Indian Stock Markets Open Flat; Infosys Surges Over 4% on Strong Q1 Result

Mon, 15 Jul 09:30 am

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Asian share markets are higher today as Chinese and Hong Kong shares show gains. The Shanghai Composite is up 0.1% while the Hang Seng is up 0.1%. The Nikkei 225 is trading up by 0.2%. Meanwhile, in the US, all three major indices posted record closing highs on Friday as firm expectations for an interest-rate cut from the Federal Reserve continued to propel shares while investors awaited next week's kickoff of the corporate earnings season.

Back home, India share markets opened the day on a positive note. The BSE Sensex is trading up by 170 points while the NSE Nifty is trading up by 51 points. Both, the BSE Mid Cap index and BSE Small Cap index opened up by 0.2%.

Barring capital goods stocks, all sectoral indices have opened the day in green with information technology stocks and healthcare stocks leading the pack of gainers.

The rupee is currently trading at 68.54 against the US$.

Speaking of stock markets, the current pattern of the Indian stock market very closely resembles 2013.

Back then too, Sensex was relatively flat while mid and small caps underperformed by a huge margin.

Only this time, the divergence is larger.

How Long Will this Sensex Outperformance Last?

While the 2013 correction was due to global macro issues, the correction in mid and small caps are due to factors back home.

Corporate governance issues leading to auditor exits plagued many mid and small caps in 2018. Then, we had the IL&FS impact leading to the NBFC crisis.

Will this Sensex outperformance continue?

Co-head of research, Tanushree Banerjee believes it will be difficult going forward. Here's an excerpt of what she wrote:

• "But when I think of safe stocks, I think long-term about the businesses rather than how the Sensex will perform.
  
  I think of businesses that will be a part of India's long-term growth story. I strongly believe these businesses stand to do well irrespective of the movement of the Index."

In the news from the IT sector. Infosys made a strong start to the fiscal year, with its first-quarter numbers beating the Street's estimates. The IT company also raised its guidance for the year.

For the quarter ended June 2019, net profit was Rs 38 billion while revenues increased to Rs 218 billion, a growth of 14% year-on-year and 1.2% quarter-on-quarter.

Operating margin however declined to 20.5% in June quarter, from 21.5% sequentially, with management attributing the fall to wage hikes and visa costs. Infosys also reported highest-ever large deal wins with total contract value of at US$ 2.7 billion.

Revenues grew year-on-year by 10.6% in US$; 12.4% in constant currency. Revenues grew sequentially by 2.3% in US$; 2.8% in constant currency.

Digital revenues were at US$1,119 million (35.7% of total revenues), year-on-year growth of 41.9% and sequential growth of 8.6% in constant currency.

Further, the company increased FY20 revenue growth guidance range to 8.5%-10% in constant currency. It maintained FY20 operating margin guidance range of 21%-23%

Its attrition rate however increased to 23.4%, as compared to 23% year-on-year.

Infosys has revised its capital allocation policy upwards to distribute about 85% of free cash flows cumulatively over a 5-year period, from 70% higher.

Effective from financial year 2020, the company expects to return approximately 85% of the free cash flow cumulatively over a 5-year period through a combination of semi-annual dividends and/or share buyback and/or special dividends, subject to applicable laws and requisite approvals.

Infosys share price opened the day up by 4.2%.

Moving on to the news from the economy. A surge in the prices of meat, fish and pulses pushed the rate of retail inflation a tad higher to nearly 3.2% in June.

Meanwhile, industrial production still seems to be in the slow lane, with 3% growth in May.

These two indicators will play a key role in the monetary policy review to be undertaken by the Monetary Policy Committee (MPC) in the second week of August.

Since the rate of retail inflation is still below the targeted median rate of 4%, and there is need to lower the rate of investment, it is expected that the MPC will go for another rate cut, the fourth successive one this calendar year.

The rate of retail inflation based on the Consumer Price Index (CPI) stood at 3.2% in June, against 3.1% in May. Urban areas faced higher inflation with the CPI rate at 4.3%.

Food inflation too hardened in urban areas, at 5.5%.

While food inflation hardened to 2.4%, its impact was partly offset by a mild dip in core inflation to 4.2%.

While vegetable prices are likely to firm up due to seasonal factors as well as higher transport costs, the pick-up in the monsoon rainfall is likely to boost sowing in the near term, which will help to keep food inflation in check, the reports noted.

Although the recent uptick in crude oil prices has been offset by rupee appreciation, the increase in duties and cesses on fuels introduced in the Budget will have a modest impact on retail inflation.

Speaking of crude oil, catch Vijay Bhambwani talk about the impact of hike in excise duty and cess on fuel in India. As per him, trading in crude oil offers excellent opportunities in nearly all market conditions due to its unique standing within the world's economic and political systems.

Meanwhile, industrial production slowed down a bit in May to 3.1%, against 4.3% in April and 3.8% in May 2018.

Per use-based classification, the year-on-year growth rates in May were 2.5% in primary goods, 0.8% in capital goods, 0.6% in intermediate goods and 5.5% in infrastructure/construction goods.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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