Foreign moolah flows into Indian market in Nov; 44 FII-heavy stocks rally 10-50%

FIIs which turned net sellers in Indian Capital markets in August, September and October pulling out nearly Rs 60,000 crore in the last three months turned net buyers in November.

After pulling out funds from Indian capital markets for three consecutive months in August, September and October, foreign institutional investors (FIIs) turned buyers in November.

They have poured in a little over Rs 10,000 crore (equity and Debt) in Indian markets so far this month as macro concerns receded due to fall in crude oil prices and a sharp appreciation in rupee against the dollar which went below Rs 70/USD in trade on Thursday.

With the sharp decline in crude prices, almost 30 percent in 7 weeks, the key macro headwind for India has been addressed and the same is reflected in Indian rupee (appreciating over 4.6% in November, which is the strongest recovery in Asian FX),” Pankaj Pandey, Head-Research, ICICIdirect.com told Moneycontrol.

“With crude price outlook fading on excess supply concerns and the US Fed adopting a slightly dovish tone, strong EM stories have started to make a comeback. India is stacked well in current set up and FIIs are likely to renew their focus on Indian markets,” he said.

Pandey further added that India continues to offer one of the highest positive real rates (accretive Bond Inflows) and equity market has also cooled off falling more than 10 percent from its record high in January 2018 and looking more compelling based on forward growth projections.

US Federal Reserve’s dovish outlook also helped money to flow into riskier assets. One big factor that will act in favour of India is the earnings growth. HSBC analysts said MSCI India EPS (earnings per share) growth consensus expectations — of 18.8 percent in 2018 and 24 percent in 2019 — pegs India as one of the fastest growing markets across the region.

FIIs turning net buyers in the Indian market also boosted some of the FII-heavy stocks. As many as 44 stocks in the S&P BSE 500 index, where FIIs hold more than 10 percent stake, have rallied 10-50% so far this month.

Stocks that witnessed rally include Adani Transmission (up 50%), followed by PNB Housing (up 28%), PC Jeweller (up 2%), Pidilite Industries (up 22%), BPCL (up 21%), Future Consumer

“It is indeed pleasant to see FIIs turning net buyers of Indian equities in November and the hope is that the trend would continue. As of now, data seems to suggest that a large part of the inflows is on the account of emerging market ETF flows of which India, too, is a beneficiary,” Shibani Kurian, Sr. Vice President and Head of Equity Research, Kotak Mahindra Asset Management Company (KMAMC) told Moneycontrol.

“In a scenario wherein risks are emerging to the global growth outlook, India does stand out with fairly stable expectations on GDP growth. Further, post the recent correction in the markets, valuations are not as stretched as before,” she said. (up 19%), VIP Industries (up 18%), and Kajaria Ceramics (up 17%). The table shows top 21 stocks from the list:

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This is not a runaway market: Quality stocks that fell in 6-8 months are up for grabs

A sharp decline in the crude price provided a much-needed boost to the Indian economy and aided the markets to retain lost value up to Rs 3.3 lakh crore during the fortnight.

After a sharp selloff in October 2018, domestic equity indices marked a decent recovery in the first fortnight of November 2018 mainly underpinned by a sharp decline in crude prices (20 percent down from the peak in October 2018) easing concerns over deteriorating twin deficits and stability in the Indian rupee.

Renewed buying from foreign institutional investors also helped in the rise of the Indian market with the Nifty 50 index and the BSE Sensex index rising 2.2 percent and 2.4 percent, respectively in the first fortnight of November 2018. But bears soon took control and pushed the Sensex below 35K and the Nifty below 10,600 levels.

A sharp decline in the crude price provided a much-needed boost to the Indian economy and aided the market to retain lost value up to Rs 3.3 lakh crore during the fortnight.

While the overall corporate performance has been slightly below expectation, and the street has already witnessed earnings cut in most of the sectors, the September 2019 quarterly corporate earnings have given a sense of confidence with positive management commentaries.

In future, crude oil prices, rupee movement and the outcome of the upcoming state elections will dictate the trend in the domestic market.

While softening crude price and favourable consumer inflation data could see the Reserve Bank of India (RBI) defer the rate hike in its upcoming monetary policy, a possible rate hike by the Federal Reserve in December 2018 may put pressure on the Indian rupee, as further reduction in spreads of real interest rates may result in flight of hot money.

Nevertheless, we continue to advise investors to be careful in stock selection and take informed investment decisions particularly in light of political uncertainty, liquidity crises being faced especially by the MSMEs and the ongoing global trade war.

