MarketsmithIndia Articles

Industry Update: December 2019

January 09 2020
By MarketSmith India

Nifty Made a New All-Time High; Gained 12% in 2019

Nifty started the month of December on a negative note as it breached its 21-DMA in the first week, and made a low of 11,832 in the month. However, since then, it made a sharp recovery to hit a new all-time high of 12,293 on December 20. As a whole, Nifty advanced nearly 1% in the month and 12% in 2019.

Nifty Midcap lost its steam after ending November on a high and gave up its 200-DMA in the first half of December. However, in the latter half, it retook its 200-DMA. It ended the month with a marginal decline of 0.7%. Nifty Smallcap, which was trading below its 200-DMA since June, inched closer toward it.

Of the 48 developed and emerging markets, we track, 34 are in a Confirmed Uptrend and none of them are in a Downtrend.

In December, Nifty added four distribution days and two expired, taking the count to six. Though Nifty and Sensex are trading near their all-time highs, broader indices are trading around 20–40% below their highs. Investors should restrict themselves to invest in fundamentally sound stocks with strong growth prospects and be extremely selective when adding risk.

Quick Update for Key Sectors:

Automobile: Nifty Auto Index is in an Uptrend Under Pressure and is currently 1.7% above its 50-DMA and 4.4% above its 200-DMA.

Banking and Finance: Nifty Bank is in a Confirmed Uptrend. It was trading 3.2% above its 50-DMA and 7.7% above its 200-DMA at December end. The index gained a meagre 0.7% in December.

Basic Materials: Nifty Metal is presently in a Confirmed Uptrend. The index added two distribution days in the month and gained almost 7%.

Capital Equipment: Indian capital equipment stocks rose 2.9% on average in December. Most of the sub-sectors closed in the green.

Energy: Nifty Energy was down 1.03% in the month. It was moved to an Uptrend Under Pressure from a Confirmed Uptrend.

Healthcare: Nifty Pharma lost ~2% in December, facing resistance at its 200-DMA. The index is in an Uptrend Under Pressure with eight distribution days.

Media and Internet: Nifty Media underperformed the market in December, as it declined 1.7% compared with a 1% gain in market.

Retail: Nifty FMCG is in a Rally Attempt. It was down 2.8% in December underperforming the market.

Technology: Nifty IT is in a Confirmed Uptrend status with a distribution day count of four, immediate support is at the 200-DMA. The index gained 4.4% month-to-date.

Telecom: The S&P BSE Telecom was flat in December as compared with a 1% gain in Sensex.



Automobile Sector

Global View


  • 2019 was one of the worst years for job losses in the global car industry as it shed 80,000 jobs in Germany, the U.S., and the U.K.

Nifty Auto


  • Nifty Auto is in an Uptrend Under Pressure and is currently 1.7% above its 50-DMA and 4.4% above its 200-DMA. The Nifty Auto Index outperformed the market as it gained 2%, compared with a 1% gain in the market in December. However, the index underperformed the market for CY2019 as it lost 11%, compared with a gain of 12% in the market.

Key Developments


  • Auto sales were down 12% y/y in November after showing a brief recovery in October due to the festive season. Auto sales remained in the negative territory across categories, including PVs (-11% y/y), two-wheelers (-14% y/y), and CVs (-15% y/y). The industry expects the decline to continue for a few more months due to higher input costs and transition to BSVI emission norms. Two-wheeler sales are reeling under the pressure of low demand from rural areas, and CV sales are expected to pick up only after infra spending revives.

  • Prominent auto manufacturers, including Honda, Toyota, and Renault have decided to halt the production of BSIV vehicles by January 31 for a smooth transition to BSVI norms. Planned production for December was cut down by 70–80% at Toyota and 30–50% at Honda.

  • Tata Motors expects a turnaround in FY21, aided by a low-cost structure, new product launches, and pickup in economic activity. It expects volume to pick up after the adoption of BSVI vehicles is complete.

