India Markets Weekahead: Outlook positive, but stay cautious

October 18, 2015

(Any opinions expressed here are those of the author and not of Thomson Reuters)

A spirited rally late on Friday saw the Nifty close 0.5 percent higher at 8,238. The index otherwise traded in a narrow range of 8,100-8,200 throughout the week. A mix of disappointing corporate results on one hand and stimulus hopes in China and Japan on the other offset each other.

The IT pack hogged the limelight as Infosys, despite posting strong growth in Q2, maintained its FY16 revenue growth guidance of 10-12 percent in constant currency due to seasonal weakness and headwinds in select client accounts in H2. HCL Tech had already issued a similar warning. TCS delivered healthy revenue growth but missed street estimates.

Brokers trade at computer terminals at stock brokerage firm in MumbaiAnother disappointment came from FMCG major HUL, which reported a 3 percent decline in earnings. Its sales push seems to have been at the cost of margins. This is also an indication of stiff competition from home-grown brands such as Dabur, Emami, Marico, Godrej, ITC as well as the international ones. The latest threat would be from yoga guru Baba Ramdev’s Patanjali Ayurved, which has tied up with Future Group. Remember the tough competition given by Nirma to HUL in the late 1980s?

Among the earnings surprises, Zee Entertainment’s advertising revenue shot up 35 percent. It could be the same story across media houses, both electronic as well as print, as e-commerce players, white goods majors, FMCG as well beleaguered developers are leaving no stone unturned to be visible through huge advertisement spends.

Reliance Industries’ consolidated net profit beat street estimates by rising 12.53 percent to 67.2 billion rupees ($1.03 billion) while revenues for the quarter declined 35.16 percent to 724.97 billion rupees ($11 billion). The launch of Jio is the next sentimental trigger for the company.

Metal and mining stocks gained momentum after Chinese stimulus reports and production rationalization by Glencore and ArcelorMittal. Shares of aviation companies were in focus with SpiceJet gaining sharply after its management indicated that the company is well-poised to post a good performance in Q2 on the back of a reasonable uplift in domestic air travel and significant fall in crude prices. Indigo’s upcoming IPO also helped sentiments as listed aviation stocks looked cheaper in comparison.

On the IPO front, the much hyped offering by Coffee Day Enterprises was oversubscribed 1.82 times as QIBs managed to fill in shortfalls in the retail and non-institutional category.

On the macro data front, CPI rose in September 2015 to 4.41 percent, mainly due to increase in vegetable prices. WPI decelerated for the sixth consecutive month in FY16 at -4.54 percent for September 2015. IIP numbers surprised the street with a 6.4 percent growth in August 2015 (the highest in almost three years) due to better-than-expected manufacturing growth of 6.9 percent. Merchandise exports declined for the tenth straight month in September 2015, dropping 24.3 percent year-on-year to $21.85 billion. Imports dipped 25.4 percent to $32.32 billion. The trade deficit narrowed 27.6 percent to $10.5 billion in September 2015 from $14.47 billion in September 2014. Though the finance ministry may harp on the lower deficit numbers, exports are an area of concern, especially when the spotlight is on “Make in India”.

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, June 29, 2015. REUTERS/Danish Siddiqui/Files On the political front, the outcome of the Bihar assembly elections will be watched. The state is important for the ruling BJP as it needs traction in the Rajya Sabha, where various reforms including the GST are pending. However I don’t think a negative outcome for the BJP in Bihar would change the course for the markets. We could have a knee-jerk reaction, which could be an opportunity to buy as it would force the government to stress more urgency on development so that changes on the ground would improve their prospects in future state elections.

A preliminary reading of manufacturing PMI indices of Japan, the euro zone and the U.S. for October 2015 along with Markit Economics preliminary readings of manufacturing PMI indices of France and Germany are expected in the upcoming week. Global markets are expected to react to various macro-economic data to be announced by China, namely Q3 GDP numbers, industrial production for September and retail sales for September. In the U.S., data on existing home sales for September 2015 will be unveiled.

Indian markets, which will initially react to Friday’s Reliance earnings, are expected to remain volatile on account of corporate results. Key results to be announced are HCL Tech, UltraTech Cement, ACC, Hero MotoCorp, Bajaj Auto, Wipro, Cairn India, Idea Cellular, HDFC Bank and Asian Paints.

The outlook for markets remains cautiously positive due to a slew of upcoming corporate results and global macro data. The Nifty has crossed the important barrier of 8,200 and the index is poised to enter the band of 8,200-8,450, although results of the Bihar elections could swing it higher or lower. But that is still three weeks away, so remain cautious till then.

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