Sea of troubles!
You can't cross the sea merely by standing and staring at the water – Tagore
A waves of worries is hitting the Tata shores as stock exchanges have sought clarification from listed entities of the Tata Group about a letter by Cryus Mistry, the ousted chairman, regarding a US$ 18 bn possible writedown at the Tata firms. Reports suggest corporate governance issues also could be brought up in the coming days as a legal tussle ensues. The US markets were mostly subdued with disappointing results. Asian markets are flat. UK GDP numbers, Home sales numbers and updates on durable goods in US, China industrial data are all on tap. Oil has cooled to 3-week low. The outlook is a tentative start as investors adopt a cautious approach as F&O expiry takes place today. Results of consumer companies like HUL which clocked just 1.6% net revenue growth shows pick-up in demand remains evasive. Depending on which polls you track, the situation is mixed as far as the race to the White House is concerned with some suggesting a narrow gap between Clinton and Trump while one has a massive lead for Clinton.
Derivatives Strategy
Rollovers (D–1) Oct'16
Subdued global cues, reduction in ETF flows and disappointing corporate results have weighed on broader indices during the October month. Post, surgical-strike, Nifty has been witnessing lackluster movement, which has translated into trimming in overall derivative market positions (particularly index futures).
The fall in index futures OI can be attributed to decrease in FIIs net long positions, which currently stands at 97K (as against 3.08lac contracts on D-1 in September and a 3m average of 2.61lac contracts). However, with fall in OI, the Nifty movement has been range-bound with a high low swing of mere 300points registered during the series. On rolls, Nifty rollover on D-1 stood at 51% as against 58%/59% 3m/6m average indicating a short fall. With coc dipping to 58bps as against 3m average of 67bps, short rolls are getting stuck which may induce a VWAP selling in last 30 minutes of trade. Market-wide rolls stood at 58% in-line with previous two expiry.
On stock future front, FIIs have reduced their net short positions to the tune of 177K contract in the current series. Trimming could largely be on account of unwinding of fresh arbitrage positions created in the previous series.
VWAP Buy: IDFC Bank
VWAP Sell: Reliance, Infosys, Sunpharma, Star
Bharti Airtel (Q2 FY17): Robust margin defence - BUY
CMP (Rs) 318, 12-mts Target (Rs) 380, Upside 20.2%
Bharti impressed yet again with its margin defence in a seasonally weak quarter. India wireless margin remained flat at 42.4% despite a 2% revenue drop driven by 3% fall in voice pricing though traffic decline was restricted to just 0.5%. Similar to Idea, data volumes surged 13% qoq on 10% cut in blended pricing though importantly broadband penetration rose 90bps qoq after 2 quarters of sluggishness. Although Africa INR revenues on comparable basis declined 9% on Nigerian devaluation, US$ cc revenues improved 4%; a low US$ cost base in Nigeria did not damage overall margin which increased 200bps qoq in cc 15-country basis. Non wireless clocked healthy traction with 6% and 11% rise in home services and enterprise business revenues respectively. Company has ring fenced high end post paid customers from Rel Jio and would look to gain revenue share in voice given the struggles outside of top 3-4 operators. We tweak estimates and retain BUY for 1-year target of Rs380.
Dr Reddys' Laboratories (Q2 FY17): Some respite in Q2 - Reduce
CMP (Rs) 3,243, 12-mts Target (Rs) 3,000, Downside 7.5%
Dr Reddys' clocked a better quarter after the large setback in Q1 as US, India posted 4% and 20% qoq growth respectively. Management remains cautiously optimistic on US business in H2 as pricing pressures ebb and flow across quarters; Q2 saw lower price erosion, volume off take in key products and new launches as key drivers of US. Emerging markets revenues declined 27% yoy though ex-Venezuela the drop was 9%. Margin rebounded from Q1 lows on back of Rs344mn provision for potential NPPA liability. Company has completed all aspects of compliance and remediation activities and has invited FDA for re inspection. In terms of key launches, DRRD has completed validation batches for Copaxone along with site transfer for Gleevec. We lower FY17/18E estimates and retain Reduce with revised 1-year target of Rs3,000.
Technical Track
Five days of consolidation around 8710 was followed by minor breakdown in Wednesday's trade as BankNifty succumbed to selling pressure dragging the benchmark Nifty towards day's low of 8596. Inability to regain control above 3-digit gann number of 8710, failure to cross above 4-digit gann number of 8743, presence of lower tops and reversal from the upper-end of the falling channel contributed to yesterday's decline. Considering series of lower high and lower low chart formation which is active since September 2016, major breakdown will come only below 8500 levels.
On immediate basis, confluence of support is seen around 8560-8600 (i.e. 2-digit gann support of 8600, 4-digit gann support of 8603 and 360 degree move on the downside from the peak of 8969).
Derivatives Diary
² Markets slumped on weak global cues, fresh shorts seen in Nifty and long unwinding in Bank Nifty futures
² Significant open Interest additions were seen at out of money call strikes and unwinding at 8600 put
² FIIs futures long/short ratio seen at 2.01x (prev 2.16x) with addition of 3.9k long and 8.6k short index contracts
² Rollover on Nifty/Bank Nifty futures stood at 51.4/47.5% respectively on D-1 day
² Maximum open interest base shifted to 8800 call and 8500 put for October series
Fixed Income Synopsis
The 10Y benchmark 7.59% GS 2026, closed flat at 6.87% and the 6.97% GS 2026 closed at 6.77%. Gsecs recorded total trading volume of ~Rs. 613 bn. Bond market traded flat ahead of FOMC and BOJ meeting scheduled next week.
