Union Budget supports, Adani disappoints; RBI Policy in focus this week
Volatility remained high during the week as the Union Budget was presented which exceeded market expectations. However, weakness in Adani Group stocks and continuous selling in these shares dented the market sentiments. In Budget 2023-24, finance minister Nirmala Sitharaman announced a capital expenditure outlay of Rs 10 lakh crore for the financial year 2023-24. This would be a 33 pct increase from the CAPEX allocation announced in the previous budget.
There were various announcements on the personal income tax slabs front which cheered the investors. The government announced a modest fiscal consolidation of 50 bps. The medium-term path of further fiscal rationalization remains in place as the government reinforced its target of lowering the deficit to -4.5 pct of GDP by FY26.
Globally, investors watched the central bank’s rate decision closely. The Federal Reserve has decided to raise the target range for the federal funds rate by 25 bps to 4.50 to 4.75 pct. Markets reacted positively to a slightly more dovish language from Chairman Jerome Powell. The Bank of England hiked interest rates by 50 bps to 4 pct, the highest since October 2008. The European Central Bank raised its key interest rates by 50 bps, in line with expectations.
On the commodities front, OPEC+’s decision to roll over an output cut helped ease oversupply concerns. OPEC+ agreed to cut its production target by 2 million barrels per day (bpd), about 2 pct of world demand, from November last year until the end of 2023 to support the market. For the week, Brent fell 7.75 pct to USD 79.94 a bbl. Gold prices fell to more than a three-week low to USD 1,863 an oz after stronger-than-expected U.S. jobs data raised fears that the Federal Reserve could keep hiking interest rates.
USDINR for the week ended with gains of nearly 0.5% after the US Fed hiked key interest rates by 25 bps which also led to the Dollar strengthening against developed currencies. The recent rebound in USDINR from the support of 81 should be seen as a major bottom with an immediate target seen at 85. With FII selling more than Rs 40,000 crores in the month of January, the rupee weakness is likely to continue against a basket of developed market currencies.
The Nifty gained 1.4 pct to 17,854 levels for the week and the Nifty Midcap and the Nifty Smallcap indices gained 0.4 pct and 1.9 pct respectively. On the sectoral front, the Nifty FMCG index gained 3.5 pct led by gains in ITC. Nifty Bank gained 2.9 pct and Nifty Auto was up 2.2 pct. Nifty Energy fell sharply by 6.3 pct led a sharp fall in Adani Green and Adani Transmission along with a 6.4 pct decline in GAIL. The nifty Metal index fell 7.6 pct led by a 42 pct fall in Adani Enterprise.
Stocks/Sector in Spotlight
- January 2023 automobile sale numbers were out during the week. TVS Motors’ total sales grew 3 pct YoY to 2.75 lakh units as exports were down 41.7 pct to 57,024 units. Bajaj Auto reported a sale of 1,40,428 units in January, up 3.6 pct YoY, and its sales were up 11.9 pct MoM. Royal Enfield sales increased 27 pct to 74,746 units in January 2023 from 58,838 units sold during the same month last year. Hero MotoCorp registered a sale of 3,49,437 units in Jan 2023 vs 3,80,476 in Jan 2022. M&M reported a 37 pct rise in vehicle sales at 64,335 units in January. In terms of PV sales, it posted a growth of 65 pct at 33,040 units. Its exports increased by 5 pct at 3,009 units in January. Ashok Leyland’s domestic sales jumped 27 pct from 12,709 vehicles in January 2022 to 16,198 units during the last month. Sales including exports, grew 23 pct from 17,200 units sold in January 2023. Eicher Motors commercial vehicle sales were 7,181 vehicles in January 2023, a 32.1 pct increase over the 5,434 units sold in January last year. Tata Motors’ total PV sales stood at 48,289 units vs 40,942 units. Its total CV sales stood at 32,780 units vs 35,268 units.
- Adani group stocks saw continued selling pressure after Adani Enterprise Board shelved plans to raise Rs 20 bn via FPO to protect investors from potential losses in spite of being fully subscribed on the last day. This decision will not have any impact on our existing operations and future plans. We will continue to focus on timely execution and delivery of projects,” Adani said.
- Listed insurance companies namely HDFC Life, SBI Life, MFSL, LIC, etc witnessed selling pressure after the Union Budget announced that maturity benefits (interest component) from all policies (ex-ULIP) issued on or after 01st Apr 2023, having premium or aggregate premium of Rs 5 lakh in a year shall become taxable. This has a negative impact on insurance companies mainly HDFC Life, SBI Life, and Max Financial. This can potentially impact new policy sales for insurance companies and especially impact their endowment / non-par portfolio.
- Automobile companies traded in the green after positive announcements in the Budget for the sector. There is an allocation of adequate funds to scrap old vehicles by the central government and support to states to replace old vehicles and ambulances. This is positive for passenger vehicle OEMs (Tata Motors, Maruti Suzuki, M&M) as older government vehicles would be replaced by new ones, creating demand. Also positive for commercial vehicles. There is an extended customs-duty exemption for the import of capital goods and machinery required for the manufacture of lithium-ion cells for batteries used in electric vehicles. This move is Positive for EV adoption and localization and will benefit EV players.