Looking Forward


  • Industry experts expect an improvement in the auto market from Q2FY21, but it will take two to three years to recover the lost volume. BSVI rollout will increase the price of diesel vehicles by 10–15%.

  • Moody’s expects a negative outlook for the global auto industry in 2020, aided by muted demand for light commercial vehicles amid weakening growth in key markets. The sector is expected to be weighed down by political risks like Brexit, technological changes like ride-sharing and autonomous driving, and environmental regulations relating to emission norms.

Stocks of Interest: Bajaj Auto, Maruti Suzuki, and Tata Motors

Stocks to Avoid: Mahindra & Mahindra and Apollo Tyres

Banking & Finance:

Nifty Bank:

Nifty Bank is in an Confirmed Uptrend. It was trading 3.2% above its 50-DMA and 7.7% above its 200-DMA at December end. The index gained a meagre 0.7% in December.

Key Developments:


  • HDFC to acquire remaining 9.12% stake in its subsidiary HDFC Credila Financial Services. After the transaction, it will be the wholly owned subsidiary of HDFC.

  • The Fed voted unanimously (for the first time in the last five meetings) to keep its interest rates unchanged as incoming economic data points to a moderate pick-up in economic activity coupled with strong job market. With the odds of recession reducing and the economic outlook for 2020 improving, the Fed has hinted at no interest rate cut next year.

  • Australia, the U.K., Japan, Switzerland, India, and Indonesia also kept its interest rates unchanged. Meanwhile Brazil and Mexico cut interest rates by 50bps and 25bps, respectively, in December.

  • Credit Suisse announced its plan to buy back shares worth up to CHF 1.5B in 2020. Cuts 2019 and 2020 profit targets. On the other hand, UniCredit is set to cut 8,000 jobs, plans buyback.

Stocks of Interest: HDFC Bank and ICICI Bank

Stocks to Avoid: RBL Bank and Yes Bank

Basic Materials

Global Front

U.S. S&P Metals & Mining Select has gained strength in December, continuing the trend from November. The index gained almost 6% in December, following a 5% rise in November due to the strength in the overall sector performance.

Nifty Metal

Nifty metal is in a Confirmed Uptrend. The index started the month in an Uptrend Under Pressure but started gaining strength during the third week. The index added two distribution days in the month and gained almost 7%.

Key Events


  • In December, there has been a positive sentiment around the trade war, which has boosted economic growth favouring the industrial metals overall.

  • In December, Palladium was up more than 5% in 2019 it has soared more than 59%, representing its firmest annual gain since 2010. Platinum was up 8.1% in December.

  • Steel prices have increased in December on the back of rising demand, and this trend is expected to continue in 2020. Steel manufacturers hiked prices for the first time in FY20 in November by ₹500–750 a tonne and followed this with another rise of ₹750–1,000 in December.

  • Gold has exhibited strength in December and gained 3.4%. Silver was also strong with a gain of 4.8%.

Looking Forward:

Towards the end of 2019, some positive signals made us upbeat about 2020. The world’s two largest economies, the U.S. and China, are seen making positive negotiations over the trade war that has slowed global economic growth for the past two years. With positive sentiments, there can be a boost in the global economy, which will boost demand for industrial metals like zinc, nickel, and copper. Gold and silver are expected to be range-bound in the short term.

Stock to Focus: JSW steel (JVS.IN) and Pidilite Industries (PID.IN)
Stock to Avoid: Hindustan Zinc limited (HIZ.IN) And Coal India (AOC.IN)
Capital Equipment

