Winter of Discontent! Stocks may inch up
Discontent, blaming, complaining, self-pity cannot serve as a foundation for a good future, no matter how much effort you make. Eckhart Tolle
The political class will be on the offensive mode as Parliament session gets underway. Expect noise over the government's recent demonetization move. The sharp swings in equity markets are forcing investors to re-assess their positions. The US market continued its recovery after last week's 'shock and awe' movement. The dollar, which has been on an advance saw signs of cooling. Asian markets too have picked up steam today and the same sentiment is likely to be reflected on the domestic bourses at least for the morning. Volatility on Dalal Street peaked to a multi-month high as investors tried to make sense of global cues and domestic demonetization impact. India's trade deficit has widened to $10.16 billion in October with gold imports doubling yoy. CPI inflation fell to 14 month low, while WPI was down for the second consecutive month to 3.39 % in October.
COMPANY RESEARCH
Balrampur Chini Mills: Cane price hike: what's the risk? - BUY
CMP (Rs) 116, 12-mts Target (Rs) 140, Upside 20.3%
Media reports (BS: Oct 30, 2016, link) suggest UP government is mulling a 10% hike in cane price after a gap of three years during which SAP has been kept constant at Rs280/qtl. Given the backdrop of UP elections next year, the only uncertainty is on the extent of hike. In the prior election cycle, the then government had hiked prices by 17% though our sense is such a sharp raise is unlikely. Our thinking is driven by recent happenings in UP sugar industry wherein the state government offered cane subsidy linked to sugar realizations. Our base case estimates factor in a 10% hike to Rs320/qtl that translates in multiyear high margin of 25% in current fiscal. A 20% hike (unlikely) to Rs335/qtl cuts our FY17E EPS by 22% while 30% hike results in a deep 60% hit to FY17E earnings. Anything above a 10% hike can be viewed as negative for the sector and especially in light of the UP government efforts to rationalize the cane arrears through judicious use of cane price subsidy. We remain positive on demand as closing Oct' 17 inventory at 4.8mn tons results in lowest stock/use ratio at ~19%, in line with lows touched in 2009. We assign 1x EV/replacement cost to BRCM FY18E earnings and rate stock BUY with 1-year target of Rs140.
BPCL (Q2 FY17): Weak refining segment performance - BUY
CMP (Rs) 643, 12-mts Target (Rs) 740, Upside 15.1%
BPCL's Q2 FY17 performance was weaker than our and street estimates on the back of lower than expected GRMs and marketing margins. GRMs were at US$3.1/bbl which was much lower than our estimates. Going ahead, marketing margins are expected to be robust while GRMs are likely to recover from the recent lows as winter season kicks in leading to demand-supply balance tilting in favor of supplies. We maintain our BUY rating with a 1-year price target of Rs740.
GAIL (Q2 FY17): Strong all round performance - BUY
CMP (Rs) 436, 12-mts Target (Rs) 520, Upside 19.3%
During Q2 FY17, GAIL reported a strong performance backed by continued turnaround in the petrochemical segment and margin expansion in all other segments. While the petrochemical segment revived on the back of lower feedstock prices, benefits of operating leverage drove performance of the natural gas transmission and trading segments. PAT performance was buoyed by higher other income due dividend income from subsidiaries and JVs. Going ahead, gas volumes are expected to increase driven by higher capacity at Dahej's LNG terminal and scale up in production from Daman and Vasai fields of ONGC. Lower feedstock prices will keep the petrochemical performance on a strong footing. Earnings traction is likely to remain strong. We maintain our BUY recommendation.
Kalpataru Power (Q2 FY17): Strong execution to continue - BUY
CMP (Rs) 223, 12-mts Target (Rs) 300, Upside 34.6%
KPTL reported robust numbers on the back of strong execution in the4 doemstic T&D space. Topline growth of 19.6% yoy was quite higher than our estimate of 6% growth. However, strong execution was not reflected in OPM. Margins were lower than expected and also lower on a yoy basis. Order inflow was strong at Rs.19.5bn (after removing an African order of Rs.4.5bn). The company is also L1 in orders worth Rs.20bn. Order book at the end of Q2 FY17 stood at Rs.94bn and provides strong revenue visibility for the next 18 months. Management has revised its FY17 revenue growth guidance downwards to +20% due to delay in execution in international projects especially in Middle East region. PGCIL ordering would be on the watch list in H2 FY17. Domestic SEB spending is expected to surge with major capex expected in South and Central India. In addition to this, railway and pipe segment are likely to witness large ordering during the year. We maintain our Buy rating on the stock with a price target of Rs.300.
