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Decision making! Sept series struggling
Truly successful decision making relies on a balance between deliberate and instinctive thinking - Malcolm Gladwell
The September series seems to be in a bit of struggle ahead of the F&O expiry. Rollovers have so far been lower than average and Tuesday's fall from the top suggests that investors are finding it hard to make a decision. Crude tumbled on reports that Riyadh has rejected Saudi's offer to cut oil output. The outcome is awaited later in the day as OPEC members meet but most negatives are priced in. The World Trade Organisation has cut its forecast for growth by over 1 pc as it expects global trade to grow 1.7% this year compared with its 2.8% estimated earlier.
The outlook is a flat start. US indices ended higher while Asian markets are mixed. Technically, the Nifty is moving below the rising trendline. Stock-specific swings will be seen as F&O adjustments take place.
Express Idea
Tata Global: Brewing gains! - BUY
CMP Rs145, 3-mts Target Rs169, Upside 17%
Since September 2014, on several instances, the stock attempted to break past its downward sloping trendline which eventually led to a retracement on the downside. This week's breakout post the recent consolidation around the same supply trendline provides strong upside potential from current levels. We expect Tata Global to attempt the upper-end of the current gann channel (Rs169) in the medium term. Traders are advised to maintain stop loss of Rs133 on long positions.
Company Research
KEI Industries: All wired up – BUY
CMP Rs116, 12-mts Target Rs168, Upside 44.8%
KEI Industries has transformed itself into a comprehensive wires and cables manufacturer and has emerged as a major player in this segment over the last two years. Its portfolio spans house wire cables to extra‐high‐voltage cables (EHV) (up to 220kV). The company registered 27% volume growth in FY16, outperforming most of its peers. The institutional segment is set to witness a surge in demand as a consequence of growth in infrastructure and power T&D sector. The company's efforts to raise its retail sales by increased spend on brand building and expanding its reach would also boost overall volumes. EPC business with an order book of Rs.20bn, provides strong revenue visibility over the next three years. A combination of increased contribution from EHV and EPC segments and focus on retail sales would lead to 13.6% revenue CAGR for KEI. This combined with nominal increase in margins and lower interest costs would translate into an earnings CAGR of 37.4% over FY16-18E. With strong free cashflow, the company expects to repay its entire term debt in 3‐4 years. Attractive valuations of 7.6x FY18E P/E makes the stock a compelling buy. We recommend a Buy with a target price of Rs.168.
Lakshmi Machine Works Ltd: Exports to lead – Not Rated
CMP Rs4,320
Lakshmi Machine Works (LMW) is the third largest player globally and accounts for 70% of domestic textile machinery market by volume and 60% by value. We interacted with the management of LMW to get an update on the textile machinery industry and the company's plan to increase its global presence. The management believes domestic market growth would remain tepid as customer utilisation levels are low at 50-55% and the government has amended its Technology Upgradation Fund (TUF) scheme towards weaving, processing and finishing of garments. In the export market, the management expects its share to increase on account of increased product portfolio and venturing into new geographies. The company has started exporting its full range of products against exports of ring frame only in the initial period. LMW's China subsidiary would turnaround in FY17 as it has increased local sourcing (70%) and imports only critical parts from India. Share of active orders of domestic order book of Rs24bn stood at 60%. The company is focusing on value addition to offset the impact of lower volume growth. Earnings growth would remain subdued due to slowdown in textile sector. At the CMP, the stock trades at 19x FY18E P/E, higher than its historical average of 16.2x.
Technical Track
For the first time since March 2016, Nifty fell below the rising support trend line. If confluence of gann support (8696-8710) and 50-DMA fails to provide any respite, current decline could be first meaningful decline since March 2016. In Tuesday's trade, Nifty slipped in the red following a gap up opening, indicating weakness in holding on to reversal in short term trend. 8689 which acted as previous bottom in second week of September will act as critical support line, if broken a decline towards 8594 is possible i.e. 360 degree on the downside from the peak of 8969.
Derivatives Diary
² Erasing early gains Nifty ended lower in a volatile session, fresh shorts seen in Nifty and Bank Nifty futures
² FIIs futures long/short ratio was seen at 4.56x (previous 5.41x) with addition of 9k long and 15k short index contracts
² Significant addition was seen at 8700 call and unwinding at 8800/8700 put in Tuesday's session, suggesting 8800 to act as immediate hurdle point; while failure to sustain above 8700 may attract further selling pressure
² Rollover for Nifty and Bank Nifty on D-2 day stood at 41% and 32% respectively.
