Industry Update: November 2019

Nifty Scales New Highs After Consolidating Gains; FII Buying Continues

In November, Nifty consolidated gains and was trapped between 10,800 and 12,000 for most part of the month. The gap between Nifty and its rising 21-DMA shrank as a result of the consolidation during the month. At the start of November, Nifty was extended 3.5% and 6.0% from its 21- and 50-DMA, respectively. Currently, Nifty is trading less than 1% and 3% above its 21- and 50-DMA, respectively. The market remained in a Confirmed Uptrend and the distribution day count remained low during the month, with the addition of two distribution days in the last week of November. The distribution day count is now at four. FIIs/FPIs were net buyers in November (Rs 13,000 crore), while net selling from DIIs was Rs 8,000 crore.

We will have an interest rate decision next week (December 5). Over the last 11 months, the central bank has been on a rate-cutting spree, reducing the rate from 6.5% to 5.15%, a cut of 135bps. Q2 FY20 GDP came in at 4.5%, in line with consensus. Retail inflation is now at a 16-month high of 4.62%, which is well above the RBI’s target rate of 4%. Against the backdrop of slowing economic growth and upward trending CPI, it will be crucial to watch how MPC will strike a balance.

Looking forward, even as we maintain a positive view of the general market, we are taking note of the higher number of distribution days. Nifty is less than half a percent above its 21-DMA. If the 21-DMA is breached and the distribution day count remains elevated, we may downgrade the market status to an Uptrend Under Pressure.

Quick Update for Key Sectors:

Automobile: Nifty Auto is in a Confirmed Uptrend and is currently 3% above its 50-DMA and 2% above its 200-DMA.

Banking and Finance: Nifty Bank rallied ~6% m/m in November. The index is currently in a Confirmed Uptrend. The index continues to trade above its key support levels.

Basic Materials: Nifty Metal is presently in an Uptrend Under Pressure. The index remained a bit volatile throughout the month and is trading 6% above 50-DMA and 3.5% below 200-DMA.

Capital Equipment: Indian capital equipment stocks were subdued in November as the sector declined 3.2% on average.

Consumer: In India, Nifty FMCG did not fare well and was down 4.5% over the month. The index breached its 50-DMA and is trading just below it.

Energy: Oil production from the 14-member Organization of the Petroleum Exporting Countries was down in November on a m/m basis. Brent crude oil price increased $2.57/bbl in November.

Healthcare: Nifty Pharma gained ~4% in November, regaining its 50-DMA and is now testing the resistance at its 200-DMA. The index remains in a Confirmed Uptrend.

Media and Internet: Nifty Media was up 2.7% in November, compared with the Nifty’s gain of 1.5%. It is trading below all its key moving averages.

Retail: The U.S. retail sector index gained 1.7% in November and continued trading along its 50-DMA, while the S&P 500 index gained 3.4% during the month.

Technology: Nifty IT is in a Rally Attempt and is currently trading below its key moving averages. The index lost 1.26% in November.

Telecom: The S&P BSE Telecom index gained 23.5% m/m, compared with a 1.7% gain in Sensex.

Automobile

Global View 

  • Daimler and Audi announced 20,000 job cuts amid global slowdown and a shift to EV technology. Auto manufacturers are slated cut 80,000 jobs in the sector in the coming years.
  • Ford unveiled its electric car Mustang Mach E in direct competition with Tesla Model Y at a price of $43,895. Government incentives can reduce the price by up to $10,000.

NIFTY Auto Index 

The Nifty  Auto Index is in a Confirmed Uptrend and is currently 3% above its 50-DMA and 2% above its 200-DMA. The index underperformed the market as it lost 4.3%, compared with the market’s gain of 1.5% in November.

Key Developments 

  • The month of October proved to be a short-term relief for PV sales that rose 1.2% y/y, while two-wheelers (-9.1% y/y) and CVs (-25.7% y/y) sales declined. PV sales were boosted by heavy discounts due to the festive season, while CV sales continued to remain under pressure as fleet owners await new-year model change and pre-buying before BSVI norms kick in next year.

  • Chinese automobile companies including Great Wall Motors, Changan, Geely, and Weichai are expected to invest $5B over the next 3–5 years.

  • Hero Electric, the EV arm of Hero Motocorp, will invest INR 7B over the next three years to develop new products and expand dealer network.

  • Tata Motors will launch Altroz, its premium hatchback in January 2020 that will compete with Maruti Suzuki Baleno, Hyundai i20, and Honda Jazz.