KNR Constructions Ltd (Q2 FY17): Robust performance continues - BUY
CMP (Rs) 696, 12-mts Target (Rs) 806, Upside 16%
KNR Constructions witnessed revenue growth of ~72% yoy during Q2 FY17, above our estimates on the back of strong execution. The order book of the Company continues to grow at a robust pace. The Operating Margins continues to remain healthy at ~ 15% levels during Q2 FY17. As on Sept 30, 2016, the order book stood at Rs.45.7 bn (~5x FY16 revenues). The Company expects orders worth Rs.10-15 bn during remaining part of FY17 which would further strengthen its position. KNR recently signed a share purchase agreement to sell entire equity stake in its two Road BOT assets to an Essel group company. This is in line with Company's strategy to focus on EPC projects. With the strong order book in place and execution picking up, we expect the Company to achieve topline in excess of Rs.12 bn and 15 bn during FY17 and FY18 respectively. With high margin orders in the unexecuted order book, the margins are expected to be strong at ~14% levels during the next few years. With better than expected Q2 FY17 performance and robust order book, we have revised over estimates higher. We believe with one of the strongest order books in the industry, topline is poised for robust growth during FY16-18. With tight cost control, high margin orders under execution and increasing scale of operations, we expect earnings growth to be strong. KNR's standalone EPC business is currently trading at a P/E of 13x FY18E EPS. In line with the strong performance and recent correction in stock price, we upgrade our rating to BUY with target price of Rs.806 (based on SOTP valuation).
Technical Track
Nifty lost further ground in Tuesday's trade as it declined by 200 points after last week's resilience of BankNifty came to an end. Despite making a low of 8093, Nifty managed to close above 2-digit gann number of 81(00). Confirmation of weakness below the same would see Nifty attempting panic low, created previous Wednesday of 8002.
Meanwhile, Bank Nifty failed to sustain above 19800 fueling further selling pressure on the downside. Market remained negative, as except IT and PSU Bank index all the sectoral indices ended in red. Nifty formed large bearish candle extending Friday's corrective move. RSI (14) indicator on daily chart entered into oversold zone breaking below 30 level for the first time since February 2016. Short term structure is likely to remain negative, as long as series of lower high and lower low is intact. So intra-day pullback could be restricted towards 8300.
Derivatives Diary
· Nifty corrected for the consecutive session as Bank Nifty failed to sustain above 19800 fuelling further selling pressure. SGX Nifty indicating 100 points gap up to start above 8200 zone.
· India VIX jumped by 16% to settle above 20. Heavy FII outflow likely to keep upside limited to 8400 on Nifty for November series.
· Open interest additions were seen across the out of money strikes. Maximum open interest base on put remains at 8000 strike
· FIIs index futures long/short ratio at 1.30x vs 1.74x with addition of 21k short index contracts
Fixed Income Synopsis
The 10Y benchmark 7.59% GS 2026, closed ~21bps lower at 6.62% vs previous close of 6.83% and the 6.97% GS 2026 ended ~19bps lower at 6.53% vs previous close of 6.72%. Gsecs recorded total trading volume of ~Rs. 1420 bn. CPI Inflation for the month of October 2016 moved lower at 4.20% vs 4.39% for the month of September 2016.
The demand at the fixed Repo window was Rs. 31.48 bn, while the supply at the fixed Reverse Repo window was registered at Rs.96.58 bn. The Call WAR closed lower at 6.04% vs previous close of 6.23%.
The benchmark five-year OIS and one-year OIS closed lower, with the 5-Y OIS closing at 6.19% vs. previous day's close of 6.27%, while the 1-Y OIS closed at 6.08% vs. previous day's close of 6.19%.
