 4.8% & Hcl Tech 4%
§ Nifty50 Draggers – Infy 6.8% Auro Pharma 5.9% Bosch 3.5% Asian Paint 3.2% & Dr. Reddy 3%
Weekly Sector Performance
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Source: Bloomberg, IIFL Wealth Research
Market Net Inflow/Outflow
§ Foreign net equity inflow: Rs.3,364cr(2nd June – 8th June)/Rs. 18,075cr YTD
§ Domestic net inflow: Rs.-420cr(2nd June – 8th June)/Rs. 9,027cr YTD
§ Foreign net debt inflow: Rs.-508cr (26th May – 1st June /Rs. -8,309cr YTD
Fund Action
§ Harrow Investment Holding sold 4.1mn shares of Redington at Rs107
§ Union Bank of India bought 0.3mn shares of Bharatwire at Rs45
§ Motilal Oswal Asset Management Company bought 0.2mn shares of Phoenixll at Rs135
§ Morgan Stanley Asia (Singapore) bought 0.8mn shares of Satin at Rs375
Technical Insight
Nifty has made four successive lower highs, which suggests that 8290 is acting as a roof in the near term. Moreover, point of polarity (8269) is turning out to be an important hurdle, as Nifty has failed to sustain above the same for more than a single session. On the downside, midpoint of current orbit (8101) appears to be an immediate support.
F&O Cues
Nifty lost some ground this week on account of weakness in global markets. However, undertone remains strong. Nifty range is getting narrow with maximum put open interest seen at 8000/8100 strikes while upside resistance is at 8300 calls. Higher degree of intraday volatility is expected between 8150 to 8300 zone. Implied volatilities are likely to inch higher as global events unfold. FIIs maintained extremely bullish stance as index futures long/short ratio stood at 6.27x near its 19-month peak.
News That Mattered
§ IOC, BPCL and HPCL have struck a temporary deal with Reliance Industries and Essar Oil to resume buying petrol and diesel from private refiners on revised terms. (ET)
§ Five subsidiaries of Coal India will buy back up to 25% of their shares from the parent so that the coal monopoly can go ahead with its own share buyback offer to the government and the public. (ET)
§ The US Consumer Product Safety Commission (US CPSC) has approached the US Dept of Justice seeking action against Dr Reddy's Labs in a 5-year-old case involving packaging for five blister-packed prescription products. (BL)
§ HDFC Ergo general insurance company, promoted by HDFC, agreed to buy L&T General Insurance owned by L&T for Rs. 5.51 bn, first buyout in the general insurance industry. (ET)
§ Hindustan Unilever is aiming to become the largest e-commerce player in the grocery/FMCG segment soon. (BL)
§ Motherson Sumi Systems's subsidiary Samvardhana Motherson Automotive Systems Group will raise USD300mn through issue of notes due in December 2021 to repay debt and general corporate purposes. (BL)
§ Larsen & Toubro (L&T) said its construction arm has won orders worth Rs.21.61 bn across various business segments. (BL)
§ Lupin has received final approval from the US health regulator to market Voriconazole tablets, used for the treatment of fungal infections, in the American market. (BL)
§ NTPC said that the company will add 4,500MW of capacity in 2016-17, more than double that of the 2,200MW it added in 2015-16. (BL)
§ Bosch looks India to contribute around one-third of its expected global revenue of EUR1bn (around Rs.75.30 bn) from its two-wheeler and powersports business in the next four years. (ET)
§ Idea Cellular will open 100 new company retail stores (CRS) across the country by the end of this fiscal year to support 4G services. It launched its 100th such store in Mylapore, Chennai, taking the overall count to 100 across the country. (ET)
§ The Nuclear Power Corporation of India and US firm Westinghouse have agreed to begin engineering and site design work immediately for six nuclear power plant reactors in India and conclude contractual arrangements by June 2017. (ET)
§ The Centre has released a new set of guidelines on capital restructuring of state-owned companies, which will make them more accountable on matters of dividends, buybacks and bonuses and will help the government meet its non-tax revenue and capital receipts target for the year. (BS)
§ The Union Ministry of New and Renewable Energy (MNRE) has set the highest ever capacity addition target 16,660MW for the clean power sector this fiscal. (BL)
Upcoming Events
§ June 13: India May CPI
§ June 14: India May WPI
§ June 15: Japan BOJ monetary policy statement, US FOMC interest rate decision and economic projections
§ June 16: US core may inflation rate yoy
§ June 23: Referendum on Britain leaving the EU (Brexit)
From IIFL Wealth Research Desk
Macro Economics: World Kaleidoscope
World markets have been facing multitude of headwinds over the past few years, beginning from fragile global economic backdrop, sovereign debt crisis in Europe, failure of 'Abenomics' in Japan, looming interest rate hike in US and the possibility of 'Brexit'. In fact, the list goes on with slowdown now pervasive in other emerging markets as well. Markets are now brooding over economic crunch in Venezuela, prolonged recession in Brazil, mounting debt burden in China, fiscal deterioration in Middle East, economic woes for Russia and deflationary trends in various other economies.
PSU Banks- At the mercy of one question… Is the worst behind?
