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Indian stock market and companies daily report (September 16, 2013, Monday)
Indian markets are expected to open in green tracking gap up opening in almost all the Asian indices, after Lawrence Summers dropped from the race to be head of the Federal Reserve and investors wagered that U.S. monetary policy would stay easier for longer should the other leading candidate for Fed chair, Janet Yellen, get the job. In addition, US and Russia reached an agreement to secure Syria's chemical weapons
The US markets rose on Friday, with the Dow industrials posting their best week since January, as worries about Syria ebbed and as investors looked to monetary-policy decision by the Federal Reserve. The Commerce Department released a report showing 0.2% retail sales growth in the month of August following an upwardly revised 0.4% increase in July. This disappointing data seemed to generate some optimism that the Federal Reserve will delay plans to begin scaling back its asset purchase program at this week's meeting.
Meanwhile, the domestic markets a volatile session modestly lower on Friday, weighed down by weak global cues as traders refrained from taking fresh positions ahead of this week's FOMC meeting. Many analysts expect the central bank to announce a modest reduction in its bond-buying program at the end of the two-day policy meeting slated to end Wednesday.
The trend deciding level for the day is 19,769 / 5,853 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 19,863 - 19,993 / 5,882 - 5,914 levels. However, if NIFTY trades below 19,769 / 5,853 levels for the first half-an-hour of trade then it may correct up to 19,639 - 19,546 / 5,821 - 5,791 levels.
PMEAC revises FY2014 growth estimates
The PMEAC on September 13, 2013 pegged real GDP growth for FY2014 at 5.3% higher than 5% in FY2013. It expects agriculture, industry and services growth at 4.8%, 2.7% and 6.6% in FY2014 as against 1.9%, 2.1% and 7.1% respectively in the previous year. The Council's growth estimates have been revised lower from 6.4% indicated in April 2013. The reasons it states for lowering the forecast are impact of currency related disruptions and corporate results remaining stressed. However these estimates continue to remain higher than market expectations of growth ranging between 4.5-5% during the fiscal year and lower than FY2013.
The three main reasons it cites for a higher growth rate as compared to FY2013 are 1) reflection of full impact of various measures taken over the last six months, 2) performance of key infrastructure sectors that lie in the public domain such as coal, power, roads and railways and 3) Continuous efforts being made to remove the bottlenecks in the implementation of projects.
Domestic savings rate is projected at 31% of GDP as against the estimated 30.2% of GDP in FY2013. Investment rate is projected to be lower at 34.7% of GDP in FY2014 as against the estimated 35% in FY2013.
It estimates WPI inflation by end March 2014 to be around 5.5 percent as against the average of 7.4% in FY2013 and 5.7% at end March 2013. But we believe that upside risks to inflation exist from the full pass-through impact of currency depreciation and deregulating of administered fuels.
The Current Account Deficit is projected at US$70bn (3.8% of GDP) in FY2014 against an estimated US$88.2bn (4.8% of GDP) in FY2013. Merchandise trade deficit is projected at US$185bn (10.1% of GDP) in FY2014 against an estimated US$1 95.7bn (10.6% of the GDP) in FY2013. It also points to the likelihood of CAD coming in lower than US$70bn if recent trends in exports and imports are maintained through the year. However a note of caution is warranted despite the improving CAD since it expects slower capital flows in the economy. Net Capital inflows are projected at US$61.4 bn (3.4% of GDP) in FY2014 against an estimated US$89.4bn in FY2013. This would entail a draw-down of US$8.6bn from the country's foreign exchange reserves. It is reiterates that for India, the short-term problem is of financing the large CAD, while the medium term issue is to compress CAD to a more sustainable level of around 2.5% of GDP and ensure price stability.
On the fiscal situation it notes that containing fiscal deficit within the budgeted estimate could be a challenge. The fiscal deficit during the first four months of the current financial year has already reached 62.8%, and expenditure on major subsidies 51.3%, of the budgetary provision for the full financial year. Discretionary expenditure budgeted may need to be compressed, and subsidies restructured, in the remaining months of the financial year in a growth friendly manner to limit fiscal slippages.
It concurs that the current stance of monetary policy has to continue until stability in the rupee is achieved. Thereafter, if the current trend in the moderation of wholesale price inflation continues, which is in fact expected, the monetary authorities can switch to a policy of easing. However it notes that the time frame for this is very difficult to specify.
