Market Commentary July 28, 2017

Global equities are definitely in fashion as markets hit new highs and companies report strong earnings. In India, the Nifty has gently pushed and held above 10,000 as foreign liquidity joins domestic flows. The Nifty has added 129 points since our last commentary to close 1.3% higher at 10015 after trading in a range of 2.4%. Average daily trading volumes have shifted up reaching $5.1bn as FPI buying added a net $554mil. For the first time in a while, domestic investors were on the sell side to the tune of $149mil. A substantial part of the action followed a decision by SEBI to ban derivative based P-notes which many FPIs used for hedging purposes. This precipitated waves of short-covering in some of the most liquid index stocks which skewed index performance towards the most heavily traded, liquid stocks. Nevertheless, volatility remained subdued as the India VIX traded between 9 and 12 before closing where it opened, at 11. Market breadth was not great, with advances outrunning declines by six to four. Index futures closed at a premium of just under 1% to cash.

We saw a slew of Q1FY18 results among portfolio stocks. Several companies reported weak sales following the widespread de-stocking seen in the run-up to the introduction of GST on July 1st. TV18 reported sales ahead by 4% with an improvement of nearly 10% in its quarterly loss in spite of reduced advertizing income. Bajaj Auto reported sales and profits both down by 5.6% as dealer de-stocking added to a slowdown due to the adoption of higher emission standards. Supreme Industries reported sales down by 7.9% and profits down by 25.9% as raw material prices squeezed margins.

In the Consumer sector, Nestle India continued its push to recover market share with a 7% advance in sales while rising costs brought a reduction of 6% in profits. Agro Tech Foods reported a drop of 1.8% in sales and an increase of 6% in profits. ITC suffered a heavy drop of 24.3% in sales but grew profits by 7.4%. Pidilite reported sales down by 2.1% and profits by 16.8%. The company saw a sharp reduction in channel inventories combined with rising raw material prices. It raised its advertising substantially to support wholesalers and dealers through the GST adoption process. In IT, HCL Tech reported a rise of 7.4% in revenues and 8.3% in profits as it worked through the completion of recent acquisitions.

Our private sector banks continue to contribute high quality earnings. HDFC Bank delivered a steady 20% increase in Net Interest Income (NII) and a 20% increase in profits. Kotak Mahindra Bank is emerging from the integration of its major acquisition and reported NII ahead by 14.7% and profits growth of 26%. Both banks have among the best ratios of non-performing loans in the market.

Away from results, Indraprashtha Gas has been licensed to deliver CNG and PNG in Gurugram in Haryana, a suburb of the National Capital Territory. It will build a CNG pipeline and open retail outlets in the area. Bajaj Auto will commence exporting two- and three-wheelers to Thailand; it already exports to Myanmar, Singapore and The Philippines. Lupin has had a USFDA inspection of its Goa plant which was completed with no observations. The company has received USFDA approval for its fluocinanide optical solution.

The second quarter stock selloff has to be seen as a sales deferral to the current quarter which will also be reflected in the next IIP. The monsoon is performing very well, with rainfall now running 5% above normal. Kharif sowing is 3% ahead of last year and the area under cropping is already at nearly 80% of the previous year.  Reservoir capacity is 4% ahead of a year earlier. All of this adds up to a significant boost to consumer demand and production in the current quarter. Record low inflation may add a rate cut to the mix this month.