TGIF: Thank God It's Festival
The light teaches you to convert life into a festive promenade. - Dejan Stojanovic
The F&O expiry saw some light as short-covering in select stocks propped the indices into positive zone. The rollovers were among the weakest in recent months but Nifty managed a close above the 8600 mark which is some relief for those who check technical levels. The broader market remained largely subdued with the mid-cap and small-cap indices closing in the red. For the October series, though the main indices clocked marginal gains, the Nifty Mid-cap rose by over 3 pc while BSE Small-cap zoomed by close to 7pc. The outlook is a weak start. The weakening yen has boosted the Japanese market but Asian markets are mostly subdued. Oil moved higher on hopes of an output cut. It's a long weekend in India as the country celebrates the festival of lights. Market will be open for a customary trading on Sunday evening for an hour as investors make token purchases seeking blessings from Goddess Lakshmi who is synonymous with wealth and prosperity.
Management meet
IL&FS Transportation Networks Ltd: Deleveraging holds the key; set up of InVIT crucial
CMP (Rs) 111
Going forward, we expect ITNL top line growth to pick up on the back of the execution of a robust order book, fruition of under-construction projects besides a strong order pipeline. We expect the consolidated top line to grow at ~10% during the coming years. ITNL, which outsources its entire EPC work to third parties, is expected to generate consolidated margins of ~30% during next few years. The InVIT setup would be crucial for ITNL for deleveraging and maintaining its order intake ability.
Derivatives Strategy
Rollover Analysis – October 2016
Nifty started the month on a cautious note, with traders/investors hand-wringing over the escalating military conflict between India & Pakistan. While, second half of the series was dominated by Q2 earnings, which exhibited a mixed bag, resulting in to a lackluster movement in the markets. Over the October series, Nifty OI shrunk by ~50lacs shares as FIIs unwind their long index future position.
For October Month, Nifty stood flat as subdued global cues, reduction in ETF flows and disappointing corporate results weighed on broader indices. Rollovers of Nifty/BankNifty stood at 70/67% (1.9cr/16lacs shares) as against 66/65% (2.5cr/19lacs shares) previous expiry and a 3months average of 71/69%. Market wide rolls stood at 82%, matching figures of the previous month and marginally above 3m average of 81%.
FII's long/short index futures rolls stood at 84/44% as against last four month average of 81/37%; however, total OI is significantly low indicating fading bullish stance. On option front, Nifty October series starts with OI build-up at 8500 puts (3.2mn shares) and 9000 call (2.8mn shares). Volatility which has been at its trough is likely to resurface as we enter into an eventful Nov series.
Hero Motocorp (Q2 FY17): Sustaining strong momentum - BUY
CMP (Rs) 3,412, 12-mts Target (Rs) 3,820, Upside 15.3%
During Q2 FY17, Hero Motocorp reported a strong beat in terms of operational performance driven by robust margin expansion. Volume growth was at 15.8% while realizations declined by 1.1% on yoy basis. Revenues were lower than our expectations on the back of weaker than forecasted growth in realizations which can be attributed to weaker product mix. Highest ever OPM was reported at 17.6% with a growth of 147bps yoy and 93bps qoq. Going ahead, margins are expected to come under pressure with increase in commodity prices and an expected rise in ad spends in H2 FY17. With monsoons being close to normal, green shoots with regards to rural demand revival have started appearing. Implementation of VII pay commission would result in better urban demand. Margins over the medium term are expected to remain strong considering the continuous effort of the company to cut costs. We assign a BUY rating with a revised price target of Rs3,820.
Sterlite Technologies Ltd (Q2 FY17): Weak quarter; outlook remains strong - BUY
CMP (Rs) 105, 12-mts Target (Rs) 130, Upside 23%
Sterlite Technologies Ltd (STL) Q2 FY17 topline performance was lower than estimates due to poor offtake of optic fibre cables (OFC). While optic fiber (OF) volumes grew by 30% yoy, cable volumes declined by 40% during the same period. The increased capacity in the optic fibre segment along with strong demand aided volumes. Inline with the weakness in topline performance, the company also witnessed moderation in operating margins which stood at 18.5%. STL expects cable business to pick up from H2 of FY17. The current order book of STL has increased 11% yoy to Rs.23 bn. STL plans to ramp up its fibre capacity to 30 mn fkm by mid FY18. The Company has been accelerating the capacity addition in the fibre segment as it is witnessing strong global demand. We remain positive on the growth prospects of STL and believe it is in a strong position to capitalize on the opportunity arising from Government's Bharatnet Program and 4G roll out by telcos. We have lowered our estimates marginally to factor in the slower offtake in OFC demand. We maintain our BUY rating on the stock for revised target price of Rs.130 (10.5x FY18E EV/EBITDA).