The Reserve Bank of India's Reference Rate for the US Dollar is Rs.67.72 on November 15, 2016, while the corresponding rate for the previous day (November 11, 2016) was Rs.67.03.
Commodity & Currency Cues
Precious metal remained flat after 10YR US treasury yield settled at 2.20% after spiking to 2.30% during the day. Post US election outcome, Gold has fallen 6%, weighed by growing perception of increase infrastructure spending in US will turn out to be inflationary.
Oil futures scaled higher from its multi-month lows on expectation that OPEC will agree to cut production in order to reduce supply glut by end of the current month. Crude further gain ground with speculation of Saudi energy minister travelling to Qatar were ministers of other oil-producing countries are set to meet.
With dollar index touching a century mark most emerging markets currencies such as Indonesian rupiah, Malaysian ringgit and Mexico's peso are under pressure. Indian rupee was relatively resilient.
Corporate Snippets
· Apollo Tyres is planning to set up a new factory in Andhra Pradesh to manufacture tyres for two-wheelers and pickup trucks. (BL)
· Religare Enterprises Ltd said its subsidiary will write off a total of Rs7.94bn on account of non-receipt of dues. (BL)
· BHEL has expanded its footprint in the international market by securing export orders for supply of industrial motors to the African nations of Togo and Benin. (ET)
· Coal India sold 7mt of coal, or 35% of the quantity on offer in an e-auction, at a floor price that was 20% higher than listed prices for non-power users. Traders as well as power producers with or without supply commitments from Coal India were allowed to bid in the auction. (ET)
· Welspun India has initiated steps to closely monitor and control its Egyptian cotton business, which had come under a cloud early this year over quality issues. (BS)
· Hindustan Petroleum Corp (HPCL) will take 25% equity stake in the proposed 60mt refinery on the west coast that the state oil companies plan to build. (ET)
· Jet Airways has expanded its existing code share pact with Kenya Airways which will allow the African carrier to fly more passengers into India. (ET)
· Reliance Industries Ltd (RIL) and its partners, BP and Niko Resources, have initiated an arbitration process against the Centre's notice imposing a penalty of USD1.55bn on these companies for allegedly using migrated gas from Oil and Natural Gas Corporation's (ONGC's) asset in KG-D6. (BS)
· L&T Infotech has been awarded a five-year contract by Hartford Steam Boiler (HSB). (BS)
· Wheels India Ltd has signed a technology transfer agreement with Fluitecnik of Spain for hydraulic components used in wind turbines. (BL)
· Welspun India has made a one-time provision of Rs4.89bn to meet expenses and losses arising from export of home textile made of fake Egyptian cotton. (BL)
Economy Updates
· Wholesale Price Index-based inflation eased to 3.39% in October from 3.57% in September as food items became cheaper. (BL)
· Aided by lower food articles inflation, the Consumer price index (CPI)-based inflation for October 2016 came in at 4.20%. (BS)
· Merchandise exports grew 9.6% year-on-year to USD23.50bn in October, while imports expanded 8.11% year-on-year to USD33.67bn. (BS)
· Petrol price was cut by Rs1.46/l and diesel by Rs1.53/l, reversing the rising trend of the past few weeks. (BS)
· Reserve Bank Deputy Governor NS Vishwanathan said the deadline for banks to clean up their balance sheet 'stands' at March 2017, even as its governor Urjit Patel hinting at pragmatic approach in dealing with non performing assets (NPAs). (BS)
· Private equity and venture capital investments declined 27% to USD1.19bn in October due to decline in big ticket transactions. (ET)
Results table
| Rs m | Revenue | YoY % | PAT | YoY % |
| AIA Engineering | 5,342 | 12.2 | 1,124 | 20.2 |
| Container Corp | 13,786 | (8.2) | 1,578 | (32.2) |
| GAIL | 118,582 | (15.8) | 9,247 | 109.9 |
| HPCL | 420,306 | 0.1 | 7,013 | LP |
| Vardhman Textiles | 14,969 | (8.4) | 4,540 | 261.2 |
Happy Investing!
Amar Ambani
Head of Research
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