Often in various discussions on PSU Banks the call for investment into them has hinged on one key question, Is the worst behind? The fact that market is undecided on this was clearly visible in the lack of substantive positive or negative reaction to an expectedly bad Q4 FY16 performance. We try to explore the answer to this question and also to its subset, whether is it time to BUY them?
Amid the justifiable flak that PSU Banks got for building a structurally weak book during the previous investment cycle, a couple of encouraging trends have gone unappreciated. First being de-risking of assets through increasing the share of retail and well-rated corporate loans and second, resilience in deposits growth and its improving mix.
We are also of the view that worst in terms of delinquency rate is behind and that it should moderate over the next couple of years. RBI's AQR, proactive identification, management commentary, decline in standard restructured assets and significant impairment already recorded in most stressed sectors provide comfort. On the macro side, trends in domestic economy, global commodity prices and stalled projects are encouraging. If recoveries and upgradations pick-up by FY18, then NPL ratios will start moving down.
With regards to capital adequacy, which is relatively weak for most PSU Banks, the government stands committed over and above the funding plan announced. Also in the longer term, expansion in PPOP margin and moderation in credit cost will augment internal generation. Some stronger banks thus should be able to raise money from the market.
While valuing PSU Banks, it is important to look beyond FY18 and factor the probable significant recovery in the adjusted book value during the initial phase of the next upcycle. Then they don't look untouchables as are being treated now. However, not all stocks may appear appealing also. Amongst the ones in our coverage, we believe that SBI holds significant value for long term investment.
Nifty: Good times ahead!
Nifty has displayed immense relative strength in comparison with other Asian emerging markets, which further supports our view of adding fresh longs on a retracement to previous breakout or on a move above 8290 for a target of 8600.
With Indian markets outperforming the emerging markets peers and the expectations that this trend will persist for quite some time, there is a strong likelihood that fund flows will be attracted towards a higher yielding market like India.
Pharmaceuticals: Living in "complex" times
Indian pharma companies face a future where presence in complex/specialty generics would no longer be an option but a must for survival. Having plucked a large proportion of low hanging fruit-plain vanilla oral solid generics, domestic companies would have to realign capabilities, capacities and platforms to ensure they stay relevant in an era where complex generics and NCE/biologics/biosimilars pipeline would play a vital role. Indeed an interaction with front line pharma players bolsters our case for such a reset; albeit we do expect companies to selectively target large, profitable opportunities to grow oral solids business. An indirect acknowledgment of such a transition is manifest in the higher R&D spending-e.g. Lupin's R&D spending would jump 500bps to 13.5% in FY17E from <9% in FY15. We believe near term stock performance would be influenced by immediate opportunity size in oral solids and valuations but beyond that market would be discerning between the "R&D haves and have not's". We pick Aurobindo, Strides and Glenmark as top picks in the sector.
Ferrous: Global steel prices on a weak footing
Steel prices have been volatile since the start of 2016. Chinese export prices surprisingly rallied from the beginning of the year until May (+80%), owing to de-stocking, improved economic sentiment and speculative trading. However, this scenario has changed since then and prices have plunged (-25%), following a regulatory clampdown on speculative trading and jump in Chinese output. Steel prices in Western countries have also experienced a slide of sorts. In the domestic market prices improved post the implementation of Minimum Import Price (MIP) in February '16. HRC prices gained 25-28% from their February lows and have sustained near their peak. However, long product prices corrected due to subdued demand from the infrastructure sector and increase in domestic production (benefit from low raw material costs). The impact of implementation of MIP has started yielding results from May '16. India's steel imports in May fell to their lowest level in 14 months to 0.55mn tons, down 41% yoy and 17% mom. We expect softness in global steel prices to continue, owing to excess capacity in the system and lower raw material costs. In India, extension of MIP beyond August '16 is a concern for investors, as the move has drawn criticism from many nations at WTO. If MIP is not extended, the government could well introduce other safeguards to prevent any dumping of steel. However, compared with MIP, these measures would be less effective on an incremental basis to block imports.
Infrastructure: Key regulatory changes fast tracks the revival in Indian Road sector
The Indian Road sector has seen strong traction and is better placed today than a couple of years ago. There are multiple factors that have driven this improvement, the most important being changes in the regulatory environment. Key policy measures like awarding projects only after majority land acquired, ease of project approval, option to exit BOT projects and compensation for delays are key measures announced recently. Additionally, increased budgetary allocations and introduction of the new developer-friendly Hybrid Annuity model is likely to pave way for strong development. Changes in regulatory environment have been effective since almost a year; results have now started showing, with order awards picking up sharply and construction gaining momentum, especially during the past few quarters. Buoyed by this improvement, the Ministry of Roads and Highways (MoRTH) is pushing the envelope and expects to increase road awards and construction to 25,000 km and 15,000 km respectively in FY17 (whopping 2.5x of FY16). We believe most of the Companies in this space would benefit from the opportunity. However the immediate beneficiary would be the pure play EPC players with strong balance sheets. We prefer EPC focused players like KNR Constructions, PNC Infratech and JKumar Infra in this space.
Chart of the Week: Will market take out this valuation barrier!!
Nifty 1yr forward PE multiple trading at 1+SD. In March-15 Nifty topped out at 1+SD levels.
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Source: Bloomberg, IIFL Wealth Research
Warm Regards,
IIFL Wealth Research
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