Sensex Opens Flat, Bank & FMCG Stocks Under Pressure

Fri, 31 Mar 09:30 am

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Asian stock markets are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is up 0.66%, while the Hang Seng is up 0.40%. The Shanghai Composite is up 0.45%. Stock markets in the US and Europe closed higher in previous sessions.

Meanwhile, <>Indian share markets have opened the day on marginally lower. The BSE Sensex is trading lower by 44 points and NSE Nifty is trading lower by 7 points. Meanwhile, S&P BSE Mid Cap and S&P BSE Small Cap are trading lower by 0.4% and 0.5% respectively. Gains are largely seen in metal stocks, oil & gas stocks and power stocks, while bank stocks and FMCG stocks witnessed selling pressure.

The Markets on the Roll...

The market is buoyant at the moment. The small-cap index has outperformed with a 14.4% return in the first three months of 2017. The mid-cap index and the BSE Sensex are up 13% and 9.7% respectively.

The BSE Sensex is trading at a PE of 22.3x. The mid-cap index is currently at 30.2x and the smallcap index is trading at whopping 64.5x. This is why fund managers are currently avoiding small-cap stocks in favour of large caps. In 2015, fund managers also shunned small cap stocks due to lofty valuations. At that time, the small-cap index was trading at a PE of 47x.

However, at Equitymaster, we had a different view. In January 2015, Richa Agarwal, managing editor of small-cap service Hidden Treasure, wrote...

Even while the small-cap index may scare away investors with overtly expensive valuations, it is not the time to ignore small caps. All you have to make sure is that you invest only in the right stocks with a sufficient margin of safety in valuations. Having done that, all you need is the patience to stay invested.

With this approach, the HTR team has been able to beat benchmark indices three times and they expect to maintain the record.

The rupee is trading at 64.93 against the US$.

L&T share price began the trading day on a firm note (up 0.4%) after it was reported that the company has won new orders worth Rs 40 billion from the hydrocarbon sector. Separately, L&T also bagged orders worth Rs 17.25 billion for construction jobs, which included one in the transport infrastructure space and another for a heavy civil infrastructure construction.

As per an article in The Economic Times, L&T announced a string of orders in the past week by its different divisions, but the market was upbeat about the hydrocarbon orders, given the slowdown in capex in the sector.

L&T Hydrocarbon Engineering, a subsidiary of the company, won all of the Rs 40 billion orders in the international market, primarily in the Middle East and Africa.

In January, the company slashed its FY17 growth guidance for order inflow and revenue after reporting dismal growth on both accounts in the third quarter of the financial year. The company reduced FY17 growth guidance for revenue to 10% from 12-15% earlier, and for order inflows to 10% from 15% earlier.

In another development, Bharat Heavy Electricals Ltd (Bhel) plans to collaborate with Indian Space Research Organization (Isro) for manufacturing space grade solar cells and partner for satellite launches. Bhel also plans to enter the maintenance, repair and operations (MRO) business for aircraft engines.

According to an article in The Livemint, Bhel is positioning itself as a transportation solutions provider, particularly in crowded urban settings. The company wants to become a turn-key metro rail end-to-end solutions provider and also manufacture electric vehicles such as buses, cars, two-wheelers and boats.

India's power sector outlook is uncertain, with India's current installed capacity of 314,642MW and projects under construction expected to meet the country's electricity demand till 2026. This leaves Bhel with little choice. The company also has been talking with the defense ministry for the maintenance of aircraft engines.

With an order book of Rs 984 billion that has contracted by 10% compared to a year earlier, Bhel's order inflow has become a cause of concern. The company's paltry order inflow of about Rs 13 billion represents a steep 79% fall from a year ago. The total order inflow for the nine months ended December was about Rs 65 billion.

Bhel share price began the trading day up by 0.4% on the BSE.

Moving on to news from the telecom sector. According to an article in The Financial Express, telecom operators' plans to sell stake in tower assets are credit positive for the telecom sector and will give a margin to them for the expansion of data services. Recently Bharti Airtel announced sale of 10.3% stake in its tower subsidiary Bharti Infratel for about Rs 61.94 billion.

According to Finch Ratings, Infratel's stake sale is expected to benefit Bharti's March 2017 FFO (fund from operations)-adjusted net leverage, which is forecasted to be around 1.8-2 times. Reportedly, Bharti will use the proceeds to pay down some debt and to fund its US$235 million acquisition of 2,300 MHz spectrum from Tikona Digital in five Indian telecom coverage areas, or circles.

Vodafone India and Idea Cellular, which are merging, also intend to sell Idea's 11% stake and Vodafone India's 42% stake in India's largest independent tower company Indus Towers, a joint venture between Bharti, Vodafone India and Idea.

With a sale - and assuming opex and capex synergies - Fitch Ratings estimate the combined entity's net debt to EBITDA ratio should improve to around 3-3.2 times with net debt of US$16.1 billion. Idea and Vodafone India intend to contribute about US$7.9 billion and US$8.2 billion of debt, respectively, to the combined entity.

Telecom stocks opened the day on a mixed note with Bharti Infratel share price and Tata Communications share price leading the losses.

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