Fickle Friday on the Street
Our criteria for deciding what's good and what's bad is very fickle... - Roberta Flack
What a hell of a week this has been. Investors are not sure if the Fed would raise rates in December. US is seeing a sell-off in government bonds and expectations are that the Donald Trump regime may usher in increased US fiscal stimulus. The price of British and French government bonds are also falling. China's currency dropped to a six-year low against the US dollar. The Indian market seems to be disconnected from the rest of the world this morning. While Asia is mixed with Nikkei up and Hang Seng down, the Nifty futures point towards a thud at start. The Index of industrial production for September will be released post market hours. Income Tax raids have been conducted across the country and those depositing large amounts of unaccounted cash will be tracked, the finance ministry has said. The new scheme for restructuring stress loans has been modified by the RBI; lenders can now treat sustainable debt as standard asset, and this could boost the construction sector.
COMPANY RESEARCH
Apar Industries Ltd: Multiple triggers for growth – BUY
CMP (Rs) 575, 12-mts Target (Rs) 724, Upside 26%
Apar Industries Ltd (AIL) commands a leading position in its two major product lines, namely conductors and transformer oil (forming major portion of Speciality oil segment) with strong presence in domestic and export markets. AIL has a commendable market share of 23% and 45% in conductor and transformer oil segments respectively. It also has presence in the fast growing power and telecom cables segments. Being a strong player, it's well placed to capitalize on the evolving opportunities in the power T&D space. Government initiatives like UDAY scheme and 'power for all' are likely to boost demand for its products. AIL recently increased capacity in both conductors and specialty oil segment to capitalize on the opportunities. The capacity addition, coupled with strong order flows, is expected to achieve a 9% top line CAGR during FY16-19E. The Company is constantly increasing the share of value added products in its product mix which would aid its margin performance. Increasing scale of operations, rising share of high margin products and lower interest costs to sales would translate into net earnings CAGR of 23% over FY16-19E. With no significant capex required, the return ratios are likely to improve in coming years. Despite strong growth prospects and the leadership position in the market, the Company is currently trading at P/E of ~10x on FY19E EPS. We recommend a BUY on the stock with a target price of Rs.724 (12.5x FY19E EPS).
Bajaj Electricals (Q2 FY17): Disappointing quarter but pieces set for growth - BUY
CMP (Rs) 231, 12-mts Target (Rs) 310, Upside 34.2%
Bajaj Electrical's (BJE's) result were quite weak due to lower revenue recognition in EPC segment, and high base (Q2 FY16 had strong EESL sales). Topline for the company was further impacted as the company had stopped wholesale sales of fans and CFL sales continue to decline. OPM for the quarter was lower by 11bps yoy due to lower topline. The company is already witnessing expansion of gross margins due to its new strategy. E&P segment had a healthy order inflow with total order book at Rs.27.2bn.. It also expects revenue growth to pickup as billing would be higher than execution in H2 FY17 in EPC. We have slightly lowered our estimates based on the two consecutive weak quarters. Regardless of such sluggish quarters, successful implementation of TOC and majority of the areas that got covered under RREP, we expect BJE revenue growth to resume from FY18 coupled with higher margins. Moreover, increased R&D investments, brand building exercise and higher ad spends would lead to better consumer demand. Based on the above factors, we value core business at 25x FY18E P/E and E&P business at 12x P/E and arrive at a SOTP target price of Rs.310.
Bosch Ltd (Q2 FY17): Play on changing emission norms - Accumulate
CMP (Rs) 20,861, 12-mts Target (Rs) 22,650, Upside 8.6%
Bosch Q2 FY17 revenues came in ahead of estimates with a 10% yoy growth compared to our estimates of a 5% yoy growth. However, OPM at 18% were lower than our forecasts of 19.2% and represented a decline of 19bps on yoy basis. Net profit came in ahead of estimates owing to higher than projected other income. Change in emission norms to BSIV at the national level is expected to drive strong growth in revenues and profitability for Bosch Ltd. Slump sale of Starters and Generators business will also improve profitability over the medium term. We cut our estimates to factor in lower than forecasted OPM. Resultantly, our target price is reduced from Rs23,500 to Rs22,650. We upgrade our rating to Accumulate post a 15% correction over the past three months.
Lupin (Q2 FY17): Strong H1 behind; H2 brings challenges - Reduce
CMP (Rs) 1,493, 12-mts Target (Rs) 1,550, Upside 3.7%
After a strong H1 that saw 34% revenue growth, we believe H2 would bring challenges as key products like Glumetza, Fortamet face competition. In Q2 Lupin reported 4% revenue and 21% EBIDTA decline qoq on back of 9% drop in US sales. Fortamet saw pricing pressure and market share loss though Glumetza remains free from newer competition. Encouragingly, Lupin managed to retain gross margin despite lower US sales while higher other expenses pulled EBIDTA margin lower by 500bps qoq. Company expects 8-10 launches in H2 FY17 and is dependent on select opportunities like Welchol, Renvela/Renegal to offset the high FY17 base of Glumetza and Fortamet. Notably, it cut GAVIS FY18 revenue guidance to US$250mn from US$300mn likely due to lack of traction since acquisition. We revise up FY17E estimates based on H1 performance though FY18E EPS remains unchanged. Assign Reduce with revised 1-year target of Rs1,550.