Tech Mahindra (Q2 FY17): On the mend – BUY
CMP (Rs) 415, 12-mts Target (Rs) 490, Upside 18.1%
² Revenue growth was ahead of expectations
² Margin performance was strong
² Valuation attractive; upgrade to Buy
Bajaj Finance (Q2 FY17): Rich valuations! – Reduce
CMP (Rs) 1,105, 12-mts Target (Rs) 1,002, Downside 9.3%
² Asset growth remains strong led by consumer finance
² NIM and Asset quality stable, C/I ratio to moderate
² Priced to perfection; valuation to consolidate
JSW Steel Ltd (Q2 FY17): Volume growth to remain strong - Accumulate
CMP (Rs) 1,636, 12-mts Target (Rs) 1,732, Upside 5.9%
JSW managed to outperform on all fronts in Q2 FY17, led by strong volume growth and higher contribution from subsidiaries. Volumes jumped 20.4% qoq on the back of ramp up of new capacities and higher exports. Exports surged 60% qoq on account of favourable prices globally and subdued domestic demand. Blended realisations declined 2.5% qoq, but were higher than our estimate due to increase in share of exports. EBIDTA/ton was marginally lower than estimate due to higher than expected increase in raw material costs. JSW has taken price hikes of Rs.1,500/ton in October to marginally pass the increase in coking coal costs. The company has managed to bag iron ore mines with capacity of 4.4mtpa and reserves of 111mn tons in the recently concluded iron ore auctions. We have raised our steel price estimate for FY17 and FY18 on account of safeguard measures and revival in global steel prices and have also upgraded our recommendation to Accumulate from Reduce.
Maruti Suzuki (Q2 FY17): Stellar show - Accumulate
CMP (Rs) 5,860, 12-mts Target (Rs) 6,300, Upside 7.5%
Maruti Suzuki reported a stellar performance in Q2 FY17 with a beat in terms of operating margins and PAT. While net sales were tad lower than our estimates due to weaker realizations, OPM came in much higher than estimates as increase in raw material costs and unfavourable currency movement was more than offset by the benefits of operating leverage (volume growth of 18.4%). PAT was significantly higher than forecasts as other income came in substantially ahead of estimates. Demand for passenger cars is expected to remain strong on the back of normal monsoons and VII pay commission implementation. Maruti, in spite of strained capacity, has sweated its assets to meet large portion of the rise in demand. Furthermore, commencement of production from the Gujarat plant at the end of FY17 will provide thrust to volume growth in FY18. Company will be able to hold its margins as adverse currency movements and rise in commodity prices is offset by favourable product mix with increasing share of new models. We maintain our Accumulate rating with a revised price target of Rs6,300.
ONGC (Q2 FY17): Recent run-up limits upsides - Accumulate
CMP (Rs) 290, 12-mts Target (Rs) 317, Upside 9.0%
During Q2 FY17, ONGC reported a better than expected performance on all counts. Revenues came in higher than expected due to better than estimated production. A beat was reported at OPM level owing to lower than forecasted statutory levies and other expenditure (lower workover expenses). With depreciation coming in lower than forecasts, PAT performance was significantly better than our expectations. Production is guided to be higher for both standalone entity and OVL. The company has announced a 1:2 Bonus issue and an interim dividend of Rs4.5/share. Post the recent run up, we downgrade our rating to Accumulate with a revised price target of Rs317.
Torrent Pharmaceuticals (Q2 FY17): A normalized quarter - Reduce
CMP (Rs) 1,440, 12-mts Target (Rs) 1,500, Upside 4.0%
Torrent reported a weaker than estimated earnings with revenue and EBIDTA decline of 16% and 54% respectively. Price erosion in large products like Abilify, Nexium mean they are now part of the ~US$200mn base business with US sales decline of 55% yoy attributed to receding Abilify contribution and represents a normalized quarter. Torrent reiterated its view of a 5-10% price decline in US base business which would be offset by volume ramp up in 5-6 key products like Detrol and 6-7 new launches in FY17. Q2 gross margin held up sequentially on better revenue mix and price hike in Brazil. Domestic business grew 12% yoy and Torrent expects better than market growth in the coming quarters. Company would look to acquire businesses at most for US$400-500mn without disturbing the capital structure. Expect Abilify to cast a long shadow over FY16-18E earnings and accordingly ascribe Reduce with unchanged 1-year target of Rs1,500.