Metals sector update
Global positives fuelling rally in metal stocks lately: Over the past one year, we have seen declines in stock prices alongside frequent earnings downgrades for Metals and Mining sector companies. This is because global and domestic metal and base metal prices have broadly slid during CY2013 (upto August 2013). However, Metals & Mining stocks have rallied by 5-35% over the past one month on the back of positive news flows across the globe, especially China, alongside INR depreciation against the USD.
Some gains for steel companies likely: For steel companies, these factors make a case for increase in realizations and better volume growth (due to higher export prospects and also import substitution due to INR depreciation). However, domestic steel demand remains weak in the near-term. Steel consumption growth declined to multi-year lows to 3.3% yoy during FY2013. Further, real steel consumption in India rose by just 0.3% yoy during April - August 201 3 due to low demand from construction and automotive sectors. Nevertheless, we expect a 3-4% improvement in realizations for domestic steel companies during 2HFY2014, compared to announced price hikes of 6-7%.
Base metal stocks to benefit the most due to weak INR: Base metal companies (mainly aluminium and zinc producers) price their products based on LME spot prices which are dollar-denominated. These companies are likely to be the real beneficiaries on the back of INR depreciation against the USD as there is high level of consolidation in the aluminium and zinc sectors in India. Hence, INR depreciation makes a strong case for increases in realizations of zinc and aluminium companies, but not of steel companies where low domestic demand coupled with fragmented domestic industry play a spoilsport.
We upgrade some stocks: For steel makers, a weakening rupee raises landed cost of steel imports, thus giving higher pricing power to domestic steel players. It also raises coking coal costs (a key raw material in steel making) which partially offsets the impact of price hikes. Steel companies have also announced price hikes in the range of 3-7% effective September 2013. However, weak domestic demand (April-August real consumption grew only 0.3% yoy) alongside fragmented domestic industry is likely to partially spoil the party; these hikes will be partially rolled-back in the form of discounts, in our view. Nevertheless, we continue to like companies with captive assets, strong visibility on earnings growth over the coming few years, low leverage levels and inexpensive valuations. Tata Steel, Hindustan Zinc and NMDC still remain our preferred bets.
Bosch to temporarily suspend production at Nashik plant
According to a filing with the BSE, Bosch has announced that it will suspend the production at its Nashik plant for a period of three days starting from September 16, 2013. The company has announced the shutdown to avoid unnecessary buildup of inventory and align the production as per the market demand. The domestic automotive industry is the primary driver of company's revenue and the weak domestic demand on account of sluggish economic growth, increasing fuel prices and weak consumer sentiments is expected to impact the company's operating performance in CY2013. Nevertheless, we remain positive on the long term prospects of BOS due to its technological leadership and strong and diversified product portfolio. At Rs.8,284 the stock is trading at 19.6x CY2014E earnings. We maintain our Accumulate rating on the stock with a target price of Rs.9,096.
JSW Steel reported August crude steel production numbers
JSW Steel reported August crude steel production numbers from all the three plants namely Vijayanagar, Salem and Dolvi. The crude steel production for August stood at 0.98mn tonnes and the rolled flat and rolled long production stood at 0.82mn tonnes and 0.13mn tonnes respectively. The capacity utilization at Vijayanagar plant remains at ~80% due to iron ore shortage caused by inordinate delays in opening category A and B mines even after Supreme court's order to resume mining operations. The production numbers are however, not comparable to the August 2012 numbers since these numbers comprises of the production from the erstwhile JSW Ispat's Dolvi plant which is now merged with JSW Steel. We maintain our Neutral view on the JSW Steel stock.
Economic and Political News
- Former U.S. treasury secretary Lawrence Summers withdraws name for federal reserve chairman position
- Government asks airlines to reduce cancellation, rescheduling charges
- Narendra Modi formally anointed BJP's prime ministerial candidate
- Petrol price increased by Rs.1.63 a litre
- PowerMin unveils model Bill on distribution responsibility
- Bayer CropScience inks pack to sell its unit for Rs.127cr
- Biocon in strategic pact with CytoSorbents for management of sepsis
- IL&FS Engg wins Rs.244cr housing project in Haryana
- ONGC to pre-empt Petrobras stake sale
- Promoters set to infuse Rs.1,000cr in PNB Housing
- REC tax-free bond issue of Rs.3,500 to close on September 16
- RIL slams DGH move to snatch gas discoveries as arbitrary
- Sun Pharma announces USFDA approval for generic Prevacid®
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