Looking Forward: 

Consensus estimates that the implementation of BSVI norms from April 2020 will lead to a 10–15% increase in cost of manufacturing, thus exerting pressure on margins.

Stocks of interest: Bajaj Auto, Amara Raja Batteries

Stocks to avoid: Apollo Tyres, Ashok Leyland

Banking and Finance

Nifty Bank rallied ~6% m/m in November. The index is currently in a Confirmed Uptrend. The index continues to trade above its key support levels.

Global Developments 

  • The Bank of England’s Monetary Policy Committee kept its interest rate steady at 0.75%, but surprisingly two MPC members voted to cut interest rates (for the first time since August 2016), which suggests the MPC is leaning toward a rate cut in the first half of 2020.

  • At its December meeting, Australia’s central bank kept its interest rate steady at 0.75%.

  • The U.S. GDP grew at a moderate 2.1%, slightly above the initial estimate of 1.9%.

  • PayPal announced the acquisition of Honey Science Corporation, an online consumer shopping platform. The transaction is expected to close in Q1 2020 and is valued at $4B.

Domestic Developments 

  • India’s GDP in Q2 FY20 slowed down to 4.5%, compared with 5% in Q1 FY20 and 7.1% in Q2 FY19. This was the seventh straight quarter of a decline in the GDP growth rate.

  • The Index for Industrial Production (IIP) contracted 4.3% m/m in September (worst since April 2012). This was the second consecutive monthly fall after a contraction of 1.1% in August.

  • After two months of negative growth, GST collections rose 6% in November. The growth was primarily aided by domestic transactions, which witnessed a growth of 12%.

  • India’s manufacturing PMI rose to 51.2 in November, compared with 50.6 in October and street estimates of 49.8.

Looking Forward: 

Given the weak GDP for Q2 FY20, we expect the sector to remain under pressure. The next few sessions will be volatile as the RBI is set to present its monetary policy (street estimates a cut of 25bps) on December 5, which will coincide with the expiry of the derivative session.

Stock to focus: Kotak Mahindra Bank, City Union Bank, and HDFC Bank

Stocks to avoid: Yes Bank

Basic Materials

Global Front

U.S. S&P Metals & Mining Select gained strength in November, continuing the trend from October. The index gained almost 5% in November, following a 3% rise in October, due to the strength in the overall sector performance.

Nifty Metal

Nifty Metal is presently in an Uptrend Under Pressure. The index remained bit volatile throughout the month and is trading 6% above its 50-DMA and 3.5% below its 200-DMA.

Key Events

  • The trade truce between the U.S. and China and positive data about the U.S. economy weighed on gold prices in November. Gold traded in a range of $1,450–1,485 for the most part of November. Silver was down 5.6% in November.

  • China’s economy is slowing for the seventh month in a row and will weigh on demand for base metals such as Copper, Nickel, and Zinc.

  • ArcelorMittal is facing intense competition in acquiring Odisha Slurry Pipeline Infrastructure Ltd (OSPIL), an insolvent company whose single asset could considerably reduce the production cost at Essar Steel.

Looking Forward:

Trade war tensions have started building up again toward the end of November. In the face of uncertainty in the ongoing trade negotiations, prices of safe-haven metals like gold and silver may remain volatile. Base metals too are expected to lose strength due to weak economic data from various emerging economies, including India.

Stock to focus: JSW steel, Pi Industries

Stock to avoid: Welspun Corporation, Tata Steel

Capital Equipment

Global Front

The global capital equipment universe underperformed broader market peers, but showed improvement in the short term. Within the sector, positive momentum was led by cyclical sub-sectors like industrial equipment and heavy machinery. Sectors like aerospace/defense and building construction materials dragged the market performance.

Domestic

Indian capital equipment stocks were subdued in November as the sector declined 3.2% on average. While all the sub-sectors closed in the red, industry weakness was mainly driven by household appliances, and building construction and material stocks which declined 5.2% and 2.4% on average, respectively.

Key Developments

  • L&T gets an EPC order from the Jharkhand Urban Infrastructure Development Company Limited (JUIDCO), for augmenting and strengthening the Dhanbad Urban Water Supply Scheme Phase II under Dhanbad Municipal Corporation. The size of order is around Rs 2,000 crore.

  • Whirlpool of India reported strong Q2 FY20 results in early November, with revenue increasing 18% y/y to Rs 1,393 crore and net profit increasing 59% y/y to Rs 125 crore. Outsized net profit growth was due to corporate tax reduction. Management remains confident on delivering outpaced growth compared to broader industry despite softening of consumer demand. Following the release, the stock shot up to new all-time highs.

