Mk­tre­cov­ers lost ground; but fears re­main

Cor­po­rate re­sults, Kar­nataka Assem­bly elec­tions and a tense ex­ter­nal en­vi­ron­ment are some stress points

Business Standard - - ISSUES AND INSIGHTS - DEVANGSHU DATTA

The mar­ket has re­cov­ered lost ground in the past fort­night with help of an op­ti­mistic Re­serve Bank of In­dia (RBI) pol­icy re­view and rea­son­able macroe­co­nomic data. Trad­ing over the next few weeks is likely to be driven by cor­po­rate re­sults. How­ever, the ex­ter­nal en­vi­ron­ment is tense.

In­fla­tion has mod­er­ated. The Con­sumer Price In­dex (CPI) rose by 4.28 per cent year-on-year in March. This was the low­est level in five months. The RBI’s Mon­e­tary Pol­icy Com­mit­tee opted to hold sta­tus quo, with one mem­ber ad­vo­cat­ing a hike in pol­icy rates.

The Cen­tral Bank ex­pects GDP growth to ac­cel­er­ate to 7.4 per cent in this fis­cal with CPI in­fla­tion held be­tween 4.7-5.1 per cent in the first half (April-Septem­ber 2018) and drop­ping to 4.4 per cent in H2 (Oc­to­ber 2018March 2019). The Whole­sale Price In­dex (WPI) is down marginally, to 2.47 per cent YoY. In­fla­tion (mi­nus food and fuel) re­mains high at 5.4 per cent.

The In­dex of In­dus­trial Pro­duc­tion (IIP) for Fe­bru­ary rose by 7.1 per cent YoY. The big pos­i­tive news here was that Cap­i­tal goods grew at 20 per cent while In­fras­truc­ture and Con­struc­tion was up by 12.6 per cent. Min­ing saw a slight con­trac­tion due to lower coal pro­duc­tion. This was the fourth month in suc­ces­sion when IIP rose by over 7 per cent. The cu­mu­la­tive 11-month growth rate (April 2017-Fe­bru­ary 2018) is 5.3 per cent.

Ex­ports are up by 9.8 per cent to $302 bil­lion for the fis­cal year (April 2017March 2018). But ex­ports fell by 0.66 per cent in March. Im­ports rose by a sub­stan­tial 19.6 per cent in 2017-18 to $459.6 bil­lion. The trade deficit (Im­ports mi­nus Ex­ports) is $ 156.8 bil­lion and likely to climb if crude prices re­main high. The Cur­rent Ac­count Deficit could rise as high as 2.6 per cent of GDP in 2018-19.

The ru­pee fell to ~65.39/USD and the slide could con­tinue given ris­ing crude. Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries (Opec), led by the Saudis, is de­ter­mined to push prices till $80/ bar­rel. There’s also fear that co­or­di­nated airstrikes in Syria could trig­ger a di­rect Rus­sia — USA+UK+ France con­fronta­tion and sup­ply dis­rup­tion. In­vestors are also wor­ried about es­ca­la­tion of the US-China trade war with the world’s two largest economies putting tit-for-tat puni­tive du­ties on each-other’s ex­ports.

In cor­po­rate re­sults, the mar­ket ex­pects prof­its to grow by dou­ble dig­its YoY, but the Q4 growth rate could be lower than in Q3. Early bird In­fosys’ re­sults were in line with ex­pec­ta­tions but in­vestors are un­happy about low guid­ance for 2018-19.

For 2017-18, In­fosys’ net prof­its grew by 11.7 per cent to ~160 bil­lion, and sales rev­enue grew by 3 per cent to ~ 705 bil­lion. There was se­quen­tial fall, largely due to an un­usual pro­vi­sion. In 2018-19, In­fosys ex­pects rev­enue growth of 6-8 per cent (in con­stant cur­rency terms). Op­er­at­ing mar­gin in 2018-19 is ex­pected to be 22-24 per cent and that’s lower than the 2017-18 OPM of 24.7 per cent.

In­fosys CEO, Salil Parekh, also an­nounced that two over­seas sub­sidiaries, Skava and Panaya, will be sold. These com­pa­nies were bought dur­ing the ten­ure of Vishal Sikka and I’m sure read­ers will re­call the whole “whistle­blower” con­tro­versy and Mr Narayana Murthy’s let­ter. There’s a di­ver­gence be­tween the stock move­ments of two IT gi­ants now, with In­fosys be­ing beaten down, while TCS gains ahead of re­sults.

The bank­ing sec­tor con­tin­ues to be rocked by new scan­dals. The Cen­tral Bureau of In­ves­ti­ga­tion (CBI) has filed a chargesheet against sev­eral se­nior UCO Bank of­fi­cials and a for­mer chair­man, in a ~6.21 bil­lion scam, while in­ves­ti­ga­tion of the ~130 bil­lion Pun­jab Na­tional Bank scam con­tin­ues. The CBI says that 47 com­pa­nies con­trolled by Nirav Modi and his as­so­ciates were used to “round-trip” money.

In the ICICI-Video­con af­fair, the IT Depart­ment says it sus­pects round-trip­ping was done by Deepak Kochhar’s firm, NuPower Re­new­ables with a sus­pi­ciously high val­u­a­tion for the shares. The third term of Axis Bank MD-CEO, Shikha Sharma has been trun­cated to end in De­cem­ber 2018, af­ter the RBI ques­tioned the rise of bad loans dur­ing her pre­vi­ous terms.

The non-per­form­ing as­sets (NPA) sit­u­a­tion im­plies that banks can’t cut rates. The largest mort­gage NBFC, HDFC, has also raised rates. Bond yields slid af­ter the cen­tral gov­ern­ment said that it would re­strict bor­row­ing. But it’s not clear if this is a re­al­is­tic com­mit­ment in elec­tion year, with GST still not to­tally sta­ble.

In takeover news, Eti­had and Anil Am­bani may con­sider bid­ding for the 76 per cent stake of Air In­dia, which is be­ing of­fered for sale. The For­tis Health­care group could see a takeover bid by any of sev­eral suit­ors. The Mun­jals of Hero Group, the Bur­mans of Dabur and the Ma­ni­pal group all seem to be in­ter­ested in In­dia’s sec­ond-largest health­care com­pany.

Do­mes­tic In­sti­tu­tional at­ti­tude and For­eign Port­fo­lio In­vest­ments (FPI) at­ti­tudes are net pos­i­tive with DII buy­ing out­gun­ning FPI sell­ing. Re­tail in­vestors are also back in the new fis­cal. Do­mes­tic pol­i­tics is likely to have its say in the Kar­nataka elec­tions in mid-May. If the re­sults favour Congress, it could trig­ger more sell­ing. Sebi’s de­ci­sion to make de­liv­ery manda­tory in the F&O seg­ment may grad­u­ally af­fect vol­umes.

The tech­ni­cal po­si­tion is hard to read. The mar­ket has pulled back above the bench­mark 200 Day Mov­ing Av­er­age. But breadth re­mains poor. Re­sis­tances are very vis­i­ble in the 10,600 range. Re­sults could trig­ger the next de­ci­sive move. Or it might be the Kar­nataka As­sem­blies.

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