Sensex Remains Strong; IT Stocks Gain

Wed, 1 Mar 01:30 pm

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After opening the day on a firm note, share markets in India have continued the momentum and are trading in the green, comfortably above the dotted line. Sectoral indices are trading on a mixed note with stocks in the oil & gas sector and stocks in the consumer durables sector trading in red, while stocks in the realty sector are leading the gains.

The BSE Sensex is trading up by 205 points (up 0.7%), and the NSE Nifty is trading, up by 56 points (up 0.6%). Meanwhile, the BSE Mid Cap index is trading up by 0.2%, while the BSE Small Cap index is trading up by 0.7%. The rupee is trading at 66.87 to the US$.

In news from India's manufacturing sector. The manufacturing sector continued its rebound from the notebandi induced downturn. The sector expanded marginally in February as a rebound in export demand contributed to a stronger expansion of total new orders, according to the Nikkei Purchasing Managers' Index (PMI) survey by Markit.

Having deteriorated in December for the first time in one year, the health of India's manufacturing economy showed signs of improvement in January 2017. The manufacturing PMI recovered from 49.6 in December 2016, to 50.4 in January 2017 and continued moving upwards marginally to 50.7 in February.

The Manufacturing PMI is an indicator of manufacturing activity. A reading above 50 indicates expansion, while any score below the mark denotes contraction.

The indicator suggests an upturn in the manufacturing activity in February, charting a steady rise since January. Manufacturing activity in December was hit due to notebandi induced liquidity crunch, lower orders and muted outputs. February is the second straight month in which the manufacturing sector improved after the notebandi move.

The main factors contributing to the marginal PMI increase in February were a strong export demand and a rise in output and orderbook.

However, the latest reading was much weaker than the long-run series average of 54.2, largely reflecting sub-par growth for output and new business. Confidence among Indian manufacturers was relatively subdued in February.

Higher commodity prices resulted in increased cost burden facing manufacturers. The sharp rate of inflation seen in February was the most pronounced in two-and-a-half years and led factory charges to be raised at the quickest pace in 40 months. A surge in inflation is likely to cause demand from price-sensitive consumers to fall and potentially jeopardise the economic recovery.

Manufacturing Activity Picking up Post Demonetisation

It is evident from the above chart that the manufacturing activity is nowhere near the pre-demonetisation levels noted in October 2016. However, manufacturing is seen to steadily pick up from the notebandi blues. The PMI has potential to chart a steady rise, especially after the budget announcements favoring the manufacturing sector.

In news from stocks in the IT sector. Shares of IT companies were in focus and were trading higher in today's trade after he US President Donald Trump's first speech to US congress softened his stand on immigration and was seen more restrained than the harsh anti- immigration rhetoric seen during his pre-election speeches.

The BSE IT index was one of the highest gainers in the morning trading session, and was trading up by 0.8%.

The US President too softened his stance on immigration a bit and there were no negative talks of emerging economies including India. The speech did not have any comment on visa issues that may hit domestic IT firms. Instead the US President said the US immigration should be based on a merit-based system, rather than relying on lower-skilled immigrants.

Trump also said a broad immigration reform plan was possible if both Republicans and Democrats in Congress were willing to compromise.

IT major Infosys' share price surged as much as 1.4% in early trade. Tata Consultancy Services share price was also trading higher by 1.1% in the morning trade.

Many Indian IT companies are also feeling the brunt of the proposed H1-B visa and immigration reforms. Large Indian IT companies, on an average generate more than 50% of their revenues from the US clients. They have built a strong client base over the years in the US market. If the suggested changes for immigration get cleared, the cost component for the Indian IT companies will go up. The need to reduce their US exposure and move to other geographies is a given.

However, we believe that it is unlikely that the companies will substantially bring down their focus on the US. Instead companies may look out for other means to reduce costs or protect margins.

How the US goes ahead with its immigration reforms will have a substantial effect on Indian IT companies. Fortunately most of them have been anticipating these changes and have been gearing up. However, uncertainties continue to loom over the Indian IT sector.

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