Looking Forward:

In December, we expect the sector to remain flat to marginally positive due to lack of new catalysts and slowing economic growth.

Stocks to focus: Whirlpool of India, Voltas, Astral Poly Technik

Stocks to avoid: Larsen & Toubro, Praj Industries

Consumer Goods

Global Front

The S&P Consumer Discretionary index moved sideways and closed marginally in the green underperforming the S&P 500 by about 300bps.

Nifty FMCG

In India, Nifty FMCG did not fare well and was down 4.5% in the month. The index breached its 50-DMA and trading just below it.

Key Events

  • For Q2 FY20, Dabur reported 6.91% increase in consolidated net profit at Rs 403.64 crore. Revenue from operations stood at Rs 2,211.97 crore against Rs 2,124.97 crore in the year-ago period, a growth of 4.09%.

  • Emami reported a 16% increase in consolidated profit to Rs 95.99 crore for Q2 FY20. Revenue from operations stood at Rs 660.05 crore, a growth of 5%.

Looking Forward:

We expect another challenging quarter for the sector, owing to a lack of demand and liquidity crunch. The recent corporate tax cuts might allow companies to introduce price cuts to boost demand or give better trading margins to distributors to capture market share.

Stock to focus: Dabur, HUL

Energy

Nifty Energy

Nifty Energy is in a Confirmed Uptrend and trading 2.5% and 4% above its 50- and 200-DMA, respectively. The index was down 1.54% in November, consolidating strong gains of more than 6% in October.

Global View

Oil production from the 14-member Organization of the Petroleum Exporting Countries was down in November on a m/m basis. Brent crude oil price increased $2.57/bbl in November.

Key Events

  • Reliance Industries market capitalization hit Rs 10 lakh crore in November.

  • Cabinet approved the sale of government’s stake in the bluechip public sector companies. The government will sell its 53.29% stake in Bharat Petroleum.

  • Saudi’s Aramco is planning its IPO and is aiming to sell about 1.5% of its 200B shares in between $8–8.53 per share.

Looking Forward:

OPEC meeting will take place in early December and the street is expecting further production cuts. This may give a boost to oil in the short term. However, the outlook of oil in the long run does not seem very healthy.

Stocks to focus: Reliance Industries

Stocks to avoid: Reliance Infrastructure, CG Power

Healthcare

Nifty Pharma

Nifty Pharma gained ~4% in November, regaining its 50-DMA and is now testing the resistance at the 200-DMA. The index remains in a Confirmed Uptrend. In October, Indian Pharmaceutical market growth declined to 5.1%, below 11.9% growth in September. The volume also slipped 2.7% in October, compared with 1.5% volume growth in the last 12 months.

Global front

During September, ishares US Healthcare (IYH) was up more than ~5%, outperforming S&P 500 gain of more than ~3%. Healthcare performance over the last month has improved and the ETF is breaking out of a year-long consolidation into all-time high.

Key Developments

  • Overall earnings season for the healthcare sector has been moderate with revenue coming in line because of decent growth in Outside US business. Some companies have seen downward revisions to the estimates with many factors (pricing issue, competition, etc.) coming into play, while some are trending higher because of large domestic presence.

  • According to media reports, several generic players are in talks with US Department of Justice to settle the generic price fixing case against them. In the last decade, generic drugs have seen significant price hike leading to strong benefits to these companies, including Sun Pharma.

  • Biocon along with Mylan has successfully launched Ogivri (biosimilar Herceptin) in the U.S. to treat certain breast and gastric cancers. Total addressable market stands at $3B for the drug, presenting a huge opportunity.

Looking Forward:

We still recommend patient and selective approach toward the sector, and focus on companies with good growth outlook. Over the last few weeks, Medical services, hospitals, and diversified multinational companies are outperforming in the healthcare space.

Stock to focus: Divis Laboratories, Dr Lal Pathlabs, Ipca Laboratories

Stocks to avoid: Aurobindo Pharmaceutical, Glenmark Pharmaceutical, Sun Pharmaceutical Industries

Media and Internet

Global Developments

  • Disney+, which is Netflix’s rival streaming platform, gained 10M subscribers in the U.S. on the first day of its launch on November 12. Since the launch, it has been adding ~1M average subscribers daily.

  • Nickelodeon and Netflix have signed a multi-year deal estimated at $200M. The deal is significant as Netflix stands to lose most of its Disney content next year.

  • Uber has been stripped of its London license, which contributed ~3% of the company’s revenue in 2018. Ola is planning its launch in London in the coming weeks.

