Dear All,
Tough talks! A different kind of war
Countries that nurture, peddle and export terror should have no place in the comity of nations - Sushma Swaraj
In what is referred to as war minus the shooting, India is preparing for an economic war on Pakistan with calibrated measures which could include some concessions given to the neighboring country and a review of the Water Treaty. The issue of ISIS was also part of the much awaited US Presidential debate, the first of which just got over with the two candidates beginning with a handshake and ending with a volley of attacks on each other. While Clinton referred to Trump's economic policy plans as Trumped-up trickle down, the latter shot back saying US needs to stop jobs from being stolen. The outlook is a flat start. Swings could take place as the F&O expiry draws near. Asian markets are seeing a recovery and the same may be seen in the Indian market too.
Thematic Report
Dairy Industry: Utterly Butterly Prospects
Having established itself as the world's largest producer of milk, the Indian dairy industry now seems fully geared to move up the value chain on the wings of disruptive innovation in the manner in which milk is produced, packaged and marketed. It's indeed ironical that the numero uno status in production offers a sharp contrast to the mediocre methods of production that still prevail across the country. Most of India's supply-side constraints are glaringly restrictive – whether the poor per cow production average or pathetic infrastructure and logistical arrangements. India produces an estimated 400mn litre of milk per day. Of the total milk supply, merely 30% is generated by the organised sector as of today, comprised mainly of co-operatives.
New waves of Demand and Supply
Clearly, the need of the hour is a significant leap in production efficiencies to be able to meet the fast-growing demand, especially for value-added products like milk-based sweets, processed cheese and flavoured variants. This is a significant shift in demand patterns considering the fact that for many years, most Indian households preferred to consume milk in plain liquid form and the only variants in vogue were butter and ghee. But in recent years, the Indian consumer has shown a marked inclination for value-added products, thanks to lifestyles shaped by Western influences, more number of working couples with higher purchasing power as also demanding work schedules that make 'ready-to-eat' a tailor-made option.
Sensing this discernible demand shift, as also the fact that co-operatives have conventionally focused on liquid milk, butter, cheese and ice cream, many private players have sensed a potent and productive market waiting to be conquered.
The high rate of growth and increasing preference for branded products is what is drawing players like Mahindra & Mahindra (M&M), ITC and others. M&M has launched liquid poly-pouch milk with 44% higher cream content and is enriched with Vitamin A & D. FMCG major ITC, on the other hand, has forayed into dairy with Aashirvaad Svasti pure cow ghee. The company will roll-out newer value added dairy products in the coming months. Godrej Agrovet raised its stake from 10% to 25% in Creamline Dairy for Rs1500mn.Meanwhile, Danone, Nestle and other existing private sector players are adding to their product line-ups and pushing in big money into the market while home-grown dairy cooperatives such as Mother Dairy and Nandini, among others, are also expanding their operations rapidly.
Companies covered in this report: Hatsun Agro, Heritage Foods, Kwality Dairy, Parag Milk Foods and Prabhat Dairy.
Technical Track
Nifty plunged sharply in Monday's trade. Both the Asian and European markets failed to provide any support to key indices as weakness was seen in global markets ahead of the US presidential debate. Despite all the upheavals seen since second week of September including yesterday's session, Nifty is still stuck in 204 points range. Index is still holding above the support of its 50-DMA. This support is in place since March 2016. 3-digit gann number is placed at 871(0) and gann rule of 8 suggest that 8704 could act as critical line of defence as it is positioned alongside 4 digit gann number of 8696. So confluence of support is seen between 8685 and 8710 which will decide the direction of this week's trade.
Derivatives Diary
² Big selloff on global cues and profit booking below 8800 levels. Nifty closed near 8735 on futures. Major cuts were seen on broader markets, with banking putting a big drag on nifty.
² Massive call buildup on 8750/8800 strikes and unwinding on 8800 puts indicates traders caught on wrong foot for the extent of fall on Nifty. IndiaVIX closed ~10% higher closing near 14.5 levels.
² FII's index futures long/short ratio was seen at 5.41x (previous 5.43x) with huge unwinding of ~22k long future positions.
² Tracking global cues, SGX Nifty is indicating flat opening recovering from lows below 8700 levels to open near 8750 zone.
² Index rollovers stood at 27% and markets wide rolls at 25.4% on D-3 days.
