Market Commentary August 28, 2017

Emerging from the August doldrums without a material market setback, global equities are still in demand in spite of geopolitical risk being quite high thanks to North Korea. In India, the Nifty has spent some time above the critical 10,000 level before subsiding under pressure from “risk-off” foreign selling. The Nifty eventually retreated 158 points, closing 1.6% lower at 9857 after trading in a range of 4.7%. Average daily trading volumes slipped $4.7bn as FPI selling of $1.4bn in cash equities was more than offset by $1.6bn of buying by domestic institutions. Volatility remained subdued: the India VIX traded between 10 and 16 before closing at 13 for a gain of 3 points. Market breadth was flat overall, with advances equal to declines and Nifty futures traded largely at a premium of about 75 basis points to cash.

The Q1 results season drew to a close with results widely affected by preparations for the introduction of nationwide GST on July 1st, including production cuts and widespread inventory selloffs. The Healthcare sector continued to disappoint with price pressures intensifying for generics in the US and domestic sales affected by evolving pricing policy aimed at cutting the cost of medications.  Lupin reported sales down by 11.76% and profits down by 5.9%. Torrent Pharma reported sales down by 10.9% and profits by 35.6%. Heidelberg Cement faced production pressures from restricted supply of sand and aggregates in Uttar Pradesh with sales down by 6.6% and profits down by 3.9%. Indian Hotels reported revenues ahead by just over 1% while profits fell by 19%.  Boosted by a strengthening order book at improving margins, Kalpataru Power reported a 1.4% increase in sales and 9% in profits. VIP Industries reported an increase of 9% in sales and 30% in profits. Finally, Indraprashtha Gas reported a 16% increase in sales and 9% in profits.

We have seen a number of interesting legal decisions handed down. In the first, of constitutional significance, the Supreme Court has held that personal privacy is a fundamental right. This was in response to a case brought in protest about the application of the Aadhaar programme. The judgement might restrain the government’s ability to continue to rollout the use of Aadhaar for benefit schemes for its 1.3bn holders. In another judgement, the Court struck down the Muslim divorce process by which a man can easily divorce his wife. This was a very popular decision particularly among women but it will require a statutory response which will be highly controversial. Moving up the geopolitical plain, India has resolved a rumbling dispute with China over disputed building works on the Doklam Plain in Bhutan, India’s client-state. This resolution precedes a state visit to China by Mr. Modi which is to promote the burgeoning trade relations between the two countries.

At its August policy review, the Monetary Policy Committee cut policy rates by 25 basis points. This was widely expected given the benign inflation outlook and at 6% it brings rates to their lowest level since October 2010. Economic data have been weak, reflecting the one-off adjustment before GST.  June’s IIP contracted by 0.1%, with contractions of 6.2% in Capital Goods and 6.6% in Consumer Durables. The July Purchasing Managers indices reflected the same slowdown: Service fell to 45.9 and Manufacturing to 47.9. Anecdotal evidence from our channels suggest that “deferred purchases” are driving a recovery already.

In the corporate sector, ITC announced a price rise for its premium cigarettes of 20% to absorb the extra tax due to GST. The company also announced that it intended to enter the Healthcare sector by establishing a multi-specialist hospital. Indian Hotels announced a rights issue to raise about $240mil in additional capital. The dilutive effect will depend on the proportional distribution of the proceeds between debt reduction and new investment.

The monsoon has eased off and is now standing at a slight reduction on the previous year’s rainfall. Kharif sowing exceeds 92% of last year’s acreage; reservoir levels are 27% lower than last year.