Industry Update : May 2019

Automobile

Nifty Auto

Nifty Auto is in a Confirmed Uptrend and is currently 2.6% below its 50-DMA and 9.7% below its 200-DMA. In May, the Auto index declined 2.1% compared with a 1.5% gain in the market.

Global View

• Fiat Chrysler Automobiles has proposed a merger plan with Renault. The combined company would manufacture ~9M vehicles annually to rank third globally.
• Car production in the U.K. declined 44% in April to 70K units, the largest drop since the global financial crisis, 10 years ago, as factories were closed for Brexit that didn’t happen as scheduled.

Key Developments

• Passenger car sales in May continued to decline, with underperformance of Maruti Suzuki (-22% y/y), Tata Motors (-38% y/y), Mahindra & Mahindra (-3% y/y), and Hyundai (-6% y/y). Commercial vehicles sales also continued to decline with Eicher Motors (-20% y/y), Escorts (-18% y/y), Isuzu (-17% y/y), and Tata Motors (-20% y/y). Ashok Leyland, TVS Motors, and Bajaj Auto posted better results with domestic sales of +6%, -4%, and +5%, respectively.
• The Society for Automobile Manufacturers submitted a proposal to the government to reduce the GST on cars to 18% from 28% to boost consumer sentiment.

Looking Forward

• Sales will remain sluggish in the near term due to weaker consumer sentiment, liquidity issues, and introduction of new emission norms in April 2020. Normal monsoon, improvement in liquidity, and stable government is expected to improve the condition in the second half of the year.

Stocks in Watchlist: Bajaj Auto

Stocks to Avoid: Tata Motors, Maruti Suzuki

Banking and Finance

Bank Nifty

Bank Nifty advanced 5.4% in May. The index is in a Rally Attempt and is trading 6% above its 50-DMA and 16% above the 200-DMA.

Global View

• EU fines five banks (Citigroup, Royal Bank of Scotland Group, JPMorgan Chase & Co, Barclays, and Mitsubishi UFJ Financial Group) €1.2B for forex rigging.
• In Germany, merger between Deutsche Bank and Commerzbank collapsed midway, as Deutsche Bank walked away citing risks associated with the deal.
• Australia, Brazil, Mexico, South Africa, Indonesia, and South Korea have kept their key interest rates unchanged, as countries keep a close eye on their growth curve.

Key Developments

• India’s Q4 FY19 GDP grew slower-than-expected at 5.8% from 6.6% in Q3. The reading was 50bps lower than expectations of 6.3% and was the slowest in five years. Meanwhile, the unemployment rate hit the highest in 45 years.
• Reserve Bank of India’s Monetary Policy Committee (MPC) is slated to announce its second bi-monthly Monetary Policy statement on June 6. Rate cut of 25 bps is expected.
• RBI has ruled out increasing age limit of bank top brass; CEOs, MDs to retire at 70. HDFC Bank MD Aditya Puri and IndusInd Bank CEO Romesh Sobti will have to retire after completing their current term and will not be eligible for an extension.

Stock to focus: RBL Bank, State Bank of India, Axis Bank

Stocks to avoid: Yes Bank, IDFC Bank

Basic Materials

Global View

US S&P Metals & Mining Select Industry Index was down almost 14% in May, mostly due to general weakness in global markets amid trade war concerns.

Nifty Metal

Nifty Metal was down ~10% in the first half of the month, but gained strength in the later half due to strong Indian market amid results of general elections. The index is presently in a Confirmed Uptrend. It is trading below the 50-and-200 DMA.

Key Events

• China is planning to cut its supply of rare-earth elements, which are critical ingredients in products ranging from cell phones to rechargeable batteries to jet fighters in order to use them as pawns in trade talks with the U.S.
• Gold remained volatile in May, but closed flat. Silver was down more than 3% for the month.

Looking Forward:

After the results of general elections, the construction and infrastructure sectors seem promising, which will boost cement, paints, and steel companies.

Stocks to focus: Asian Paints, Pidilite Industries

Capital Equipment

Global View

Capital Equipment stocks started the month on a solid note globally, boosted by a positive earnings season. However, in the second half, most stocks witnessed a trend reversal, weighed down by revived U.S.-China trade war and global growth concerns. While most global markets were impacted by these factors, the Indian capital equipment universe was largely resilient.

Indian Sector Performance

Capital Equipment and related stocks in India gained 3% in the month. They have displayed strong momentum ahead of the Lok Sabha election results. As expected, companies engaged in construction and real estate development outperformed other sub-sectors spurred by optimism on increased infrastructure investment by the government. The leading sub-sectors were Bldg-Constr Prds/Misc and Bldg-Heavy Construction.