Retail investors should strictly venture this market through an advisor or invest through mutual funds. This is not a runaway market but quality stocks which are available at attractive valuations following sharp correction during the last 6-8 months can be accumulated at the current levels.

The market would be gripped with volatility and therefore, investors should be careful and invest in stocks of companies that generate free cash flows.

Source:https://www.moneycontrol.com/news/business/markets/this-is-not-a-runaway-market-quality-stocks-that-fell-in-6-8-months-are-up-for-grabs-3214111.html

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Plastic pipe makers Q2 FY19 review | Strong quarterly show; prefer Finolex Industries

We see Finolex continuing to grow at a steady pace for the next couple of years as it is witnessing good traction in the high-margin CPVC business

Plastic pipe manufacturers delivered a strong set of numbers for the second quarter of this fiscal year. The government’s push on agriculture, irrigation and infrastructural development has had a positive impact on organised players in the sector and this was evident in the Q2 performance of major companies in the sector.

Here, we discuss the results of 3 leading plastic pipe manufacturers — Astral Poly Technik, Supreme Industries and Finolex Industries — that are trying to enhance their profitability through expansion of distribution networks, product diversification and capacity expansion.

Astral Poly Technik’s sales for the September quarter rose 22 percent on year, primarily due to a strong performance by its adhesive and sealant business.

Revenue from the company’s pipes business grew 9 percent on year, driven by an amalgamation of higher volumes (up 5 percent YoY) and improved realisations (up 4 percent YoY).

Operating profit jumped 20 percent, while operating margin remained largely unchanged.

Astral has fortified its presence in the adhesive and sealant space over the past few years through its acquisition of Resinova Chemie and Seal It Services.

For Q2 FY19, the company’s revenue from its domestic adhesive and sealant business (Resinova Chemie) grew at a rapid 18 percent on year.

Seal It Services, the UK-based subsidiary, grew much at faster pace, reporting topline growth in excess of 40 percent.

The segment continues to gain market traction and therefore, its share in the company’s total revenue has increased from around 30 percent in FY16 to more than 45 percent now.

In a strategic move to further enhance its presence in the pipe segment, the company has announced a merger with Rex Polyextrusion, a leading manufacturer in the double-walled corrugated pipes space.

The transaction marks a strategic point in Astral’s diversification into high-growth segments of the pipe industry, like urban infrastructure and cable ducting in telecom.

The deal also gives the company a head start in a less-crowded product segment with relatively high entry barriers.

In the quarter gone by, the company has initiated commercial production at Ghiloth Plant (Rajasthan) post the successful completion of trial runs.

Further, the Hossur plant (Karnataka) is expected to come on-stream by FY19-end. These two plants together will add around 37,000 tonnes of capacity in the pipes segment.

Supreme Industries

Supreme Industries’ Q2 sales were 18 percent higher than its sales in the same quarter last year, thanks to a combination of a 5 percent rise in volumes and 13 percent rise in realisations.

Volumes from the industrial and piping segment grew in the mid-single digits, but the overall growth was much higher on account of higher realisations.

The packaging division had a muted quarter as business was impacted by a plant shutdown and price erosion. The consumer business saw volumes falling by 2 percent.

The improvement in realisations, along with lower employee costs, drove the significant jump in the company’s operating profit. Operating margin expanded 230 bps on a sequential basis.

Given the competitive environment in the industry at the moment, the management has revised its full-year volume guidance downwards to around 10 percent (from 12-15 percent at the start of the year).

The company’s operating profit margin is expected to be at around 15 percent for the full year.

Finolex Industries

Finolex Industries’ topline increased 14 percent on year, on the back of a sharp jump in realisations across both the resins and pipes segments.

Volume growth remained largely flat during the seasonally weak monsoon season. The sharp jump in operating profit was aided by a low base as well as an expansion in margins.

Higher realisations, coupled with inventory gains, led to the company’s operating profit margin expanding.

While overall pipe volumes were muted in Q2, the chlorinated polyvinyl chloride (CPVC) business continued to witness a rise in volumes.

The management expects the trend to continue and expects volumes from the business to grow at healthy rate of more than 30 percent over the next couple of years.

On the margin front, the company could witness some moderation in its operating profit margin as input costs continue to inch up.

Finolex is on track to expand its capacity to 370,000 tonne by FY19-end. It plans to add 30,000 tonne of capacity every year by incurring an investment of Rs 30 crore.

Outlook and recommendation

Astral Poly Technik trades at a premium valuation because of its track record, growing presence in the adhesive segment and earnings visibility.

