The Empire Strikes Back!
Invincibility lies in the defence; the possibility of victory in the attack. Sun Tzu
Patriotism hit a high while market slumped to a low as the Indian Army went on the offensive to carry out surgical strikes in Pak-occupied Kashmir. The market was perhaps waiting for an excuse to correct and the skirmishes in the border led to a sell-off inflicting damage especially on the mid-cap counters. With India now striking at terrorist launch pads and choosing to retaliate and take pre-emptive measures, a lot of global attention will be focus on how the two countries handle the situation. The Indian currency shed some weight inching closer to the 67 mark against the dollar. The outlook is a weak start. On agenda today are GST Council meet, CPI for Industrial workers and Core Sector growth for August. The rollovers have been below average. Foreign investors have pumped in over Rs.7,000 crore. If tensions escalate, deleveraging may set in. US indices saw the sharpest decline in a fortnight while Asian indices are bleeding for now.
Management Meet
Talbros Automotive Components: Multiple triggers for growth – Not Rated
CMP (Rs) 135
We interacted with Mr Anuj Talwar, Joint Managing Director and Mr Naveen Juneja, Group CFO of Talbro Automotive Components Ltd (TACL). TACL has a near monopoly status in two-wheeler gaskets, while it has a 40% market share in CV gaskets. It has a meaningful presence in forged components, hoses, anti-vibration products and chasis/suspension components. It has strong tie-ups through JVs and technical assistance with industry leaders such as Magneti Marelli, Nippon Leakless, Marugo Rubber, Sanwa Packaging and Interface Solutions.
TACL had seen flattish revenues in the past five years as two-wheelers where it has 92% market share in gaskets saw tough times, its forging segment utilization was under pressure owing to power availability issues and new JVs took time to scale up operations. However, going ahead the company believes that it would see a sustainable 12-13% CAGR in revenues led by 1) strong 2W/CV demand for gaskets on back of rising auto sales, 2) entry into passenger car segment for gaskets, 3) scale up of the heatshields (a new product) business, 4) revival of orders in forging business as power costs recede, 5) Magneti Marelli (MMT) JV revenues to see revival as new products and new OEs get enrolled and 6) scale up of hoses business in the Marugo Rubber (MRT) JV.
Margins should see steady increase as utilization improves across segments and contribution of high margin MMT JV rises. Resultant robust earnings growth along with limited capital expenditure requirements would allow the company to prune its debt (net D/E of 0.8x). Return ratios will also improve on the back of higher asset turnover and improvement in margins. P/E of 17.2x on FY16 EPS of Rs7.9 looks reasonable but is not reflective of the ensuing strong earnings growth.
Derivatives Strategy
Rollover Analysis – October 2016
Surgical strike by India spooked domestic market as geo-political uncertainty translated into nervousness, which was visible with VIX shooting up 40% during the day. Traders were caught on a wrong foot, particularly the PUT writers, who were forced to unwind their position as market kept falling fiercely after the news broke out.
For the September Month, Nifty stood flat as market was influenced by global and domestic uncertainty. Rollovers of Nifty/BankNifty stood at 65/65% (2.4cr/19lacs shares) as against 84/73% (2.7cr/20lacs shares) previous expiry and 75/73% 3month average. Market wide rolls stood at 82% vs 81.2% previous month and 81.4% 3M average.
FII's long/short index futures rolls stood at 61/38% as against last four month average of 88/37% indicating fading bullish stance. On the other hand, FIIs stock futures long/short rolls stood at 89/78% as against 76/84% average of the last four months indicating some unwinding of arbitrage position. On option front, Nifty October series starts with OI build-up at 8600 puts (3.0mn shares) and 9000 call (3.7mn shares).
Technical Track
Emergence of geopolitical issues following surgical strikes by Indian army in Pakistan spooked the key indices. Nifty fell sharply from the peak of 8801 and made a low of 8558. For last three weeks, Nifty was contracting in a range and in yesterday's trade it confirmed a breakdown. However, development of external events took many by surprise on Dalal Street and Nifty settled at 8591. With today being a weekly, monthly and quarterly close, much will depend on whether Nifty is able to defend multiple gann support points around 8560-8600 and as well the low of the month of August (8518). If selling pressure fails to settle down around this levels in next two sessions, index could see sharp cuts going ahead.