Fixed Income Synopsis
The 10Y benchmark 7.59% GS 2026, ended ~1 bps lower at 6.93% vs previous close of 6.94%, and the 6.97% GS 2026 ended flat at 6.79%. Gsecs recorded total trading volume of ~Rs. 1184 bn.
The demand at the fixed Repo window was Rs. 116.64 bn, while the supply at the fixed Reverse Repo window was registered at Rs. 58.92 bn. The Call WAR closed lower at 6.42% vs previous close of 6.43%.
The benchmark five-year OIS and one-year OIS closed lower, with the 5-Y OIS closing at 6.30% vs. previous day's close of 6.31%, while the 1-Y OIS closed at 6.43% vs. previous day's close of 6.44%.
The Reserve Bank of India's Reference Rate for the US Dollar is Rs.66.46 on September 27, 2016, while the corresponding rate for the previous day (September 26, 2016) was Rs.66.71.
Commodity & Currency Cues
Precious metals took a backseat, as the first US Presidential debate proved that Democratic Presidential candidate has an edge over her counterpart Donald Trump. Markets perceive Clinton as a status quo President, while Trump is regarded the most disruptive ever in US history. However, there are some market participants who still do not rule out the possibility of Trump making it to the White House. In such an event, volatility can exacerbate in the broader markets and in the process augment the safe haven appetite for the yellow metal.
In the non-ferrous pack, Nickel prices spearheaded the gains, underpinned by reports of Filipino government suspending 20 more mines. The tally for total shut mines is 30 and it accounts for 55% of Philippine nickel ore output.
Oil futures remain under pressure, as there are growing signals that nothing concrete will emerge out of the ongoing oil industry summit in Algeria.
Greenback regained lost ground after US Consumer Confidence index for September showed a strong increase. Nevertheless, British Pound continues to remain on the defensive, weighed down by looming threat of an imminent invocation of Article 50 (termination of EU membership).
Corporate Snippets
² L&T Finance Holdings, is in talks with bulge bracket investors such as Bain Capital LLC, Canada Pension Plan Investment Board (CPPIP) and secondary portfolio buyer NewQuest Capital Partners, as it plans to sell off its private equity portfolio to consolidate business segments. (ET)
² Tata Motors has forayed into the Bolivian commercial vehicles market through a distribution agreement with Bolivian Auto Motors, a part of the business group Salvatierra. (BL)
² NIIT has acquired the business of Bangalore-based start-up Perceptron Learning Solutions Pvt Ltd. This acquisition aims to bring together complementary technology platforms and capabilities of NIIT and Perceptron, enabling NIIT to further accelerate its Digital Transformation initiatives – StackRoute, digiNxt, and Training.com. (BS)
² KNR Constructions Ltd has completed the rehabilitation and upgradation of existing National Highway 565 from 425km to 509km between Penchalakonda and Yerpedu section in Andhra Pradesh under National Highways Development Programme IV. (BL)
² The Board of ONGC is split on the issue of claiming compensation for Rs110bn worth of natural gas spewing from its KG basin block into adjoining fields of Reliance Industries. (BS)
² Essar Steel, Jindal Steel & Power, JSW Steel and Steel Authority of India (SAIL) among other domestic steel producing companies are gearing up for a second consecutive upward price revision of its products for October on the back of increased key raw material prices mainly that of coking coal. (BS)
² The share buyback programme worth Rs36.50bn of Coal India would open next week on October 3. (BS)
² Bayer has inaugurated a new Global Formulation Technology Laboratory at its site in Vapi, Gujarat. The plant in Vapi is a production site for active ingredients for the Crop Science Division of Bayer globally, with expertise in Analytics and Formulation Development. (BL)
² Lanco Infratech Limited is looking to sell 1200mw coal-fired Anpara Power plant in Uttar Pradesh to bring in additional equity required to complete the under-construction power plants totalling 4000mw. (BS)
Economy Updates
² Moving at a fast pace, the tax department came up with two more draft rules and their formats on GST returns and refunds requiring assessees to file monthly returns and specifying procedure for claiming refunds of taxes, interest and fees. (ET)
² Reduction in ceiling prices of 464 drug formulations after the introduction of the National List of Essential Medicines (NLEM)-2015 has led to savings of Rs22.88bn to consumers. (BS)
Happy Investing!
Amar Ambani
Head of Research
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