In our view, Finolex Industries put up a good show in the first half of this fiscal year. We see the company continuing to grow at a steady pace for the next couple of years as it is witnessing good traction in the high-margin CPVC business, which registered a volume growth of more than 30 percent in H1 FY19.

The company’s margins are also seen moving higher with increasing economies of scale and new product launches. The stock’s current valuation (FY19 P/E of 18 times) is at a significant discount to that of its peers and appears to be fairly reasonable from a long-term perspective.

Source:https://www.moneycontrol.com/news/business/moneycontrol-research/plastic-pipe-makers-q2-fy19-review-strong-quarterly-show-prefer-finolex-industries-3212951.html

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These midcaps have fallen 10-40% from 52-week high but can give double-digit returns

Companies have been taking a hit on their margins due to rising prices of commodities, rupee depreciation and high competition

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While the benchmark index, S&P BSE Sensex, has dropped about 9 percent from its record high that it hit in August, many midcap stocks have fallen by about 40 percent from their respective highs.

High valuations, liquidity concerns, rise in commodity prices and weakening rupee resulted in a sharp correction in the mid-cap names in the recent past.

Motilal Oswal has shortlisted 10 stocks that have fallen up to 40 percent from their 52-week highs, but still have potential to give 10-90% return in the next 12 months.

Stocks which have dropped 10-40 percent from their respective 52-week highs include Shriram Transport, RBL Bank, Exide Industries, Tata Chemicals, JSPL, Oberoi Realty, MindTree, CG Consumer and Teamlease.

A midcap company which is able to maintain its margins, along with growth, may be accumulated on declines, suggest experts.

“In the current fall, many companies with strong fundamentals have corrected owing to cyclical issues or high valuations. Sustainable growth companies where free cash flows are high/rising along with strong balance sheet are always the preferred midcaps,” Vineeta Sharma, HOR at Narnolia Financial Advisors told Moneycontrol.

In terms of valuations, midcaps have moderated slightly which will give comfort to long-term investors to get into quality stocks on declines. Now that valuations are close to be reasonable, the two main factors to be considered in picking stocks in the broader market are earnings growth and stability of earnings.

“A company which has steady and consistent earnings growth over time even during times of economic difficulty and market upheaval can be a good bet for the future. Investors who got stuck in this correction are advised not to compromise with quality while reviewing their portfolio,” Soumen Chatterjee, Director, Guiness Securities told Moneycontrol.

Both BSE Midcap and Smallcap indices are currently trading at 18-28 percent below their recent highs, and in some cases, stocks have corrected by more than 40-50 percent.

“Such declines have generated opportunities for buying into selective good quality midcap stocks where earnings visibility is stable and high. One-year forward price-to-earnings (PE) ratio of BSE Midcap is currently at 21 times, a premium of 11 percent over the Sensex which trades at 19 times, according to Bloomberg data,” said Chatterjee.

What should investors do?

The selection criteria for investors could be a mix of technical as well as fundamental factors. It is important to understand how the prices are moving, and fundamentally how the company does its business and earnings potential.

“Investors are advised to look for fundamentally strong stocks trading above their 50- and 200-DMA, and are about to break out on higher volume, to add to their portfolios,” Vipin Khare, Director- Research, William O’Neil India told Moneycontrol.

“Some good quality stocks include VIP industries and Vinati Organics. On the other hand, technically weak stocks, which are unable to sustain above 200- or 50-DMA, should be avoided,” he said.

Out of the Motilal Oswal’s midcap picks, Khare said following three stocks are technically looking very strong:

Marico:

The stock, after hitting its all-time high of Rs 387.85 on August 24, came under huge selling pressure and breached all its key support levels at 50- and 200-DMA. It bottomed out at the Rs 282.95 mark, down 27 percent from its all-time high. Since then, it has had a good run and has reclaimed all its support levels, backed by strong Q2 numbers.

In its Q2 results, revenue from operations increased 20 percent YoY to Rs 1,836.8 crore, beating consensus estimates. Improving technical characteristics backed by strong Q2 results bolstered investors’ optimism in recent times. While we would love to see it break above the pivot, aggressive investors can initiate their position as it retook all its key support levels (50-, 100-, and 200-DMA).

Shriram Transport:

Shriram Transport remains a strong business model due to its presence in the less competitive used-vehicle finance market. The Company reported a strong set of number in Q2 with its revenue growing at 20 percent and PAT at 23 percent, beats consensus estimates.

Post the result, the stock acted strongly and within a span of four trading session, it retook its 50-DMA. However, we would love to see it breaks above 200-DMA, before initiating any fresh position.