Global View

Capital equipment stocks across the globe were relatively subdued in comparison to broader market as key sub-sectors like aerospace/defense and industrials displayed weakness. Notably, aerospace/defense sector, which led the momentum for a major part of the year, is currently under selling pressure due to Boeing’s prolonged issues on the 737 Max recertification process (which is weighing down on a large supply chain).
Going into 2020, we remain cautious on the sector due to lack of positive catalysts and industry specific uncertainties. However, despite broader weakness, we continue to see outperformance from fundamentally strong leaders in most sub-sectors.
Indian Capital Equipment Stocks
Indian capital equipment stocks rose 2.9% in December on average. Most sub-sectors closed in the green. The significant gain in the sector was driven by Household Appliances/Wares and Metal Production and Fabrication stocks which advanced 6.5% each on average.
Top performers include Orient Paper and Industry (+15.1%), KEC International (+12.4%), and ABB India (+11.8%), while three major underperformers were V-Guard Industries (-6.8%), Voltas (-5.2%), and Crompton Greaves Consumer Electricals (-4.8%).
Sector News:
  • CNH unveiled its first electric vehicle, the Nikola Tre, built in partnership with the U.S. startup Nikola Motor Co. and its truck business Iveco. This truck will be produced in full electric and hydrogen fuel cell models, with a range of up to 600 miles (966 km). Under their agreement, CNH took a $250M stake in Nikola and plans to spin off Iveco in 2021.

  • Boeing’s CEO Muilenburg resigned after he had come under pressure following the head of the Federal Aviation Administration reprimanding him for putting pressure on the agency to move faster in approving the return of the company’s 737 Max jet. Boeing’s CFO Greg Smith will serve as interim CEO during a brief transition period. It also recently halted production of new 737 Max aircraft, pending its recertification for service.

  • National Aluminium announced the appointment of Shri Sridhar Patra as the company’s Chairman and Managing Director, effective December 17.

  • KEC International bagged orders worth Rs 1,520 crore across its business lines. Major order was Rs 964 crore project for the construction of elevated viaduct along with eight stations of the Delhi Metro Phase IV project from Delhi Metro Rail Corporation.

Looking forward, in January, we expect the sector to be modestly positive in the first half. The upcoming Q3 FY20 earnings season will drive the further momentum in the last two weeks, which we expect to be largely in line with consensus.
Stocks in Watchlist: Shree Cement, Astral Poly Technik, and The Ramco Cements

Stocks to Avoid: National Aluminium and Graphite India

Energy

Nifty Energy

Nifty Energy was down 1.03% in the month and was moved to an Uptrend Under Pressure from a Confirmed Uptrend.

Global-View

WTI Crude continued its ascent as started in September, rising more than 9% to $61.06. Much gain was observed at the beginning of the month following a production cut by the OPEC+. It soared again at the beginning of 2020.

Key Events


  • Reliance Industries has announced a joint venture with British energy major BP for expanding its fuel retail business. Under the brand name Jio-BP, it plans to start 4,100 petrol stations in the next five years. In this JV, RIL will hold 51% and BP the remaining 49% stake.

  • OPEC and non-OPEC allies (together called OPEC+) decided to implement tighter oil production policy to reduce total oil output by 1.7M barrels/day. It was much larger than many analysts had expected. Also, the energy alliance said it plans to review the policy at an extraordinary meeting on March 5–6.

  • Global LNG supply is forecast to grow 9.2% to 406M tons in 2020, according to BloombergNEF.

Looking Forward

The oil sellers are expected to continue doing good until the OPEC+ reviews the production policy. The expansion plans by Reliance is expected to drive the sector up.

Stocks to Focus: Mahanagar Gas (MG2.IN), Reliance Industries (REL.IN), and Petronet LNG (NET.IN)

Stocks to Avoid: Hindustan Petroleum (HPT.IN) and Castrol India (CAS.IN)

Healthcare

Global front

During September, ishares US Healthcare (IYH) was up more than ~3%, in line with the S&P 500’s gain of ~3%. Healthcare performance over the last several weeks have improved and the ETF is trading within 1% range of all-time highs.

Nifty Pharma

Nifty Pharma lost ~2% in December, facing resistance at its 200-DMA. The index is in an Uptrend Under Pressure with eight distribution days. In November, medicine sales grew 14.5% y/y with top 10 drug makers having sales growth of 12–18%.