Technical Track
After forming a panic bottom between 8000-8200 levels around its 187-DMA in Wednesday's trade, Nifty witnessed follow-up move as it advanced by 1% in Thursday's trade. However, it failed to cross the 2-digit gann number of 86(00) as it retraced lower after recording a high of 8598. In the late afternoon trades, Nifty pared some of the early morning gains to close below 3-digit gann number of 8560. Moreover, presence of overhead resistance of 50 – DEMA (8615) is seen, which has acted as supply point on three occasions since last week of October. Also, downward slanting trendline resistance from the September peak of 8969 continues to remain intact. So multiple pressure points are placed between 8560-8615 zone. Overnight Emerging Markets ETF fell by 3% and US Dollar strengthen, contributing to weakness across Asian markets.
Derivatives Diary
· Momentum on banking stock surprised on upside on yesterday trade, SGX nifty indicating big gap down lead by bond selloff in emerging markets and strength in dollar.
· Nifty options data indicates 8200 to 8700 would be now trading range, with volatility within the band likely to continue as news flows on global events dominates.
· VIX index closed ~7% down at 15.45 levels, today chances of inching up again after the recent EM bond selloff.
Dollar index inching towards 99 levels, likely to key upside limited for equities in near term.
Fixed Income Synopsis
The 10Y benchmark 7.59% GS 2026, closed unchanged at 6.75% and the 6.97% GS 2026 ended ~1bps lower at 6.66% vs previous close of 6.67%. Gsecs recorded total trading volume of ~Rs. 883 bn.
The demand at the fixed Repo window was Rs. 151.59 bn, while the supply at the fixed Reverse Repo window was registered at Rs.79.97 bn. The Call WAR closed higher at 6.23% vs previous close of 6.20%.
The benchmark five-year OIS and one-year OIS closed lower, with the 5-Y OIS closing at 6.23% vs. previous day's close of 6.23%, while the 1-Y OIS closed at 6.15% vs. previous day's close of 6.21%.
The Reserve Bank of India's Reference Rate for the US Dollar is Rs.66.43 on November 10, 2016, while the corresponding rate for the previous day (November 09, 2016) was Rs.66.80.
Commodity & Currency Cues
Gold bore the brunt of vigour in the greenback, with values retreating towards US$1,250/oz mark. Markets now sense that with Republicans enjoying majority in both chambers of US Congress, there is an expectation of hefty cut in corporate taxes and increased government spending on infrastructure. As a result, inflationary pressure will emerge in the economy, persuading US Federal Reserve to remain hawkish or persist with the process of policy normalisation. Imperatively, a series of rate hikes can be possible during next year. However, it seems to us that markets are simply jumping the gun. There is no clarity yet on Trump's fiscal and trade policy. Moreover, we need to understand that Republicans have never favoured fiscal spending amid high government debt. Ambiguity prevails on how Trump will fund the proposed hefty cuts in corporate taxes.
Base metals pack persisted with the advance, with copper prices testing the high above US$5,700/ton. It is widely reported that CTA buying has triggered the strong upside in Copper prices, leading to a breakout from a multiyear downtrend. Copper has been a laggard for major part of this year but new speculative money seems to be bringing a reversal in the price prospects. Palpably, Donald Trump's plan of sizable spending on roads, bridges, airports and various other infrastructure is helping the sentiment. However, we need to understand that proportion of US base metals demand is very less, when compared with China. US consumes anywhere between 2%- 6% of each of the six base metals, when compared with China's share of 40%-50% for China. Although new infrastructure spending could theoretically ramp demand, the spending will not make much of a difference in aggregate.
US dollar is marching ahead particularly against the emerging market currencies. Chinese Yuan has breached the government's tolerance level of 6.8 against the greenback in offshore markets, while Indian rupee is has receded towards 67.3 mark.
Corporate Snippets
· The Oil Ministry has launched a probe into the role played by officials at ONGC and regulator DGH for their alleged inaction on information about the state- owned firm's natural gas flowing into adjoining fields of Reliance Industries (ET)
· Fashion retailer Shoppers Stop is looking at doubling its mobile application downloads to 2 million and 15 percent sales through its digital touch points by 2020, a senior executive said (ET)
· Petronet LNG Ltd has rolled out an LNG fuelled bus in Kerala for the first time in the country. It has been a joint effort of PLL, Indian Oil Corporation and Tata Motors to introduce LNG as a fuel in commercial vehicles in the State capital. (BL)
· The Queensland government has granted Adani's Carmichael mine project in the Galilee Basin an 11th-hour exemption to new water laws that could have seen the project subjected to further legal challenges. (BS)
· The Karnataka High Court on Thursday upheld rules framed by the state government to regulate fares by taxi aggregators such as Ola and Uber, which includes a ban on surge pricing by these platforms (BS)
Economy Updates
· Sugar production in India, the world's second largest producer after Brazil, is estimated to decline by 10.27 % to 22.52 mn tonnes in ongoing season (ET)
· India's fuel demand rose 8.1 percent in October compared with the same month last year. Consumption of fuel, a proxy for oil demand, totalled 16.49 mn tonnes, data from the Petroleum Planning and Analysis Cell (PPAC) of the oil ministry showed. (ET)
· All segments of the automobile industry have reported growth in domestic sales in October, the last festive month of the year. Passenger vehicles and two-wheelers, the two key segments, reported growth of 4.5% and 8.7%, respectively. (BS)
Happy Investing!
Amar Ambani
Head of Research
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