JK Lakshmi Cement Ltd (Q2 FY17): Dispatches Nosedive - Accumulate
CMP (Rs) 481, 12-mts Target (Rs) 550, Upside 14.3%
² Realisation overshoot our estimates
² Positively surprised by lower power and freight cost
² Downgrade to Accumulate
Technical Track
Bulls survived by the skin of their teeth as Nifty managed to find support around 3-digit gann number of 856(0). In just three sessions, Index travelled from the peak of 8723 to a low of 8550 and thereby completed 180 degree move on the downside. However, it regained lost ground in late-afternoon trades led by gains in BankNifty to register a close above 2-digit gann number of 86(00). So confluence of support around 8560-8600 provided some respite yet again. After staging a comeback in yesterday's trade, minor rally could see the index attempting 8700. However, presence of downward sloping trendline and lower tops since September has led to formation of overhead resistance zone around 8700-8750 which continues to act as an important hurdle.
Derivatives Diary
² Nifty recouped early loses to settle above 8600, September series ended on a flat to positive note.
² Rollover on Nifty/Bank Nifty futures stood at 70/67% respectively on expiry day. India Vix cooled off by 2.5%
² FIIs futures long/short ratio seen at 3.82x (prev. 2.01x) with unwinding of 31k long and 54k short index contracts
² Maximum open interest base for November series is seen at 9000 call and 8500 put
² Immediate support for Nifty spot is visible at 8550-8500 levels, negative opening possible as SGX Nifty is trading at 8615 lower by 40 points
Fixed Income Synopsis
The 10Y benchmark 7.59% GS 2026, closed ~2bps higher at 6.89% vs previous close of 6.87% and the 6.97% GS 2026 closed ~2bps higher at 6.79% vs previous close of 6.77%. Gsecs recorded total trading volume of ~Rs. 406 bn.
The demand at the fixed Repo window was Rs. 37.45 bn, while the supply at the fixed Reverse Repo window was registered at Rs. 96.38 bn. The Call WAR closed higher at 6.19%. vs previous close of 6.12%
The benchmark five-year OIS and one-year OIS closed higher, with the 5-Y OIS closing at 6.33% vs. previous day's close of 6.32%, while the 1-Y OIS closed at 6.35% vs. previous day's close of 6.34%.
The Reserve Bank of India's Reference Rate for the US Dollar is Rs.66.89 on October 27, 2016, while the corresponding rate for the previous day (October 26, 2016) was Rs.66.76.
Commodity & Currency Cues
Precious metals continue to trade on an uneventful note, with gold and silver prices confined within a narrow range. However, we can expect some volatility today after US GDP report. In this regard, the first estimate for Q3 GDP (q/q) is at 2.5%. Meanwhile, Federal Reserve Bank of Atlanta is projecting growth of 2.1%. A positive surprise on the same can keep the gold bugs on the defensive, while a disappointing reading can deter the Fed from moving on the rates and effectively bolster the precious pack.
In the non-ferrous pack, metals continue to trade on a relatively firm note, with LME Aluminium spearheading the gains yesterday, reflecting the recent advances on SHFE. There is nothing much in terms of fundamental trigger, but we sense that arbitrage opportunity between Shanghai & London is leading to the buying spree across the board on the LME.
Crude oil futures are hovering around US$50/bbl, deriving support from the expectations of production cuts from OPEC. Although Iraq has expressed its unwillingness to trim output, Saudis (the one who calls the shots) are determined towards concrete price stability measures.
US dollar continues to dominate market action, now marching higher against Japanese Yen (105). Meanwhile, British Pound garnered support from positive UK Q3 GDP growth figures, where the economy grew 2.3%, higher than the prior quarter reading of 2.1%. Now, there is a growing perception that BOE will not provide any further monetary stimulus, given the recent spike in inflation and resilient GDP growth. In the credit markets, UK GDP number has pushed British sovereign 10yr bond yields to 1.25%, the highest since Brexit, while German Bund yields has soared to 0.17%, 33bps higher than the -0.16% reading seen in September. Spanish yields are at a three month high ahead of a vote on the possible formation of a minority government, ending 10 months of political impasse. US yields are also at a three-month high of 1.86%, but the rise is entirely due to a different reason (possibility of a rate hike).
