stockaxis Market Intelligence (Commentary for December 2018; Outlook for January 2019)

We are pleased to present to you our monthly market commentary and outlook for the forthcoming month. The ‘stockaxis’ Market Intelligence’ is a quick update on the markets for the month gone by and our view for the next month. Use our sharp and crisp synopsis to continue building your wealth!

Global Trends

Moody’s Investors Service places a stable outlook on Indian banking system for the next 12-18 months amidst healthy economic growth prospects.
India and Sweden sign two Memorandums of Understanding (MoUs) to bolster renewable energy technologies, further long history of collaboration.
According to the World Bank, India retains its top position in remittances with USD 80 bln. China, Mexico and Philippines next in line.
Oxford Economics report indicates that 17 out of the 20 fastest growing cities in the world between 2019-35 are located in India.
India’s total software services exports, including exports through overseas commercial presence, rose by 11.6% to USD 108.4 bln in 2017-18 according to RBI data.
Asian growth to be on expected lines in 2018 and 2019 according to ADB. Expect China and India to grow at 6.6% and 6.3%, while India to grow at 7.3% and 7.76% in 2018 and 2019 respectively.

Domestic Trends

Good start to IIT hiring season. More than 1,800 positions offered with average salaries ranging from Rs. 13-15 lakh. Microsoft emerges as the largest recruiter.
Revenue Secretary Ajay Bhushan Pandey indicates simplified GST return forms to be released from 1 April 2019; expresses hope that budgeted target for GST will be met.
Income Tax Department working on pre-filled ITR forms making tax filing easy. Department claims it is curtailing discretion of tax officials as scrutiny cases will be selected by computer system.
India shines on global renewable map as installed renewable generation capacity reaches 73.35 GW. Additional 21.5 GW of projects are under implementation.
Online gaming market in India is currently at USD 290 mln with projected growth at USD 1 bln by 2021, says report by KPMG and Google.
Exim Bank says India’s merchandise exports to increase by 7% to USD 82 bln in Q3 FY 2018-19. Non-Oil exports to rise by 7.2% to USD 71.45 bln.
Average ticket size of life insurance policies jumps 2.45 times in the last decade; average premium collected from a retail customer rose from Rs. 9,942 in FY 09 to Rs. 22,549 in FY 18, data released by Kotak Institutional Equities indicates.
ICRA predicts good times for hospitality sector in the country, which is set to grow 9-10% through FY 23. Demand driven by increased air connectivity and high demand for domestic leisure travel.
Nine major cities including Mumbai, Bengaluru, Chennai, Kolkata and Hyderabad see housing sales rise by 25% in 2018; decrease in sales of homes stands mitigated according to PropTiger.
Increased awareness, ease of access and changing lifestyles pushing FMCG momentum in India. Authenticity, Consistency and Societal and environmental activism will be central, say industry experts.
‘Housing for all’ by 2022 is a job creator, according to the government; the scheme is believed to have created 6 crore jobs.
Nielsen indicates E-Commerce share in FMCG retail triples in the last two years generating an estimated USD 70 bln in additional sales.
RBI data shows bank credit rose 15.07% to Rs 92.03 trillion in the fortnight leading up to Dec. 7 while deposits grew 9.66% to Rs 118.84 trillion.
Finance Minister Jaitley advocates lower taxes and a standard GST rate; calls the 28% GST rate as a “dying slab”.
Increasing shipments to United States help Indian Pharma exports in H1FY19. Shipments rise 10.34% to USD 3.2 bln. Exports to other countries grow 13% to USD 7.6 bln.
CII predicts robust economic growth to continue in 2019; body points out to India shining amidst difficult external circumstances.
RBI says banks manage to recover Rs. 40,400 crore from defaulters; channels of recovery include Insolvency and Bankruptcy Code, SARFAESI Act and Debt Recovery Tribunals as well as Lok Adalats.
Public Sector Banks’ provision coverage ratio, a measure of provisioning for bad loans, has increased from less than 50% in 2015 to 66.85% in September 2018; shows improvement in financial health.
India’s forex reserves rise by US$ 167.2 mln to US$ 393.28 bln in week leading up to Dec 21, 2018 as foreign currency assets rise.
The Nikkei India Manufacturing PMI rose to an 11-month high of 54.0 in November 2018 from 53.1 in October and above market forecasts of 52.6.. A reading above 50 indicates an expansion of the manufacturing sector compared to the previous month.
The Indian Rupee strengthened vis-à-vis the dollar; it was at INR 69.74 on 1 January 2019 against INR 69.77 on 30 November 2018.

