Eyeing Peak 20k!

Mon, 20 Sep Closing

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While Indian markets maintained their winning streak today as well, this time it was the turn of FMCG stocks that led the rise. The Sensex is just a whiff (0.5%) away from the 20,000 levels. Anyways, banking stocks, which were the heroes of the previous week, performed the worst today. On the broader BSE, almost two stocks gained for every one that closed in the negative.

The BSE Sensex and NSE Nifty closed with gains of around 310 points (1.6%) and 100 points (1.8%) respectively. Midcap and smallcap stocks followed suit, as the BSE Midcap and BSE Smallcap indices closed up by around 0.6% and 0.7% respectively. The rupee was trading at 45.67 to the US dollar at the time of writing this.

FMCG stocks led today's gains in the broader markets. The BSE-FMCG index closed with gains of around 3.5%. Leading the pack were stocks like Colgate, Hindustan Unilever, ITC, and Nestle. Gains in these stocks were seemingly fueled by reports that some of these companies have started raising their product prices to offset the rise in input costs. So, while many companies are taking price hikes, there are others who are reducing their pack sizes without raising prices. Hindustan Unilever (HUL), for instance, has raised prices of its flagship brands Rin and Lifebuoy over the past few days. And then, HUL's closest competitor P&G India has also effectively followed by upgrading its detergent brand Tide by launching Tide Plus at a higher price.

We believe these and other FMCG companies have no choice but to raise product prices to avoid taking a hit on their margins. For the consumer, however, this just adds to the inflation he is facing due to the rise in food items.

In a break from how they performed last week, banking & finance stocks emerged the worst performers today. The BSE-Bankex gained very marginally in a market that rose relatively sharply. Stocks that lost out today included the likes of Axis Bank, Kotak Bank, SBI, and Corporation Bank. Today's weakness in these stocks seems a clear case of profit book after the last few days of phenomenal run. It was indeed interesting to see bank stocks rise last week even after the RBI raised interest rates, an event that is generally negative for banks. One reason for this could be that banks are hoping that the RBI is done with its rate hike policy and will maintain a neutral stance going forward. But this is just a probability, and not a certainty. After all, high inflation continues to rule the roost. And increase credit off-take, which is expected by most economists, is only going to add fuel to this fire.

However, what looks certain is that valuations of banking stocks do not have much headroom to go up from here on. At least the fundamentals do not justify the same. With little upside in margins, banks are expected to rely heavily on their fee income generating abilities in addition to their operating leverage. Also, most banks envisage higher loan restructuring and provisioning costs in the next fiscal, which may eat into their profits. So, buyers of banking stocks need to be very careful about the choices they make.

Power major NTPC was among the key losers from the Sensex today. Among other power stocks, while gains were seen in NHPC and Neyveli Lignite, selling pressure marked trading in Tata Power and PTC. Earlier, a leading business daily reported that NTPC is looking to review its hydropower capacity addition plans. In fact, the company seems cautious on this front given that the government recently scrapped its 600 MW Loharinag Pala project in the state of Uttarakhand on resistance by some environmental groups. The company does not currently have a presence in the hydropower space, but has been actively scouting for opportunities there. This news this comes as a negative for it, especially given that it is just starting on its massive expansion drive. The company had recently released its plan for the year 2032, by when it plans to take its generation capacity to a mammoth 128,000 MW (from 32,194 MW currently). This plan is possibly an extension of the company's earlier target of achieving 75,000 MW by 2017.

Given that NTPC has slipped up off late in executing its plan on time, we see the extension of the target (and that too, a much bigger one) as a way to buy time. This we do not see as making much sense given that such a huge target requires perfect execution capabilities and falling in line of several issues like fuel supply and pricing, and land availability among others.