Teamlease:

On the back of strong Q2 results and upbeat estimates, the stock has moved higher and is currently trading 40 percent above its recent lows and retook all its support levels. As per our methodology, we would like to see it break out with high volumes, however on aggressive stance; an investor can initiate a position if it breaks above Rs 3,000 level on high volumes.

 

Source: https://www.moneycontrol.com/news/business/markets/these-midcaps-have-fallen-10-40-from-52-week-high-but-can-give-double-digit-returns-3204891.html

 

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Living the ‘Stockdale paradox’: Earnings downgrades outpace upgrades in Q2

Out of 230 widely covered companies, 77 beat estimates, 88 missed estimates, and 64 reported earnings in line in Q2.

Investors are eagerly waiting for a bounce back in earnings, but like the ‘Stockdale paradox’, best illustrated in the book ‘Good to Great’, optimism around earnings recovery belied expectations once again resulting in the quarterly earnings downgrade of 5 percent during Q2FY19 (3 percent downgrade in Q1FY19), ICICIdirect said in a report.

The book Good to Great explains the Stockdale paradox as, “Retain faith that you will prevail in the end, regardless of the difficulties, and at the same time confront the most brutal facts of your current reality, whatever they might be.”

The crude reality in today’s market is that earnings recovery has not been matching the optimism on the Street.

Out of 230 widely covered companies, 77 beat estimates, and 88 missed estimates and 64 reported earnings in line in Q2. The threshold for beats and misses is +/-5 percent.

Nifty target cut:

Since the beginning of FY19, the 1-year rolled forward EPS for the Nifty50 has moved up by a mere 2 percent due to earnings downgrade. Despite weak earnings growth for the past six years (5 percent CAGR). The Nifty50 index has risen at a CAGR of ~13 percent due to expanding valuation multiples for stocks.

However, over the past one year, the environment for rising equity valuations is deteriorating with global liquidity getting tighter, higher bond yields, macro headwinds, and prospects of slowing global growth from FY20 onwards.

We expect incremental downgrades to our base Nifty50 earnings estimate thereby resulting in a CAGR of 15.5 percent during FY19-21 and cut our target multiple to 17.1x (+ 0.4 s.d.) to arrive at our December 2019 target of 11,800.

Source:https:// www. moneycontrol.com/news/business/markets/living-the-stockdale-paradox-earnings-downgrades-outpace-upgrades-in-q2-3203111.html

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Good bargain: Motilal Oswal picks 10 largecaps trading below 52-week high

Motilal Oswal sees an upside of 9-40 percent on these 10 large-cap stocks which include names like RIL, HDFC and Infosys

The last round of correction, which pushed the index lower by about 9 percent from its August record high, also led to many quality largecap stocks tumble from 52-week highs.

The real challenge for investors now is to look for quality largecaps. Motilal Oswal in a report highlighted 10 stocks which have fallen up to 27 percent from 52-week highs.

The brokerage firm sees an upside of 9-40 percent on these 10 large-cap stocks which include names like RIL, HDFC, Infosys, SBI, ICICI Bank, Maruti Suzuki, L&T, Axis Bank, Titan Company and Hindalco.

India Inc’s September earnings were broadly in line with analyst expectations as far as Nifty companies are concerned. As many as 73 companies saw earnings cut of over 3 percent, while 38 companies saw upgrades of over 3 percent.

“While the underlying earnings story is improving (better revenue growth trends, corporate banks’ asset quality turning around, etc.), new risks to earnings are also emerging (autos, NBFC). Consequently, the direction of the earnings revision is still trending down,” Motilal Oswal said in a report.

Analysts feel that if investors are looking to enter markets on declines, largecaps are still a better bet compared to shaky small and midcaps. Earnings for most of the large-cap names are looking up which is a positive sign.

The EPS estimates of most of the stocks in the table above suggest that the earnings are inching higher in FY19 as well as in FY20.

“The headline large-cap indices are still being held up by few major stocks; however, the market breadth remains weak and the broader markets have seen continued selling pressure,” Sahil Kapoor, Chief Market Strategist, Edelweiss Investment Research told Moneycontrol.

“Small and midcaps usually lead the reaction to down cycles, and as the market sentiment turns sour they are the first ones to decline. In our opinion, the broader market is already pretty overvalued relative to the large-cap indices, and the latest market rout is an opportunity for such indices to come back to better valuations,” he said.

The recent correction in the Indian market might have seen many stocks losing their sheen but from a benchmark point of view the valuations are still slightly on the higher side, suggest experts.