Market Trends

Overseas investors bring in Rs. 12,260 crore into Indian capital markets in November 2018, making it the highest inflow in 10 months as oil prices fall and the rupee appreciates.
India’s capital market regulator SEBI relaxes rules for clubbing of investment limits by ‘well regulated’ foreign investors. Multiple entities which have common ownership whether directly or indirectly of more than 50% will be treated as the same investor group.
FIIs recorded a net inflow in Indian equities of Rs. 3,301.45 crore in December 2018 against an inflow of Rs. 4,934.11 crore in November 2018.
The Nifty closed at 10,862.55 on 31st December 2018 against 10,876.75 on 30th November 2018, having fallen marginally by 14.2 points over the previous month.
The Nifty 50 P/E ratio was at 26.17 at end-December 2018 against 26.31 at end-November 2018. The average P/E ratio for the past 12 months is 26.41.

Highlights

The Good: Economic growth momentum to continue, strengthening currency, higher credit growth
The Bad: Global trade slowdown, election uncertainty

stockaxis’ Outlook for January 2019

NBFC
To counter the liquidity crisis faced by NBFCs a couple of months back, the RBI has provided some incentives to banks to lend to NBFCs. Banks can now use government securities as level 1 high-quality liquid asset equivalent to the bank’s incremental lending to NBFCs (including HFCs). This has eased the mandatory liquidity coverage ratio (LCR) requirements for banks as they have more funds to lend. Further, banks can now lend up to 15% (earlier 10%) of their capital funds to a single non-infrastructure funding NBFC. When originally announced, these measures were expected to facilitate ~ Rs.60,000 crore of bank lending to NBFCs and HFCs.

Furthermore, after the IL&FS scare, overall liquidity in the broader financial system is also improving, with about over 80 per cent of outstanding commercial papers (CP) rolled over without any serious mishap. In November 2018, NBFCs successfully rolled over Rs 1.52 lakh crore of CPs that came up for maturities. It’s forecasted that in December 2018, about Rs 1.11 lakh crore worth of CPs sold by NBFCs would have matured and rolled over.

These events coupled with a decent correction in NBFC valuations over the last few months, have provided a higher margin of safety in case of investments in NBFCs. Select (large) NBFCs have become a compelling buy with 2-3 year perspective.

PSBs
For the financial year of 2017-18, PSBs (public sector banks) declared a combined loss in excess of Rs.85,000 crore which was much more than the combined profits in earlier years. After stocks being beaten down over the last few quarters, additional slippages are now dropping and PSBs stocks are now showing resilience. Recent slippages were mostly from accounts that were already under watch and not from good quality accounts. The primary factor why banks recognized and provided such large NPAs in 2017-18 was change in policy from the RBI. Earlier, it allowed banks to keep restructuring doubtful loans and as banks kept on reporting low NPAs in the past using this ‘ever-greening’ technique, the asset quality rot grew bigger. When RBI changed its stance, banks were forced to recognize all their existing NPAs. This done, it’s now believed that the worst is behind us as far as NPA recognition is concerned.

Recent amendment of the Insolvency and Bankruptcy Code (IBC) is also helping as these amendments will safeguard the interests of lenders and spur the pace of resolution under IBC. Fine tuning of this Code is also expected to increase the number of eligible bidders significantly for distressed assets. Several accounts marked as NPAs may get reversed if there is some resolution during the bankruptcy procedure at the National Company Law Tribunal (NCLT).

Also with falling oil prices and increasing rupee strength, inflation is gradually decreasing. This is expected to put pressure on interest rates and increase bond prices resulting in a significant rise in valuation of PSU banks’ investment portfolios.

Furthermore, the government had earlier announced an infusion of Rs.65,000 crore in PSBs in 2018-19. Of this, Rs.23,000 crore was disbursed, while Rs,42,000 crore was pending. Of this pending amount, the government has decided to pump Rs 28,615 crore into seven public sector banks (PSBs) through recapitalization bonds soon. This recapitalization would enhance the lending capacity of PSBs and help them come out of the Reserve Bank of India's Prompt Corrective Action (PCA) framework.

These measures are expected to give a fillip to the severely beaten down PSB stocks.

Capital Goods
Investment cycle continues to strengthen and is presenting an improving picture after a long time. This is suggesting a strong pick-up in private industrial investments. Investments are happening in auto and auto parts, chemicals, consumer, engineering, cement and steel selectively.

Index of short cycle industrial products is up double digits in FY18 and up 24% in 2Q FY19. Growth is broad based across categories like bearings, abrasives, electricals, automation, etc. Capital goods imports (1H up 26%), order inflows (2Q up 34% YoY) and capacity utilization is also strong.

A recent report by CARE Ratings also suggests that based on several factors including improved gross fixed capital formation and higher government expenditure, investment climate is on an upswing. Gross fixed capital formation has been at 29% in the first half of FY19 (28.3% in first half of FY18). Government spending is also increasing in infrastructure, housing and defence. The report goes on to mention that overall capex of the government in the first 7 months of the year was Rs 1.77 trillion as against Rs 1.62 trillion last year. Capacity utilization has been picking up in recent times. Revival of investment cycle portends happy days for capital goods stocks.

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