Market recovers lost ground; but fears remain

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

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 2018-March 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 2017-March 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 Rs 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 Rs 160 billion, and sales revenue grew by 3 per cent to Rs  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 Rs 6.21 billion scam, while investigation of the Rs 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.