Key Events

• Ircon International Ltd. reported that it has been awarded a contract worth Rs 635 crore by Sri Lanka Railways. The project involves the upgrade of the Maho-Omanthai Northern Railway line.
• Voltas and Havells reported Q4 FY19 results; the numbers were below estimates. Hindalco Industries reported its Q4 FY19 results. Revenue grew 7% higher y/y while PAT was down 37%. Net profit was impacted due to weaker realizations and macroeconomic conditions, along with an increase in input costs.

Looking Forward

In June, we expect the sector to consolidate globally from current levels due to the lack of catalysts. Meanwhile, in India, we see continued positive trend in the sector.

Stocks in Watchlist: Ultratech Cement, Havells India, V-Guard Industries, and Larsen & Toubro

Stocks to Avoid: Gmr Infrastructure

Consumer Goods

Global Front

The S&P 500 Consumer Discretionary index was down 7.72% in the month, while Consumer Staples was down 4.02% on a monthly basis. The S&P 500 itself was down 6.56%.

Nifty FMCG

The Indian counterparts fared much better with Nifty Consumption up 3.03% in May whereas FMCG gained 1.78% in the same period. Nifty 50 gained 3.2% in May. Consumption stocks are gaining momentum lately, especially after the election results on May 23. Increased certainty after elections, increased consumer confidence due to stable inflation, and a possible policy rate cut by the RBI will likely drive the sector.

Key Events

Aditya Birla Fashion & Retail reported on May 15. The results were a miss on both revenue and EBITDA.

Britannia reported Q4 FY19 revenue and profits on May 2, in line with BB consensus.

Looking Forward

Increased certainty after elections, increased consumer confidence due to stable inflation, and a possible policy rate cut by the RBI will likely drive the sector.

Stock to focus: Nestle India, HUL, Dabur

Energy

Nifty Energy

Nifty Energy is in an Uptrend Under Pressure. The index lost its momentum during the first half of May. However toward the end of the month, especially in the last few sessions, it started gaining strength.

Global View

Crude has been picking up from the start of the year and has rallied almost 40% YTD. This was mainly driven by the deal between OPEC and other major oil-producing countries such as Russia. But, due to trade war tensions, crude corrected ~10% in May.

Key Events

• Saudi Arabia, the de facto leader of OPEC, announced that consensus toward oil production cut in the second half of 2019 would ensure oil price stability.
• Oilfield services stocks lost the most in the energy space in May. The stocks have fallen out of investors’ favor due to expectations of reduced capital spending by oil producers—oilfield services companies’ main customers. Reduced exploration and production activity mean lower demand for oilfield services.

Looking Forward:

Overall, the outlook of oil, does not seem very healthy in the long run and for 2019, it is expected to remain range bound due to weaker than expected global economic growth. Excess production from the U.S. will also be weighing on the oil process, pulling it downwards.

Stock to focus

Reliance Industries, Hindustan Petroleum

Healthcare

Global front

In May, the U.S. pharmaceutical index (IHE) was down ~2.5%. The index is facing resistance at its 50-DMA.

Nifty Pharma

Nifty Pharma index is currently in a Rally Attempt. The index fell more than 10% in May and is trading 7-8% below its key moving averages. The Indian Pharma market grew 10.4% in April, higher than 9% growth in March. The Indian companies registered 10.9% growth, compared with MNCs at 8.6% in April.

Looking forward

• We maintain a cautious approach toward the sector because of struggling growth opportunities, increase in observations by the FDA, and no earnings surprise. Thus far, most of the frontline pharma companies reported below expected Q4 results, with muted top-line growth, bottom-line decline (mostly due to one-off charges), and bleak outlook.
• Observations from the FDA inspection of manufacturing facilities continued during the month. The inspection number has risen to 252 in 2018 from just 66 in 2017, indicating watchful approach by the FDA toward the Indian generic industry, which accounts for ~40% of the total U.S. imports in generics.
• Almost all the major pharma stocks are trading below their key support levels and we believe it will take time to repair the damages.

Stock to focus: Syngene International, Merck India

Stocks to avoid: Torrent Pharmaceuticals, Sun Pharma, Biocon

Media and Internet

Global View

Facebook removed 2.2B fake accounts in Q1. This number is a bit lesser than the 2.4B Monthly Active Users. Google will start featuring ads on the home page of its mobile app later this year. Twitter is experimenting with more ads for selective users. It is trying to increase the monetizable Daily Active Users with various initiatives. Last year, the company deleted 6% of twitter accounts in order to fight fake accounts.

