India’s benchmark indexes clocked their fourth straight week of gains led by banks in a week with a lot of stock- specific movement. Major cues on the global and local front were absent and trading during the week was largely dull with range-bound trading seen in the Nifty between 8,700-8,800 levels.
The only earnings surprise was Tata Motors resulting in a sharp stock reaction. FIIs were net buyers to the tune of $136.5 million during the week.
The NSE announced changes in Nifty constituents effective March 31. Indiabulls Housing Finance and IOC are in, while Idea and BHEL are out of the Nifty 50. IDFC Bank will replace Bank of India in the Nifty bank index. ICICI Pru Life, Petronet LNG and Rural Electrification Corporation (REC) will be included in the Nifty 100 index, whereas Apollo Hospitals Enterprises, Bharat Forge and Castrol India will move out.
HDFC Bank hogged the limelight on Friday after the Reserve Bank of India (RBI) removed restrictions on foreign investors from buying its shares. Foreign ownership in private banks in India is restricted to 74 percent and the RBI places these banks on the caution list when ownership touches 72 percent.
However, as expected, the limit got breached again within a few hours as foreign investors used this window to buy further shares. The stock gained around 4 percent at the end of the day after rising as much as 9.5 percent. The RBI had called an emergency meeting of the custodians to deal with the breach, which concerns trades worth about 60-70 billion rupees. One needs to see how it will be reversed.
Tata Motors was another stock in the news. After reporting dismal December quarter earnings with its profit after tax (PAT) declining by 95 percent, Tata Motors saw its biggest two-day drop in three months. The Jaguar Land Rover (JLR) business had a disappointing quarter.
Indian economic data released included CPI inflation that continued to slide, down to 3.2 percent from 3.4 percent in December. Food inflation was 0.6 percent in January (1.4 percent the previous month), again largely due to pulses and vegetable inflation. WPI inflation rose to a two-and-a-half year high of 5.2 percent in January from 3.4 percent in December. Rising prices of commodities, including petrol and diesel, led to the rise.
Petroleum consumption declined around 4 percent for January, which points to a slowdown indicated earlier by the IIP data for December. This confirms my fears of corporate performance for the fourth quarter of FY17.
On the global front, U.S. Fed Chair Janet Yellen’s testimony before Congress appeared slightly more hawkish as she said it would be “unwise” to delay raising interest rates further. Investors will now be looking out for Federal Open Market Committee (FOMC) minutes this week to provide further clues on the Fed’s assessment of economic conditions and monetary policy stance.
The coming week is a truncated one as markets will remain closed on Friday. It’s also the derivative contract expiry week, so expect some volatility. There could be winding down of positions as the next settlement would witness the election results. Some important corporate results expected in the coming week include Ambuja Cement and Castrol India.
The results season is largely over and contrary to market expectations, demonetisation did not have a sharp impact in earnings this quarter, thus no sharp cuts to EPS estimates. Excluding stocks such as Tata Motors, Tata Steel, Bank of Baroda, SBI and Axis Bank which widely missed estimates, earnings season was largely in line with expectations. Also the impact of demonetisation on the consumer sector seems lower than expected.
However, I would still await another quarter’s data to put the demonetisation effect behind us. Though commodity prices have been rising, the exchange rate has turned slightly favourable.
The Nifty has again reached an important pivot point near 8,800. Further upsides from here on will depend on the outcome of state elections, Goods and Services Tax (GST) implementation and earnings recovery trajectory. GST implementation is some time away, state elections results are on March 11 and the next earnings indication would around the second week of April.
We would start hearing about monsoon forecasts by March-end or early April, but the preliminary forecast indicates the rising influence of El Nino that is not considered favourable for monsoon rains in India.
Some of the smarter money managers have stopped accepting fresh funds for deployment especially in midcaps and small caps, confirming that valuations are expensive. I would continue to suggest profit booking as the risks in the short-to-medium term far outweigh rewards at this stage.
(Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.)