Derivatives Diary
² Erasing early gains Nifty suffered steep losses on geopolitical concerns. Fresh shorts seen in Nifty/Bank Nifty futures
² Market breadth turned to be negative, as all the sectoral indices ended in red in Thursday's session
² Open interest additions seen across the board with maximum base at 9000 call and 8600 put on October series
² India VIX was jumped by 33% in single session. Rollover for Nifty/Bank Nifty futures on expiry day was recorded at 65.6/65.3% respectively
² Immediate support for Nifty spot is seen at 8540-8510 spot levels. Another gap down opening possible as SGX Nifty is trading at 8592 down by 47 points
Fixed Income Synopsis
The 10Y benchmark 7.59% GS 2026, ended ~9 bps higher at 7.01% vs previous close of 6.92%, and the 6.97% GS 2026 ended ~8 bps higher at 6.86% vs previous close of 6.78%. Gsecs recorded total trading volume of ~Rs. 711 bn. Bond yields spiked after the announcement of surgical strikes conducted by Indian army in Pakistan across the LoC.
The demand at the fixed Repo window was Rs. 76.72 bn, while the supply at the fixed Reverse Repo window was registered at Rs. 39.92 bn. The Call WAR closed higher at 6.44% vs previous close of 6.42%.
The benchmark five-year OIS and one-year OIS closed higher, with the 5-Y OIS closing at 6.40% vs. previous day's close of 6.32%, while the 1-Y OIS closed at 6.49% vs. previous day's close of 6.44%.
The Reserve Bank of India's Reference Rate for the US Dollar is Rs.66.55 on September 29, 2016, while the corresponding rate for the previous day (September 28, 2016) was Rs.66.45.
Commodity & Currency Cues
Precious metals held ground, underpinned by weakness in global equities. German indices have been adversely impacted by uncertainty over the fate of Deutsche Bank. There is ambiguity on whether the beleaguered bank will receive any state aid. On macroeconomic side, although the third estimate of second quarter GDP was upwardly revised to 1.4% from 1.1%, IMF reported that it will lower its 2016 US growth forecast again (no new projections yet).
LME base metals, barring Nickel moved higher. Nickel prices witnessed profit taking after Filipino government reported that mining companies whose operations have been ordered to be suspended, can appeal within seven days before the government decision is implemented.
Oil futures are trading on a firm note, however markets are contemplating over the fact that production cut announcement by OPEC is devoid of any details.
INR lost ground, adversely impacted by reports of surgical strikes by Indian military on terrorist camps in Pakistan occupied Kashmir.
Corporate Snippets
² Zee Entertainment Enterprises Ltd has acquired the UAE's leading radio station, Hum 106.2 FM, for an undisclosed amount. (BL)
² Larsen and Toubro has bagged orders worth Rs20.46bn across various business segments. (BL)
² Wockhardt said that the UK health regulator has completed inspection of its Chikalthana plant at Aurangabad in Maharashtra without making any critical observations. (BL)
² Cipla has decided to trim its ballooning employee cost by freezing increments of 300-400 of its top managers as part of the company's operational revamp. (ET)
² Balaji Telefilms Ltd (BTL) announced a streamlining exercise for its group structure to combine similar business interests, improve allocation of capital, enhance operational efficiencies and optimise cash flow. (BS)
² National Aluminium Co Ltd (Nalco) to re-think its overseas expansion plans including a proposal to set up a USD2bn smelter unit in Iran. (BS)
² Apollo Hospitals and Italy's KOS group have jointly launched a medical rehabilitation hospital here. (BL)
² The NTPC 4000mw Pudimadaka (Lalamkoduru) super thermal power project, proposed to come up close to Visakhapatnam, is awaiting fuel (coal) linkage to commence works on the project. (BL)
² NTPC Ltd is on course to implementing 1GW (1000MW) solar photo-voltaic power generation park at Kadiri in Anantapur district of Andhra Pradesh. (BL)
² Tata Steel plans to add 3mt steel output to its existing 13mt steel capacity across two facilities at Jamshedpur and Kalinganagar through brownfield expansion over the next few years. (BS)
² Lupin, received the US health regulator's approval to market its memantine hydrochloride extended-release capsules, used for treating Alzheimer's disease. (BS)
² The State Pollution Control Board (SPCB) has slapped a showcause notice on Vedanta Ltd's Lanigarh unit for unauthorised sale of hazardous waste. (BS)
Economy Updates
² The government's Income Declaration Scheme (IDS) has seen a revenue of Rs67.50bn for the Income Tax department, as unaccounted money to the tune of Rs150bn has been disclosed. (BS)
² Unemployment rate in India has shot up to a five-year high of 5% in 2015-16, with the figure significantly higher at 8.7% for women as compared to 4.3% for men. (BS)
² Labour ministry has decided to increase the equity investment of the employees provident fund organisation (EPFO) to 10% in 2016-17 as compared to 5% invested in the last financial year. (ET)
Happy Investing!
Amar Ambani
Head of Research
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