Fixed Income Synopsis
The 10Y benchmark 7.59% GS 2026, ended ~3 bps lower at 6.94% vs previous close of 6.97%, and the 6.97% GS 2026 ended ~1 bps lower at 6.79% vs previous close of 6.80%. Gsecs recorded total trading volume of ~Rs. 846 bn.
The demand at the fixed Repo window was Rs. 27.48 bn, while the supply at the fixed Reverse Repo window was registered at Rs. 30.34 bn. The Call WAR closed higher at 6.43% vs previous close of 6.42%.
The benchmark five-year OIS and one-year OIS closed lower, with the 5-Y OIS closing at 6.31% vs. previous day's close of 6.33%, while the 1-Y OIS closed at 6.44% vs. previous day's close of 6.45%.
The Reserve Bank of India's Reference Rate for the US Dollar is Rs.66.71 on September 26, 2016, while the corresponding rate for the previous day (September 23, 2016) was Rs.66.65.
Commodity & Currency Cues
Gold prices were underpinned by weakness in European equities. German indices were adversely impacted by meltdown in share price of Deutsche Bank, which nosedived to 30-year lows on account of concerns over hefty penalties that bank may have to pay for mis-selling mortgage securities in US. Moreover, German Chancellor Angela Merkel ruled out any state bailout for the bank. The weakness was pervasive in UK markets as well, with selling intensifying in banking and mining sectors. On short term outlook, markets will be interested in today's US Presidential debate. Polls are now suggesting narrowing gap between Donald Trump and Hillary Clinton. Lead of Republican Presidential candidate can augment the element of volatility in the broader markets and in the process underpin the safe haven appetite for the yellow metal.
On commodity regulation front, US Fed has proposed a plan to limit Wall Street banks from being active in the physical business or at least hold more capital against energy and commodity investments.
On non-ferrous fundamentals, International Copper Study Group (ICSG) reported that global copper markets witnessed a deficit of 227,000 tons during the first half of this year, a relatively much tight situation when compared with a surplus of 27,000 tons during the same period last year.
Oil futures moved higher as the industry summit commenced in Algeria. However, cynicism prevails over the efficacy of this conclave. Saudi Arabia is ready to trim output, subject to the condition that Iran freezes its production at 3.6mbpd.
Greenback remains on the defensive against Euro and Yen, while it is holding ground against Sterling. Indian rupee persisted with strength, helped by healthy foreign capital inflows.
Corporate Snippets
² CARE Ratings has notched up a tad the ratings of the bank facilities of V-Mart Retail Ltd (VMRL) aggregating Rs530mn. (BL)
² JK Paper is exploring the possibility of enhancing forest plantation in Myanmar to secure its key raw material for operations in India. (BL)
² Coal India (CIL) has asked for alternative coal blocks from the Mozambique government since it did not find any commercially viable reserves in the block it was allotted a few years ago. (ET)
² Indiabulls Housing Finance said it will raise up to Rs70bn from non-convertible debentures (NCDs) to fund its business expansion. (ET)
² Mahindra & Mahindra (M&M) said it will raise Rs4.75bn through issuance of non-convertible debentures (NCDs) on a private placement basis. (BS)
² Suven Life Sciences has been granted two product patents, one each in India and Japan, for the molecules to be developed for the treatment of neuro-degenerative diseases. (BL)
² NTPC will raise USD500-USD700mn in Masala bonds from the financial markets in London, Hong Kong and Singapore from November this year. (BS)
² Pfizer has completed the process of transferring four products to Piramal Enterprises after getting necessary regulatory approvals.
² Bank of India (BOI) has sold 18% stake in the insurance joint venture Star Union Dai-ichi Life Insurance Company Ltd (SUD) to its Japanese partner. (ET)
² Zee group is likely to buy a majority stake in Associated Broadcasting Company Pvt Ltd (ABCL), which owns a bouquet of regional news channels under the brand name TV 9. (BS)
² Indian Oil Corporation (IOC), and the US Trade and Development Agency (USTDA), have signed an agreement to jointly explore cleaner fuels. (BS)
² Jet Airways is negotiating a joint venture agreement with Air France-KLM to expand its commercial co-operation with the two European airlines. (BS)
Economy Updates
² An inter-ministerial panel approved 11 proposals entailing foreign direct investment (FDI) inflow of over Rs23bn. (BS)
² Buoyed by interest shown by global investors, the government plans three more sector specific sub-funds, including for the development of airports and ports, under the Rs400bn National Investment and Infrastructure Fund (NIIF). (ET)
Happy Investing!
Amar Ambani
Head of Research
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