“The Indian market valuations are still on the higher side relative to history and bond yields despite the correction over the past few months. The valuations already factor in 15 percent and 26 percent growth in net profits of the Nifty-50 index for FY19 and FY20,” Kotak Institutional Equities said in a note.

“We find decent value in a few sectors and stocks in financials, energy, metals & mining and power utilities but do not find value in the ‘quality’ stocks. Also, it remains to be seen if their high multiples will hold up in the event of tighter global monetary conditions and higher bond yields,” it added.

As the market is expected to remain volatile for an extended period, investors looking to build portfolio should approach with caution by deploying bottom-up strategy, suggest experts.

“At an aggregate level, we believe that largecaps offer a better risk-return profile. However, some individual stock names among small and midcaps look better. Investors should stick to quality,” Vivek Ranjan Misra, Head of Fundamental Research at Karvy Stock Broking.

“I think investors are well-off doing staggered buying as more volatility is expected in the near term before elections. Our Sensex target for the 2019-end is 45,000. Portfolio strategy: Equities – 40 percent, Debt – 30 percent – Mostly G Secs, Gold – 10 percent, and Cash – 20 percent,” he said.

Source: https://www. moneycontrol.com/news/business/markets/good-bargain-motilal-oswal-picks-10-largecaps-trading-below-52-week-high-3195801.html

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Opinion | Beware! Low oil prices foretell a sooner-than-expected global slowdown

Oil prices and inventory along with other telltale signs suggest we are in for tougher days ahead

Indian policymakers are breathing a sigh of relief. Contrary to expectations earlier this year, when oil prices were forecast to touch $100 per barrel, crude rates have fallen 25 percent (since early October) to around $65 now. Falling oil prices will relieve some pressure on the current account deficit and the rupee, and bring some stability to the economy.

Part of the reason why oil prices shot up in the first place was the US sanctions on Iran, the fourth largest oil producer. That was expected to have taken away a substantial amount of oil from the world market. However, that hasn’t happened with US President Donald Trump agreeing for a 180-day waiver to China, India and six other countries who account for more than 75 percent of Iranian exports.

Secondly, in anticipation of a reduction in oil supply from Iran, the top three oil producers – Saudi Arabia, the US and Russia – had increased their oil productions to record levels. The highest increase was from the US shale oil industry which pumped 23 percent more oil in August compared to a year ago. The country is now the largest producer of oil at $11.6 million barrel per day.

Now the oil market is flooded with oil. US crude inventory levels have jumped more than 10 million barrels to 442.1 million barrels, about 5 percent higher than the five-year average. These inventory levels plus a strengthening dollar has hit the demand for oil.

It has also prompted discussions among key oil producers. Reports talk of the Organisation of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, considering coordinated production cuts along with Russia. Saudi Arabia’s oil minister, Khalid al-Falih, said the kingdom would lower output by 500,000 barrels a day in December. However, these are unlikely to have much of an impact unless the US shale industry reduces output and inventory comes down.

Moreover, other headwinds to oil prices are gathering force, especially the ongoing trade war which is affecting global demand. Trump’s import duty hike on Chinese imports is now in place. The shipping industry has already warned of a further slowdown and lower rates. The Baltic Dry freight index is down from 1,800 in July 2018 to just over 1000 presently.

Analysts are now expecting a hard landing for China. The fourth quarter data of the calendar year 2018 is eagerly awaited as the first signs of the impact of higher US duties will be seen on the Chinese economy. China’s export to the US had moved higher just before the duties were imposed on account of stocking by US companies.

China’s impact on oil prices cannot be understated. According to OPEC, China accounted for 40 percent of the growth in demand for oil last year. As prices keep falling analysts are expecting OPEC to announce production cut in their meeting in Vienna, despite Trump’s warning against doing so. But it remains to be seen what kind of impact it will have.

What does all this mean for India?

Falling oil prices are always welcome for an oil importing nation. But the reasons behind the fall in oil prices are also important. Oil demand growth is a proxy for global growth. Various agencies have already warned of slowing oil demand. Economic growth could well take a hit if exports fall or don’t gain in a significant manner.

Secondly, Indian companies, especially those present in market indices are dependent on global growth. Equity markets have a strong correlation with international oil prices. So. While Indian markets may be enjoying falling oil prices and a stable rupee a look back at history suggests challenging times ahead.

Source:https://www.moneycontrol.com/news/business/opinion-beware-low-oil-prices-foretell-a-sooner-than-expected-global-slowdown-3195781.html

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