StockAxis Market Intelligence (Commentary for June 2018; Outlook for July 2018)

We are pleased to present to you our monthly market commentary and outlook for the forthcoming month. The ‘StockAxis’ Market Intelligence’ is a quick update on the markets for the month gone by and our view for the next month. Use our sharp and crisp synopsis to continue building your wealth!

Global Trends

• The Indian government held the 'Incredible India' road show in New York, Houston, Chicago and St Louis from June 18 to 22 to showcase India as a ‘must visit’ tourist destination. This is expected to double the number of US tourists visiting India over the next 3 years.
• The Confederation of Indian Industry (CII) stated that Indian companies are likely to increase their overseas investments. Citing a World Investment Report of UNCTAD, CII said that India's total cumulative stock of overseas foreign direct investment (OFDI) amounted to USD 155 billion in 2017.
• Indian pharma companies will now be able to make in-roads into the lucrative Chinese market. The Chinese government has assured India of expediting the process of drug approvals in less than 12 months.

Domestic Trends

• India's exports grew 20.18% to USD 28.86 billion in May, the highest in six months.
• Exports from special economic zones (SEZs) grew by 38% in May to Rs 29,236 crore, according to Export Promotion Council for EoUs and SEZs (EPCES). The major sectors contributing to the growth include biotech, chemicals, pharmaceuticals, computers, electronics, non-conventional energy, plastic, rubber, trading and services.
• Domestic institutional investors (DIIs) have invested aggressively into the Indian equity market over the year having bought net assets worth USD 7.9 billion.
• Solar installations in India increased by 34% in Q1FY18 as compared to Q4FY17 reaching 3,269 mw, according to Mercom Communications.
• The revenue from e-commerce in India is likely to grow by 20.2% per year to reach $52 billion by 2022.
• According to Boston Consulting Group’s (BCG) ‘Global Wealth Report 2018’, Indian billionaires’ wealth grew by 18% in 2017.
• The Confederation of Indian Industry (CII) stated that India Inc. expects the GDP to grow by about 8% over the next couple of years due to strong reforms process and fiscal prudence.
• Google expects the cloud business in India to triple year-on-year for the next 5 years.
• The Nikkei Manufacturing PMI in India rose to 53.1 in June 2018 from 51.2 in May, registering the fastest improvement since December 2017. A PMI of more than 50 represents expansion of the manufacturing sector.
• India’s Consumer Price Index (CPI) is expected to be 138.07 for the quarter ended June 2018, up from 137.80 in May 2018. The CPI is a measure of prices of a basket of consumer goods and services, such as transportation, food and medical care.
• The Indian Rupee depreciated vis-à-vis the dollar over the month ending June at 68.45 INR against 67.1434 at end-May 18.

Market Trends

• Various external factors, including trade tensions between India and the US, saw markets on a downtrend thereby yielding attractive picks for value investors.
• FIIs recorded a net outflow in Indian equities of Rs. 3,637.95 crore in June (as on 27 June 2018) against a net outflow of Rs. 7,581.12 crore in the previous month.
• The Nifty closed at 10,714.30 on 29th June 2018, having fallen 21.85 points over the previous month.
• The Nifty 50 P/E ratio was at 25.90 at end-June 2018. The average P/E ratio for the past 12 months is 26.16.

Highlights

• The Good: Normal monsoons, rural recovery, tempering oil prices
• The Bad: Rising interest rates and inflation, trade wars

StockAxis’ Outlook for July 2018

Improved global markets and normal monsoons have triggered positive developments for the following three sectors among others:

Pharma
The Indian pharma sector, which had so far been negatively impacted by US regulatory tightening, consolidation of buyers, an increasing number of observations from the USFDA (US Food and Drug Administration) and greater competition, is now experiencing a positive shift towards growth and valuations. Pharma companies have taken a number of measures to sustain this positive upwards move. First, companies have stepped up their research and development spends, which will result in several product launches across complex generic and specialty categories during FY19-20. Second, pharma companies have added new plants to avoid business loss in case of any USFDA observations. Third, in the domestic market, pharma companies will witness strong growth due to population growth, increasing geographical penetration, improving healthcare infrastructure and the government’s focus on better healthcare for the masses.

Rural sector
India is expected to be blessed by the third consecutive year of normal monsoons with the IMD and Skymet projecting rainfall at 97% and 100% of long-period (LPA) respectively. The 4-month period of June to September provide about 80% of India’s water requirements for agriculture. This bodes well for the agri sector, which is on an uptrend since the last 2 years. In addition to higher produce, normal monsoons also result in lower agri input costs and better quality of produce. This, in turn, is expected to have a significantly positive impact on farm incomes. Normal monsoons coupled with government initiatives such as minimum support price (MSP) for crops and a wider e-NAM network (National Agriculture Market) will result in higher farm incomes. Sectors related to rural India (tractors, insecticides, rural finance, rural infrastructure, etc.) are expected to do well, going forward.

Information Technology (IT)
The Indian IT sector is witnessing green shoots with new areas of opportunities, improving global markets, greater usage of digital technologies and larger deal sizes along with the added comfort of a depreciating rupee resulting in free cash flows. The industry is clocking a rise in exports especially in its primary market, the US. The increasing acceptance of outsourcing in Europe has opened up another geography for Indian IT companies. The industry estimates exports to rise by about 30% in FY19. Two other positives for the industry are the end of pricing pressure in the US and higher contract values for traditional services. Additionally, the initiatives of migration to the cloud and customization will offer a sizeable revenue stream.

The Engineering, Research & Development (ER&D) segment has been growing and Indian IT companies are positioned to grab a large share of this business. This segment includes IoT (Internet of Things) in every product and service, customisation of products/services, greater cost efficiencies, more innovation in products, enhanced user experience, etc. According to Nasscom, the Indian ER&D industry is expected to clock a 10-year CAGR of 13-16%, which is nearly twice the growth of the overall industry.