Stocks likely to drift lower
The equity markets tumbled during the week and lost more than three and half per cent on selling by foreign investors. The issue of payment of minimum alternate tax (MAT) continued to weigh on investor sentiment even as the finance ministry clarified that MAT would not be applicable to the entities based in countries having double taxation avoidance pacts with India. Forecast of below normal rainfall this year from India’s weather office also dampened market mood. As a result, selling was witnessed across the board and excessive intraday volatility added further negativity. Besides results announced by some major companies during the week failed to cheer the market participants. In the coming holiday shortened week, some of big listed corporate are scheduled to announce their results. UltraTech Cement, Maruti, ICICI Bank, Bharti Airtel, Idea Cellular, Sesa Sterlite, Axis Bank, HDFC, Ambuja Cements, IDFC and Grasim Industries are prominent names amongst all. Shares of automobile companies will be in focus as companies start announcing monthly sales volume data. The overall sentiments and market structure are pointing towards the lower levels in the benchmark in the coming sessions. And we believe possibility of testing 8200 level in Nifty is quite high till it’s upholding below 8530 mark. Meanwhile, stocks may continue to witness volatile moves in both directions so we reiterate our advice to maintain stock specific trading approach.
Jayant Manglik, Religare Securities
Earnings will be driven by lower costs
ACC’s reported earnings are above expectations. The company is expected to benefit from lower raw material costs due to the restoration of limestone mining in Jharkhand mines and likely resumption of limestone mines in Orissa. The company’s earnings have crossed estimates by wide margin. Further, although volumes were low it was offset by lower packing material costs, flat employee cost and reduced raw material cost. In the past, ACC underperformed its peers for a considerable period due to its higher cost of operations. Hence, we always believed that lower costs and efficient operations on a sustainable basis would be the key for re-rating of ACC’s valuations. ACC addressed high costs with the modernisation of old and obsolete plants, increased usage of pet coke/alternate fuel and rationalisation of freight cost. We expect continuous reduction in costs over the next 18 months on the back of elevated capacity utilisation and commissioning of modern projects.
PSU oil cos to benefit from LPG subsidy exemption
Recently, the government exempted PSU oil companies from bearing the LPG subsidy burden. Exemption of the subsidy (estimated at Rs 150 billion in 2016) is likely to lift company profits. This warrants re-rating of some companies. We believe this measure is imperative given the lower upstream profitability post the slump in crude. Diesel deregulation has perhaps been the most significant reform undertaken in the domestic energy sector. Historically, diesel has constituted more than 50 per cent of the gross under-recovery (U/R) burden. Now with diesel deregulated our estimates suggest that U/R is likely to improve assuming crude at $60/bbl. Upstream PSUs would still be required to bear a part of the kerosene U/R while the government is likely to share a part of the burden. In Budget 2015-16 the government earmarked Rs 220 billion towards LPG and kerosene as fuel subsidy. Low crude prices and diesel deregulation have improved oil marketing companies (OMC) profitability, obviating the need for continued subsidy compensation to them by upstream players. In our view, there is a high likelihood that some subsidy burden will be apportioned to OMCs to ensure upstream sector profitability as well as India’s energy security.
Strong growth in profits
Siyaram Silk’s margins are expected to improve on back of falling raw material cost. Further, the company is aiming to increase the share of readymade garments segment in its product mix, which has higher profits. The revenue share of readymade garments is expected to increase to 17.4 per cent in 2016-17 from 15.1 per cent. It will result in higher profitability margin. Strong balance sheet profile with improving cash flow is the USP of this stock. In future, the net debt to equity ratio s expected to improve on account of higher cash on books as there are no major capex plans in the next two years.