Corporate Snippets
² Cairn India plans to invest USD100mn with focus on Rajasthan gas fields. (BS)
² Hero MotoCorp has invested Rs2.05bn to pick up 26-30% stake in domestic electric vehicle (EV) maker Ather Energy. (BS)
² The Thane Food and Drug Administration on Wednesday has sent a show cause notice to Wanbury Pharma for illegal export of Metformin Hyrdrochlodride, a diabetes drug. (ET)
² NMDC and Mishra Dhatu Nigam (MIDHANI) have signed a memorandum of understanding to develop tungsten mines and processing technology for the metal, a key ingredient in making heavy-alloy ammunition systems for the armed forces. (ET)
² Sun Pharmaceutical Industries has launched generic versions of Daiichi Sankyo medicines, used in the treatment of high blood pressure, in the US market. (BL)
² The board of Oil and Natural Gas Corporation gave its nod for issuance of one bonus share of Rs5 each for every two shares held in the company. (BL)
² MMTC has joined hands with HDFC Bank, ICICI Bank and Andhra Bank to retail gold coins with a new buyback option. (BL)
² Sagar Cements Limited has decided to raise Rs3bn by way of issuance of securities, including the issue of equity shares on a preferential basis to promoter and promoter group and to others. (BS)
² Nava Bharat Ventures Limited has recently concluded sale of 100% shares in one of its overseas subsidiary Nava Bharat Lao Energy Pte Limited, and thereby its 70% shareholding in Namphak Power Company Limited. (BL)
² The British subsidiary of ICICI Bank -- ICICI Bank UK Plc -- announced the launch of online money transfer services to facilitate transaction from any bank accounts in Sweden, Norway and Denmark to any recipent account based in India. (ET)
² The government is yet again looking to monetise its stake in Hindustan Zinc and may suggest a share buyback offer to the company controlled by Vedanta's Sterlite Industries besides seeking a special dividend. The government owns 29.59% stake in the firm that is worth over Rs300bn at current market prices. (ET)
Economy Updates
² Around 7.8mn new assessees started filing income tax returns between assessment years 2012-13 and 2014-15, pushing up the total number of filers to 39.13mn. (BS)
² The Income Tax (I-T) Department has unearthed cases of tax evasion worth about Rs380bn involving around 1,000 entities, and has issued notices to 147 individuals. (BS)
² A consortium of 19 public sector banks could look at conversion of their loans worth about Rs100bn to Air India into equity. If the proposal goes through, then, as much of 40% of Air India equity could be held by the consortium of public sector banks. (BL)
² The Cabinet gave in-principle approval to strategic sale and disinvestment in the public sector units as recommended by the NITI Aayog. (BS)
Results table
| Rs m | Revenue | YoY % | PAT | YoY % |
| ABB India | 20,248 | 4.4 | 811 | 38.0 |
| Bajaj Finance | 23,660 | 39.1 | 4,078 | 46.0 |
| Bajaj Finserv | 29,997 | 34.9 | 5,758 | 30.5 |
| Bharat Electronics | 17,946 | 16.2 | 3,463 | 68.2 |
| Cholamandalam | 11,728 | 14.6 | 1,677 | 37.8 |
| Emami | 5,836 | 1.6 | 661 | 7.8 |
| Glenmark Pharma | 21,732 | 14.7 | 2,236 | 13.0 |
| Info Edge (India) | 2,100 | 20.6 | 801 | 136.1 |
| Inox Leisure | 2,788 | (18.2) | 16 | (92.3) |
| IOCL | 8,00,435 | (6.0) | 31,219 | LP |
| JSW Steel | 1,29,866 | 20.9 | 7,265 | 521.2 |
| Maruti Suzuki | 1,75,946 | 29.6 | 23,980 | 95.7 |
| ONGC | 1,82,866 | (11.1) | 49,749 | 2.7 |
| PVR | 5,410 | 14.2 | 291 | (29.0) |
| Redington India | 97,254 | 16.1 | 1,002 | 3.7 |
| Shriram City Union | 11,156 | 17.9 | 2,045 | 34.3 |
| Supreme Inds | 8,844 | 14.7 | 662 | 219.8 |
| Tech Mahindra | 71,674 | 8.3 | 6,447 | (17.9) |
| TVS Motor | 37,655 | 21.1 | 1,774 | 33.4 |
| United Spirits | 60,388 | 12.5 | 825 | 15.9 |
Happy Investing!
Amar Ambani
Head of Research
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