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Weekly wrap: Sagging macros fail to deter bulls: Market up 3%


Manu Kaushik 

Weak macroeconomic data (released earlier this week) notwithstanding, market participants resumed their buying spree this week in anticipation of better days and easing of geopolitical risks globally.

In the holiday truncated week, both Nifty & Sensex surged 3 percent, gaining on all four trading sessions this week. Broader markets made a comeback, after witnessing a sell-off last week. CNX mid-cap was up 1.5 percent while small-caps remained flat.

“Indian equities are in a bull market in our view, but relative performance in the near-term could be subdued. Outperformance should resume in Q4CY14 as the market discounts growth acceleration in 2015. Use the current period of consolidation to add risk for Q4CY14 rally. We continue to remain bullish on Asian equities,” said noted market expert Adrain Mowat of JP Morgan.

It was a data heavy week that saw inflation and industrial production data disappointing the street; which however failed to deter the bulls. A spate of earnings was responsible for counter specific action and keeping analysts busy this week.

Macro indicators: High hopes sag

War against inflation

Consumer Inflation or CPI for July inched close to 8 percent , led by increase in food inflation which spiked over 9 percent due to 16.9 percent increase in vegetable prices. Also, June CPI was being revised higher to 7.46 percent versus 7.31 percent earlier also disappointed.

The latest data seems to have somewhat validated RBI governor Raghuram Rajan’s fears over risks in achieving sub-8 percent (CPI inflation) target by 2015.

A recent report by Bank of America Merrill Lynch says that normal rains hold the key to the RBI’s 6 percent January 2016 target. A 5 percent swing in agro prices impacts CPI inflation by about 250bp. “We reiterate our view that CPI inflation is peaking. At the same time, poor rains pose an immediate 200bp risk. We do not agree with the pessimism now that it is rising again. After all, the key drivers of non-food CPI inflation – oil, rupee, rentals – are all reversing. Overall, this points to a possibility of CPI inflation coming-off by 200 plus bps in FY16 from current levels of 8 percent,” it adds.

Consumption story anticlimax

Signs of sluggishness in the economy continue to persist as growth in the Industrial output (measured by IIP index) for the month of June stood at 3.4% (it contracted1.8% in June, 2013) against an expectation of 5.8 percent, due to a contraction in consumer goods and consumer durables sector.

Signaling that consumption is far from a pick up – consumer durables after growing 3.2 percent in May (due to base effect, 18 percent contraction in May 2013), sharply contracted by 23.4 percent in June. It was expected that the sector will continue to expand at a fasted rate than May.

Consumer goods sector too contracted by 10 percent against 1.5 percent contraction seen in the same period last year.

Good show in manufacturing, mining and power sectors helped the overall industrial activity stay in the green zone.

The fact that industrial activity continued to grow for a consecutive third month was a relief in itself.

In another dampener, the Indian Meteorological Department (IMD) scaled down its projections for the monsoon rain to way below normal from moderately sub-normal. Even this failed to deter buying frenzy. Met Dept said monsoon rains were 20 percent below average in past week.

Geopolitical risks ease

Globally sentiment saw an improvement and stock markets witnessed resurgence after being beaten last week over Russia-Ukraine and Israel-Palestine tensions. Russia ended its military exercise near the Ukranian border, marking a significant de-escalation of tension in the region.

Sentiment went for a toss last week owing to heightened risks after US declared limited strikes against ISIS in Iraq to prevent its advance in to the Kurdish region.

Market Internals & big earnings

The winning pack in Nifty this week was led by Tata Motors; stock vroomed 12 percent higher on back of solid earnings.

HDFC, BPCL, Sesa Sesa Sterlite, M&M, Sun Pharma surged between 7-9.5 percent higher while UltraTech Cement, GAIL, ONGC, Infosys HDFC Bank and Ambuja Cement were up 3.7-6.6 percent.

On the losing side, Hindalco, BHEL, Hero Moto, SBI, Bharti Airtel tanked between 2.3-3.6%.

Commenting on the stellar performance by Tata Motors, Amar Ambani, Head of Research, IIFL, said, “Tata Motors is one of our top picks in the auto sector as multiple themes are expected to play out in the next couple of years.