Key Developments


  • In 2019, the Indian Pharmaceutical market grew 10% y/y, despite several domestic and international challenges. The healthcare sector will be hoping for a similar growth in 2020, with prime focus on the domestic market.

  • Overall, the U.S. generics pricing pressure have stabilized from high double-digit price decline to single digit in 2019, but the overhang remains the same for drug companies operating in the U.S. More than 18 companies received warnings letters from the U.S. FDA in 2019, compared with 8–9 companies in 2018, which might intensify more in 2020, hurting operations.

  • True North has invested $100M in Biocon Biologics for 3% stake, valuing the biologics arm at $3B–3.5B, compared with $4.8B market cap of the holding company Biocon. This might be the first step to raise $200M–300M fund by the company in 2020.

Looking Forward


  • We still recommend patient and selective approach toward the sector, and focus on companies with good growth outlook. Medical services, hospitals, and companies with high domestic presence will be few sub-sectors to watch in 2020.

Stock to Focus: Narayana Hrudayalaya, Aster DM Healthcare, Apollo Hospital, Abbott India, Divis Laboratories, Dr Lal Pathlabs, Metropolis Healthcare Ipca Laboratories, and Biocon

Stocks to Avoid: Aurobindo Pharmaceutical, Glenmark Pharmaceutical and Jubilant Lifesciences

Media and Internet

Global View


  • Facebook will not use the phone number provided for two factor authentication in friend suggestions as a part of overhaul of its privacy practices.

  • Comcast is in discussions to acquire Xumo, an ad supported streaming platform with live channels and on demand content, as it prepares to launch Peacock, its premium streaming service from April 2020.

Nifty Media


  • Nifty Media underperformed the market in December, as it declined 1.7% compared with 1% gain in market. It underperformed the market in CY19 as it declined 30% compared with a 12% gain in the market.

Key Developments


  • Indian music companies including T Series and Saregama could earn Rs 1B–1.2B in FY20 as social media apps like Facebook, Instagram, and TikTok will pay a licensing fee for using their music.

  • Netflix is testing multi month (three, six, and 12 months) plans at discounted prices as it seeks to look into consumer behavior if they are willing to pay in advance for several months.

  • Netflix is expected to spend INR 30B in FY20 for creating original content for Indian audience.

  • Direct-to-home operations of Bharti Airtel and Dish TV India merged creating world’s largest TV distribution company. DTH business of Dish TV will be divested and merged with Bharti Telemedia that operates Airtel Digital TV.

Looking Forward:


  • The trend in internet data consumption over mobile would be closely watched as the telecom companies raised data tariffs by ~40% in December. This price hike comes on the back of the Supreme Court’s ruling that allows the Government to collect INR 926B in adjusted gross revenue from the telecom companies.

Stocks of Interest: Info Edge and PVR

Stocks to Avoid: Zee Entertainment and Just Dial

Retail

Global View

During December 2019, the U.S. Retail index rose 2.8%, underperforming S&P 500. However, Europe’s retail stocks performed much better during the month (+8.2% Germany; +7.2% France; +6.2%, U.K.), lead by Apparels and Electronics retailers.

Key Developments
  • Among the major retail names in India, Aditya Birla Fashion, and Retail was the leader with ~6% gains, followed by Jubilant Foodworks.

  • Aditya Birla Fashion & Retail’s multi-brand store, The Collective, announced to double its presence in the company and open 10 stores over the next three years.

  • Titan Company announced its December quarter Jewelry segment sales at ~11% y/y, in line with the company's revised guidance. The stock had a strong positive reaction following the announcement.

Looking Forward:
  • Because of colder winters, seasonal apparel sales should be impacted positively in Q4 FY20.

  • February’s budget announcement may come up with crucial decisions on demand-side stimulus and farm income. Higher disposable income as a result of the announcement should give direct boost to discretionary as well as non-discretionary sales and may impact related stocks in the retail space.