The demand at the fixed Repo window was Rs. 84.33 bn, while the supply at the fixed Reverse Repo window was registered at Rs. 44.18 bn. The Call WAR closed lower at 6.12%. vs. previous close of 6.17%.
The benchmark five-year OIS and one-year OIS closed higher, with the 5-Y OIS closing at 6.32% vs. previous day's close of 6.31%, while the 1-Y OIS closed at 6.34% vs. previous day's close of 6.34%.
The Reserve Bank of India's Reference Rate for the US Dollar is Rs.66.76 on October 26, 2016, while the corresponding rate for the previous day (October 25, 2016) was Rs.66.88.
Commodity & Currency Cues
Gold traded within a familiar price range, influenced by prevalent counterbalancing forces, with rising US dollar enacting as a headwind, while improving Indian physical demand (ahead of festive and wedding season) providing an element of support. Nevertheless, slew of hawkish remarks from various US Fed members during past two months has imposed a short term ceiling on the upside in gold prices.
LME non-ferrous metals persisted with firm tone amid rumours of an imminent Chinese government stimulus plan. Meanwhile, Aluminium prices in Shanghai surged 4%, helped by concerns over rising coal prices.
Crude Oil futures seem to be losing steam, as there is growing anxiety over the outcome of OPEC's formal meeting on November 30th. Reluctance of Iraqis to participate in the proposed production cuts has already led to moderate retracement in oil prices.
British Pound seem to be bottoming out around 1.21-1.22 level against the greenback, as markets interpret from BOE governor Mark Carney's testimony to the House of Lords that the probability of a further rate cut has diminished considering the recent rise in inflation due to a weak Pound. The central bank cannot afford to overshoot inflation targets and risk stagflation.
Corporate Snippets
² Reliance Industries Ltd has raised a term loan of USD573mn to partially finance the construction of its six very large ethane ships. (BS)
² Idea Cellular managing director Himanshu Kapania said has not violated any quality of service (QoS) norms on the issue of providing points of interconnection (PoIs) to Reliance Jio Infocomm, and would shortly approach the department of telecommunications (DoT) on the matter. (ET)
² The Suzlon group has entered into a joint venture with Ostro Energy for the development and construction of a 50-MW solar project in Telangana. (BL)
² The Navneet Education Ltd signs an agreement to acquire Britannica's Indian curriculum business for Rs0.88bn. This move will help expand Navneet's range of curricular offerings in the Indian school market. (BL)
² ONGC by deploying a record number of rigs, including one from China, has embarked on an aggressive road-map to explore more natural gas in the northeastern state of Tripura, bordering Bangladesh. (ET)
² LIC picked up more than half of the NBCC shares sold by the government in the Rs22.18bn disinvestment. (BS)
² Dr Reddy's Laboratories has entered into a strategic collaboration with Gland Pharma to market and distribute a diverse portfolio of eight injectable Abbreviated New Drug Applications (ANDAs), or alternatively called as generic drug approvals. (BS)
² Sun Pharmaceutical will acquire Ocular Technologies, Sarl (OTS) of Auven Therapeutics, an international private equity company focused on therapeutic drugs. (BL)
² Gulf Oil Lubricants India Limited (GOLIL) has entered into a tie-up with Bajaj Auto Limited to manufacture and supply lubricants. (BS)
Economy Updates
² The finance ministry is examining the possibility of cutting the corporation tax rate by 1 - 2 percentage points, even as the revenue department is set to kickstart Budget consultations with industry and consultants from the first week of November. The ministry's thinking is part of bringing down the corporation tax rate to 25% by the end of 2018-19, from 30% at present. (BS)
² The government has allowed 100% foreign direct investment (FDI) in 'other financial services' carried out by non-banking finance companies (NBFCs), continuing with the liberalisation of the overseas investments regime. (ET)
² Just a week before the next Goods and Service Tax (GST) Council meeting on November 3 and 4, the view of states being compensated through a cess rather than a hike in the proposed GST rate has gained strength, with the Centre telling them that an increase in the tax rate has to yield around Rs1.72trn. On the other hand, a cess which will yield Rs500bn a year would be enough to compensate states. (BS)
² Union minister said the Phase-III auction of radio channels, which started in July last year, is likely to bring in an estimated USD390mn revenue to the government. (BS)
² Markets regulator Sebi has begun looking into the high profile Tata-Mistry case for any possible breach of corporate governance norms and listing regulations at various listed companies of the over USD100bn conglomerate. (BS)
Results table
| Rs m | Revenue | YoY % | PAT | YoY % |
| Cadila Healthcare | 23,867 | 0.5 | 3,376 | (13.6) |
| Coromandel Intl | 35,589 | 0.2 | 2,134 | 23.0 |
| Cummins India | 12,500 | 7.1 | 1,969 | (0.9) |
| Dabur India | 19,757 | (5.6) | 3,573 | 4.7 |
| Deepak Nitrite | 2,991 | (10.6) | 154 | 4.3 |
| Exide Industries | 19,233 | 10.8 | 1,813 | 16.2 |
| HDFC | 80,632 | 8.0 | 18,265 | 13.8 |
| Hero Motocorp | 86,011 | 15.3 | 10,042 | 27.7 |
| Hindustan Unilever | 83,351 | 6.6 | 10,956 | 13.9 |
| ITC | 95,355 | 8.3 | 25,000 | 2.8 |
| JK Lakshmi Cement | 7,331 | 13.5 | 250 | (267.2) |
| JSW Energy | 7,767 | (68.8) | (83) | (101.7) |
| Jubilant Foodworks | 6,654 | 13.3 | 216 | (9.7) |
| Torrent Pharma | 14,720 | (16.6) | 2,070 | (59.3) |
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