JLR is expected to see a sustained robust trend in volumes driven by rising penetration of luxury cars in emerging economies coupled with economic recovery in the western world. Margins are also expected to remain strong on the back of operating leverage and lower discounts due to high contribution newer models. Consolidated net sales grew by 38 percent yoy as 15 percent Y-o-Y fall in standalone sales was more than offset by 30.7 percent Y-o-Y jump in JLR sales. Net profit at JLR was at pound 693 million, a jump of 128 percent Y-o-Y and 54.3 percent Q-o-Q.”

Among sectors, Bank Nifty gained 2.2 percent this week. Talks of a merger between HDFC and HDFC Bank benefitted the index since both are index heavy stocks.

Good earnings presented by oil marketing companies helped BSE Oil & gas index rise 1.4 percent this week.

BPCL posted a massive 8 fold increase in it’s first quarter net profit, which stood at Rs 1,216.3 crore led by higher other income and lower finance cost but impacted by higher tax expenses. It’s profit in the year-ago period was Rs 150.3 crore.

Both Barclays and Deutsche Bank suggest buying the stock. A Deutsche report suggested buying BPCL with a price target of Rs 675 per share. “We estimate fuel subsidies in FY15 at Rs 1 trillion (USD15.8bn), down by 29 percent year-on-year, the largest yoy fall ever excluding FY10. Lower fuel subsidies could reduce working capital debt by USD1bn for BPCL over FY14-16E. We expect exploration successes, reserve certification and final investment decision for Mozambique and Brazil in the next one year to be key catalysts for the stock.,” the report said.

ONGC, which was up 4 percent this week, missed street expectations with the first quarter net profit rising 19 percent year-on-year to Rs 4,782 crore impacted by higher exploration cost written off and depreciation cost (due to change in depreciation method). Sharp jump in tax expenses and lower other income too impacted profitability. Profit in the year-ago period was Rs 4,016 crore. Analysts had expected the company to report profit of Rs 5,820 crore on revenue of Rs 21,840 crore for the quarter, according to CNBC-TV18 poll estimates.

BSE Healthcare index surged 3.6 percent this week. From the space, drug major Sun Pharma shot up 7 percent after reporting a net profit of Rs 1,391 crore for the June quarter as against a net loss of Rs 1,276 crore, a year ago. The company’s sales grew 13 percent to Rs 3,927 crore.

BSE Consumer Durables index rose 1.5 percent higher despite the sector showing contraction in the latest IIP figures released recently.

Hindalco Industries stock which was among the top losers this week, missed street expectations with the first quarter net profit falling 30.9 percent year-on-year to Rs 327.5 crore , dented by higher power and fuel, finance and raw material costs. Profit in the corresponding quarter of last fiscal was Rs 474.1 crore.

Tarang Bhanushali, AVP- Research, IIFL says the underperformance is largely due to a jump in interest cost which has come due to commissioning of new capacities during the quarter.

On earnings season, experts say it was a mixed bag. In an interview with CNBC-TV 18, Rakesh Arora, head of research (India) at Macquarie Capital Securities said, “It was a mixed bag and also possibly reflection of where the economy was and not where the economy is headed to. So clearly the defensive companies did very well and cyclical companies were found wanting which was not really surprising. So suddenly we are finding that market is giving too much emphasis on these results whereas the economy is changing for better and the next 12-24 months the story will be totally different. So from that perspective I would say that good chance to accumulate some of the cyclical sectors and stocks in this result where there has been little bit of disappointment.”

From the auto space, he is bullish on Maruti Suzuki, Mahindra and Mahindra and Tata Motors.

What’s Next: Eye ahead

In a research report, UBS said, “We do expect headlines intensity to pick up: 1) Mr Modi’s 15th August (Independence Day) speech, 2) Early September would be 100 days of government and roadmap for different ministries may be announced. The impact of such headlines will gradually reduce, as the initial honeymoon period ends. The direction is likely to remain positive though. We believe investors will be willing to give a premium for growth, economic recovery starts manifesting in data points. We maintain our Nifty target for end-2014 at 8000. Their top picks are BHEL, Bharti Airtel, HDFC Bank, ICICI, ONGC, Power Grid, PFC, RIL and SBI.



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