A great month for the Nifty

The next fortnight will see newsflow in the run up to the Karnataka Assembly elections and that could mean wide swings

Mr Market” as Ben Graham personified the equity market, has a capricious and manic-depressive personality. Consider the contrasting cases of Maruti Suzuki and Axis Bank, both of which declared their Q4 results (January-March 2018) results last week.

Maruti delivered a net profit of Rs 18.82 billion, 10 per cent up on a year-on-year (YoY) basis. Net sales grew 14.4 per cent YoY to Rs 205.94 billion. Axis Bank declared its first-ever loss, reporting a Rs 21.9 billion loss and a massive increase in non-performing assets (bad loans) to the tune of Rs 165.4 billion crore. Guess which stock got a thumbs-up from the market and which one received a hammering? 

Maruti was hammered by disappointed investors and the stock closed down 2 per cent after the results. Axis was bid up by investors who pushed up the stock by 9.7 per cent after digesting the non-performing assets (NPAs). Maruti Suzuki India Limited (MSIL) disappointed because it was expected to deliver around Rs 24 billion in net profits. Axis delighted because investors believe that the high NPA recognition is helping accelerate a clean-up of the balance-sheet. 
 

This was despite brokerages backing MSIL which sold a total of 461,773 vehicles during January-March 2018,  a growth of 11.4 per cent YoY. Most institutional advisories also downngraded Axis, which holds around Rs 342 billion of declared NPAs, amounting to about 6.8 per cent of outstanding loans. 
 

The action here was largely driven by retail, including HNIs. However, taking April as a whole, domestic  institutional Investors (DII) have been largely responsible for pushing up the major index, the Nifty, by a substantial 5.7 per cent in April. The DIIs have bought Rs 85 billion in April, which has more than counter-balanced selling to the tune of Rs 55 billion by Foreign Portfolio Investors (FPIs). Incidentally, the FPIS have also sold over Rs 100 billion in rupee debt during April and that’s a signal that they are now bracing for an Reserve Bank of India (RBI) policy rate hike.

The rupee is down, by 5 per cent against the USD since January 1, 2018. It’s fallen more against other hard currencies, by 6.5 per cent versus Euro, 8.2 per cent against the Yen and 8.5 per cent against the pound. Net bond market sales by FPIs is only one of the factors driving rupee weakness. 

 

The current account deficit, which is around 1.9 per cent of GDP, along with a trade deficit of $157 billion are key data points that explain the weakness. The CAD is expected to rise, to 2.7 per cent of GDP in 2018-19, assuming crude maintains its current uptrend. 

The fiscal deficit may well exceed Budget targets if GST collections don’t pick up. Fitch Ratings cited fears of fiscal slippage when it maintained its stance on India, leaving the sovereign rating unchanged at the lowest investment grade. S&P has also maintained its low investment-grade rating, despite the Moody’s upgrade last November.

 Crude imports cost about 26 per cent more in 2017-18 compared to 2016-17. The price of the Indian crude basket has risen again, in April. However, the easing of geopolitical tensions in Korea could take some pressure off crude rates, even though that sounds strange since Korea doesn’t produce oil!

 

At the same time, there are inflationary pressures showing up in the US. The benchmark 10-year government bond is now yielding over 3 per cent and the Federal Reserve’s target of 2 per cent inflation was exceeded recently. 

This could mean investors start looking at US bonds. Given admittedly milder inflationary pressures in the Eurozone and Japan, it’s likely that the concerned central banks will tighten monetary policy in tose currency regions. Everybody’s waiting for those tapers and FPIs will be wary of large commitments to third world debt until the Bank of Japan and the European Central Bank clarify respective policy stances and timelines. 

The next fortnight will see newsflow in the run up to the Karnataka Assembly elections and that could mean violent swings. However, the current focus is corporate results. Reliance Industries (RIL) delivered excellent results though the crude price factor showed up here. RIL’s revenue was up 29 per cent YoY to Rs 1.2 trillion. Net profits grew to Rs 94.6 bn, up 17.5 per cent YoY. The Gross Refining Margin fell slightly compared to October-December 2017. 

RIL’s telecom subsidiary, Reliance Jio Infocomm reported revenues of Rs 71.28 billion (up 3.6 per cent quarter-on-quarter compared to October-December 2017) and added 26.5 million subscribers, bringing the subscriber base to 186.6 million by March 31, 2017. Average evenue per user fell to Rs 137, which is still a lot better than its leading rival Bharti Airtel, which has an ARPU of Rs 116. 

Airtel reported a 73 per cent decline in Q4 profits although the Africa business improved. Revenue fell by 3.4 per cent Q-o-Q to Rs 196 billion. However, the merger of the Bharti Infratel towers business with Indus towers is expected to lead to some cost savings and also create room for Bharti group to sell some stake in the tower business and raise cash for investments. 

Technically speaking, this has been a great month for the Nifty. The index has bounced 5.7 per cent, from well below its own 200 Day Moving Average to test 10,700 levels. The short-term trend is up and targets 

in the 10,900-11,000 range could be in reach.