Nifty Media

Nifty Media was up 2.7% in November, as compared with a 1.5% gain in the Nifty. It is trading below all its key moving averages.

Key Developments

  • PVR entered the Sri Lankan market with a nine-screen property. With this launch, PVR now has 809 screens at 171 properties.

  • Zee Entertainment founder, Subash Chandra, resigned as chairman as his stakes in the company declined below 5%.

  • Info Edge reported mixed Q2 FY20 results. Revenue was a beat and EPS was a miss on account of provisioning due to a decline in its investment value.

  • Swiggy’s ~500 cloud kitchens currently deliver 1.5M orders monthly. This represents 15–20% of total orders within the kitchens’ service radius of four kilometers.

Looking Forward:

Subdued growth in consumption will continue to affect advertising revenue of media companies this fiscal year.

Stocks of Interest: Info Edge, PVR

Stocks to Avoid: Zee Entertainment, Just Dial

Retail

Global Front

The U.S. retail sector index gained 1.7% in November and continued trading along its 50-DMA, while the S&P 500 index gained 3.4% during the month. On an YTD basis, the retail sector index gained 22.37%, compared with the S&P 500’s 24.2%. U.S. annual inflation rate was 1.8% in October compared with 1.7% in September, boosted by food and medical care prices and a smaller decline in gasoline prices.

Key Events

  • Black Friday shoppers spend a record $7.4B online, 19% more than last year. However, brick-and-mortar stores’ traffic dropped 6.2% y/y.

  • China’s annual Singles day was celebrated on November 11. Alibaba recorded sales of $38.4B at the end of the day, increasing 25% y/y.

  • Titan Company Ltd on reported a 3.5% y/y jump in net profit at Rs 311.65 crore for Q2 FY20.

Looking Forward:

With the promotional offers and festival sale in Q3 FY20, there could be an uptick in the top-line of retail firms. However, margins may remain soft.

Stock to focus: Jubilant Foodworks, Trent

Stock to avoid: Future Retail, Titan Company

Technology

Global View – IGV is breaking out of a Base

The North American Software Index (IGV) was up 8% this month followed by 1.43% gain in October. IGV broke out of a 17-week cup base with support at its 10-DMA.

Nifty IT

Nifty IT is in a Rally Attempt and is currently trading below its key moving averages. The index lost 1.26% in November.

Key Developments

  • In November, Tata Consultancy Services extended its deal with the Phoenix group, European life insurance, and pension consolidator.

  • Tech Mahindra acquired Born, a U.S.-based marketing and media solutions company for $95M. The acquisition will increase Tech Mahindra’s capability in commerce and customer experience.

  • HCL Technology fixed December 7 as a record date for the 1:1 bonus share.

  • Wipro signed a deal with the Australian federal government’s Services Australia to digitize the welfare system.

Looking Forward

Nifty IT is currently finding resistance at its 200-DMA. We expect the index to consolidate for a while before retaking its 200-DMA.

Stocks in focus: Tech Mahindra

Stocks to avoid: Infosys

Telecom

BSE Telecom

The S&P BSE Telecom gained 23.5% m/m as compared with 1.7% gain in Sensex.

Global View

  • T-mobile launched 5G across the U.S. using 600MHz carrier waves and became the first company to claim complete U.S. coverage.

  • Ericsson expects 5G to cover 65% of the world by 2025 with average monthly data consumption per smartphone to increase to 24GB from 7.2GB at present.

  • China launched a nationwide 5G network on November 1, ahead of the targeted 2020 launch. Plans start at ~$18 (Rs 1,300) per month.

Key Developments

  • Reliance Jio added 7.0M subscribers in September, per TRAI data. Vodafone Idea and Bharti Airtel’s subscribers declined by 2.6M and 2.4M, respectively.

  • Airtel, Reliance Jio, and Vodafone Idea are increasing tariffs from December, ending the tariff war that started since the launch of Jio in 2016. Three telecom companies have approached the Telecom Regulatory Authority of India (TRAI) to set up floor prices for data services as the fierce competition was preventing companies from increasing the tariff voluntarily.

  • Finance minister Nirmal Sitharaman assured that the government intends to not let any company shut down due to financial instability.

Looking Forward:

The government’s decision on dues from Vodafone Idea will largely decide the company’s ability to fund its daily operations. Last month, the Supreme Court had it given a three-month deadline to pay up their dues.

Stocks of Interest: Reliance Industries (Jio), Bharti Airtel

What do you think? Please email us any questions or comments.

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.

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