Nifty Media index

The Nifty Media index declined 8.5% in May, as compared with a 1.5% gain in the Nifty. Currently, it is trading 5.3% and 10.6% below its 50- and 200-DMA, respectively. All the major constituents of the index declined in May except PVR (+0.8%) and Inox Leisure (+19.9%).

Key Developments

• PVR Cinemas, Zee Entertainment, and Inox leisure reported Q4 FY19 results. The numbers beat consensus estimates.
• Info Edge Q4 revenue was ₹10.9B (+20% y/y) in-line in with consensus estimates, while EBITDA was ₹3.4B (+15% y/y), slightly below consensus estimates. It acquired iimjobs.com in the quarter.

Looking Forward

Zee entertainment will remain volatile as the stock price movement has become sensitive to the news on strategic sale of stakes. We recommend investors to continue to hold stocks which have sound technical and fundamental ratings.

Stocks of Interest: Pvr and Info Edge

Retail

Global Front

The U.S. retail sector index declined 6.52% in May, in line with the S&P 500 index, which also fell 6.58% during the month due to worries surrounding the escalating trade tensions and global economy slowdown. On YTD basis, retail sector index has increased 10.81% as compared with 9.78% gain in the S&P 500 index. Many companies have taken a hit due to increased tariff on Chinese imports and adjusted their full-year guidance incorporating these tariffs. The U.S. retail sales dropped 0.2% in April, following 1.7% growth in March. It was below consensus of +0.2% growth. Six of 13 major retail categories showed m/m decrease. The U.S. inflation rate also rose 0.3% in April.

Key Events

• The Titan company reported its Q4 FY19 results. Top and bottom line were in line with consensus estimates. Revenue increased 19.3% y/y while EPS increased 4.4% y/y. Management expects 20% growth in FY20 on the back of strong momentum in the jewelry segment.

Looking Forward

• The biggest challenge for Amazon and Flipkart will be Reliance Retail, which is set to enter in the online retail sector. It operates more than 10,000 stores in 6,600+ cities, giving the kind of scale required to swiftly launch online operations.

Stock to focus: Titan Company, Jubilant Foodworks

Technology

Global View

After making new highs in April, the Semiconductor Index (0SOX) has declined ~16% this month, breaching 200-DMA. The North American Software Index (IGV) was down 7% this month and has now dropped below its 50-DMA. We see its next support at the 100-DMA level.

Nifty IT

The NIFTY IT index remains in an Uptrend Under Pressure with an elevated D-day count of four. The index lost 3.2% MTD. During the start of the month, it witnessed sharp selling amid trade war concerns but recovered towards the end with the exit poll and solid final election results.

Key Developments Globally

• A ban was imposed by the Trump administration on Chinese technology company Huawei.
• Qualcomm violated antitrust laws by charging unreasonably high royalties for its patents.
• The U.S. SEC approves Silicon Valley Stock Exchange.
• The EU to launch antitrust investigation against Apple after considering Spotify’s complaint.
• Microsoft and Sony sign the Strategic Cloud Gaming Partnership.

Looking Forward

Positive developments on the U.S.-China trade deal could reduce the volatility and further improve market conditions. In mid June, the Electronic Entertainment Expo (E3) will be one of the most watched events given the number of announcements expected by leading gaming companies, including Microsoft.

Stocks to Focus: Tata Consultancy Services

Stocks to Avoid: Infibeam Avenues

Telecom

Global view

The Federal Communications Commission (FCC) is in favor of the Sprint and T-Mobile merger. But the deal is opposed by the antitrust division of the Justice Department. The $26B proposed merger of the third and fourth largest telecom companies is based on the argument that the merged company will be better positioned to help the U.S. lead over China in 5G technology.

BSE Telecom Index

The S&P BSE Telecom index gained 2.5% m/m in May, as compared with 1.2% gain in Sensex.

Key Developments

• Airtel (-15.1M) and Vodafone Idea (-14.5M) together have lost 30M subscribers in March, according to a TRAI report. Reliance Jio added 9.5M subscribers in the same month. Vodafone Idea has said that it lost 53M subscribers in Q4 due to the implementation of minimum recharge requirement.
• Bharti Airtel is planning to raise ~$1B through an IPO of its African subsidiary in London Stock Exchange.

Looking Forward

Despite losing market share to Reliance Jio, Bharti Airtel has been able to maintain steady revenue and is currently improving its margin. Meanwhile, Vodafone Idea has seen continued decline of its revenue. The competitive pressure from Reliance Jio will continue to affect both the companies in the near-term as they try to reduce debt and improve ARPU.

Stocks to Avoid:  Vodafone Idea

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