Sensex Trades Marginally Lower; Telecom Stocks Witness Selling

Fri, 31 Mar 11:30 am

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After opening the day on a flat note, the Indian share markets witnessed choppy trades and are presently trading marginally lower. Sectoral indices are trading on a mixed note with stocks in the banking sector and telecom sector witnessing maximum selling pressure. Energy stocks are trading in the green.

The BSE Sensex is trading down 62 points (down 0.2%) and the NSE Nifty is trading down 13 points (down 0.2%). The BSE Mid Cap index is trading up by 0.5%, while the BSE Small Cap index is trading up by 0.6%. The rupee is trading at 64.83 to the US$.

As per a leading financial daily, the expected loss for auto industry from the Supreme Court's verdict to ban the sale of vehicles which are not compliant with Bharat Stage (BS) IV emission standard is said to be around Rs 120 billion. This also includes the dealer inventory which might have been bought against bank loans to buy vehicle stock in advance to cater to the year-end demand.

This will impact the revenues and profitability of Indian auto players.

The decision by the SC has left automobile companies saddled with a large inventory of BS-III vehicles estimated to be worth Rs 60-70 billion at the end of the month. The below chart shows companies with an unsold inventory of BS III vehicles.

Inventory Pile of Unsold BS III Vehicles

To minimise the damage, companies are trying to divert the vehicles to export markets. Likewise, they are also offering higher discounts to clear the inventory.

Please note that this is the second major blow for the automobile industry from the SC in the past 15 months. In December 2015, the SC had imposed a ban on sales of diesel vehicles with an engine of 2,000 cc and above in the National Capital Region. This ban was lifted in August 2016.

For investors, this comes as a reminder to consider the impact of regulatory risks such as the above while considering auto stocks for investment.

We, at Equitymaster, rigorously follow Equitymaster Risk Matrix (ERM^®). The risks are objectively evaluated via the ERM^® score. This helps us keep our analysis objective and casts aside all pre-conceived biases.

In the news from global financial markets, data released showed that activity in China's manufacturing sector expanded at a faster pace than expected in March. The official Purchasing Managers' Index (PMI) rose to 51.8 in March, as against previous month's PMI of 51.6. This was recorded as the highest in almost five years.

This was above the 50-point mark that separates growth from contraction on a monthly basis. The data meant that the world's second-largest economy is gaining momentum.

The above increase follows a factory rebound since mid-2016, and a pick-up in industrial output and private investments. However, most of the aid was seen on the back of surging producer prices.

While the above developments come as a welcome breather, one shall note that China's trade has slowed down in recent months. Exports have dropped in dollar terms. Furthermore, the prospect of an interest rate hike in the US has led to further declines in the yuan's value. Also, many economists are of the view that continuing stimulus measures by the central bank are masking the deeper problems of industrial overcapacity and high levels of corporate debt in China.

However, despite the above concerns, one of the issues of Vivek Kaul's Inner Circle (requires subscription) states that there are plenty of legs left for the dragon economy. The issue points out some positive signs emerging in the Chinese economy, without undermining the longer-term risks and challenges.

Regarding stock markets, many participants are worried that China and its slowing economy will bring more concerns for Indian markets. However, a crash can be an ideal time to bet on solid Indian companies that are well-shielded from any adverse developments in China. In our view, these companies can turn into bargain buying opportunities.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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