Stocks to Focus: Jubilant Foodworks (JF1.IN), Aditya Birla Fashion, and Retail (ZAF.IN).
Technology

Global View- IGV 1% off highs

The North American Software Index (IGV) remained almost flat (+0.4%) in December, after gaining ~8% in November. Though the IGV has improved over the past six weeks, the improvement has not been uniform across all constituents. Remaining selective until more visibility is available into the next fiscal’s earnings growth will be the key.

Nifty IT

Nifty IT Index is in a Confirmed Uptrend with a distribution day count of 4; immediate support is at the 200-DMA. The index gained 4.4% MTD. It was shifted to an Uptrend Under Pressure in early December but it quickly reclaimed high of the previous rally, shifting it back to a Confirmed Uptrend. Bellwethers Tata Consultancy Services and Infosys are expected to report Q3 results around January 9–10, their prints and most importantly performance of the BFSI vertical and margin expansion will be points to watch out for.

Key Developments


  • Amazon, Google, and Apple team up to form “Project Connected Home over IP” to create a new standard for smart homes.

  • Amazon recorded its fastest ever holiday shopping season, Prime 1-day and Prime Same-Day deliveries quadrupled.

  • Google Cloud targets to surpass AWS and/or Azure by 2023.

  • Tencent has partnered with Nvidia to launch cloud gaming in China.

  • China’s government has ordered all its state offices to remove foreign hardware and software within the next three years. Substitutions will take place at a pace of 30% in 2020, 50% in 2021, and 20% the year after.

  • The U.K. will create a tech regulator in 2020 to police big tech companies.

Earnings
  • Companies that reported better-than-expected results – Adobe (gapped up 4%), Domo (gapped up 20%), Docusign (gapped up 9%), Healthequity (+3.5%), Coupa (+0.3%)

  • Companies that missed expectations – Oracle (fell 3.5%), Workday (fell 4.7%), Elastic (fell 18%)

Looking Forward

IGV’s 34% YTD gain was led by mid caps and small caps at the start of the year followed by a brief rally by large caps toward May–July and then more of selective stocks’ outperformance toward the end of 2019. Next month, Q4 earnings season begins, ~15% of the IGV reports, with heavyweights – MSFT, IBM, NOW, EA, and AMZN expected to report in late January.

Stocks to Focus: NIIT Technologies (NTT.IN) and Tech Mahindra (TMH.IN)

Stocks to Avoid: Cyient (CYE.IN)

Telecom
Global View
  • France’s communication regulatory agency will kick off the auction for 5G spectrum licenses in February with its four telecom players namely Orange, SFR, Bouygues Telecom, and Free being offered 50Mhz spectrum at a fixed price of $390M.

  • In 2019, Samsung sold ~7M 5G smartphones, exceeding expectations of 4M smartphones. It currently has ~54% share in the global 5G devices market.

BSE Telecom Index


  • The S&P BSE Telecom was flat in December as compared with 1% gain in Sensex.

Key Developments


  • Reliance Jio added 9M subscribers in October, while BSNL, Vodafone Idea, and Bharti Airtel added 288K, 189K, and 82K subscribers, respectively, per TRAI data.

  • The government has announced the availability of the 5G spectrum for trial for all players including Huawei, China’s telecom giant, despite it being banned from doing business with U.S. companies.

  • The Department of Telecom is expected to meet the telecom companies on January 6 to address their concerns regarding the reduction of levies, including license fees and spectrum usage charges.

  • Telecom Regulatory Authority of India has tweaked its regulatory framework for cable and broadcast TV in order to offer more channels at lower subscription prices to protect customer interests.

Looking Forward:


  • The Digital Communications Commission approved the March–April 2020 spectrum sale plan for 5G airwaves that could bring more than INR 5T to the government exchequer.

Stocks of Interest: Reliance Industries (Jio) and Bharti Airtel



What do you think? Please email us any questions or comments.
Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.

What do you think? Please email us any questions or comments.

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.For more information, see our Legal disclosures here.

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