- Capital Good and Infrastructure companies were in focus as the Union Budget is capex heavy with an increase in overall capital expenditure by 33 pct YoY to Rs 10 tn. Capex budgetary allocations have risen sharply in FY24 (up 37% vs. 23% in FY23). Incremental capex allocation in FY24 is highest for railways, roads, infra spending by states, and energy. Defence and housing are muted; an additional allocation of Rs 550bn has been made towards OMCs and BSNL capital infusion. The move is positive for L&T, Siemens, ABB, CG Power, Thermax, KEC International, Cummins, etc.
- ITC Ltd. gained after the Budget announcement of an increase in National Contingent Calamity Duty by 16 pct on all segments of cigarettes which was lower than what markets were expecting. The overall increase in tax incidence will be only 2 pct vs. the expectation of 7-8 pct.
- L&T reported a strong set of numbers for Q3FY23. Consolidated sales came in at ~Rs 464 bn (up 17 YoY YoY) driven by revenue growth across segments such as Infrastructure (up 19 YoY YoY), IT&TS (up 25 YoY YoY), and Hi‐Tech Manufacturing (up 20 YoY YoY). EBITDA came in line at Rs 50.7 bn with EBITDA margins coming in at 10.9 YoY, down ~50bps YoY. Adj PAT grew 24 YoY to Rs 25.5 bn. Order inflows grew by 21 YoY YoY to Rs 607.1 bn in Q3FY23. Order Book stands at an all‐time high of Rs 3.9 trn (2.2x TTM revenues) providing strong revenue visibility for the next 2‐3 years. Management indicated that the order pipeline stands healthy at ~Rs 4.9 trn with good traction witnessed in sectors such as Metros/RRTS/HSR, Roads and Expressways, Water, Renewables, Non-Ferrous Metals, and Power T&D.
- HDFC Ltd Q3FY23 NII was up 13 pct at Rs 48.4 bn, due to lesser AuM growth and margins. Net AuM growth was 12 YoY YoY. NIM too was a bit a lower at 3.39 YoY led by higher interest cost at 7.52 YoY. Provisions were lower at Rs 3.7 bn. Driven mainly by lower total income, core PAT at Rs 33.4 bn. As dividend income was higher, overall PAT was in-line at Rs 36.91 bn. Loan book at Rs 7014 bn grew 1.6 YoY QoQ / 13.3 YoY YoY, mainly led by individual loan book.
International News
- The European Central Bank raised interest rates by 0.5% and explicitly signaled at least one more hike of the same magnitude next month.
- The US central bank announced a quarter-point hike to the benchmark lending rate at the end of its two-day policy meeting, taking the rate to a target range of 4.50-4.75 percent. Fed Chair Jerome Powell also said that inflation still remained elevated in the country and that he was unsure of how much further the bank would need to hike rates in order to cool price pressures. The central bank also expressed uncertainty over where interest rates will peak. This drove up expectations for a pause in the Fed’s interest rate hikes by mid-2023 and a potential reduction in interest rates by the end of the year as U.S. economic growth cools
- Data showed U.S. job openings unexpectedly rose in December ahead of the Labour Department’s comprehensive report on nonfarm payrolls for January due. Separate economic data showed U.S. manufacturing contracted further in January as higher rates stifled demand for goods.
- China’s service sector showed a rebound in the first month of 2023, according to the Caixin/S&P Global services PMI. The reading rose to 52.9 in January, above the 50-mark that separates growth from contraction from the business activity index of 48 seen in December. China is set to make market-oriented changes to the way initial public offerings are approved, as it tries to reset the economy and rebuild investor confidence after a chaotic exit from zero-Covid.
Mutual Funds Industry Update
Mirae Asset Mutual Fund launches Mirae Asset Flexi Cap Fund
Mirae Asset Mutual Fund has launched Mirae Asset Flexi Cap Fund. The NFO opens for subscription on February 3 and closes on February 17. The fund will be managed by Vrijesh Kasera. Mirae Asset Flexi Cap Fund will be benchmarked against the NIFTY50 TRI. The flexi cap fund will invest across market capitalisation—large-cap, mid-cap, and small-cap, thus offering a large investment horizon to help investors capture the growth curves across sectors. The fund house said that the scheme will invest in a mix of value and growth stocks and diversify across ideas, sectors, caps, and risk.
Nippon India Mutual Fund launches Nifty SDL Plus G-Sec – Jun 2029 Maturity 70:30 Index Fund
Nippon India Mutual Fund has announced the launch of Nippon India Nifty SDL Plus G-Sec – Jun 2029 Maturity 70:30 Index Fund, an open-ended Target Maturity Index Fund with a relatively high-interest rate risk and relatively low credit risk. The New Fund Offer will open on February 6 and close for subscription on February 14. According to the press release, the investment objective of the scheme is to provide investment returns corresponding to the total returns of the securities as represented by the Nifty SDL Plus G-Sec Jun 2029 70:30 Index before expenses, subject to tracking errors. The Scheme will predominantly invest in State Development Loans (SDLs) and Government Securities (G-Secs) which have the highest safety. The Scheme will invest 95% to 100% in State Development Loans (SDLs) representing the SDL portion of the Nifty SDL Plus G-Sec Jun 2029 70:30 Index and Government Securities representing the G-Sec portion of the Nifty SDL Plus G-Sec Jun 2029 70:30 Index.
Outlook Week Ahead
For the coming week, the RBI policy outcome will be keenly watched. The MPC is expected to deliver another 25 basis points (bps) rate hike at the 6-8 February meeting, bringing the repo rate to 6.50 pct. Some of the key results expected this week are Tata Steel, Adani Ports, Ambuja Cements, Bharti Airtel, Hero Moto, Shree Cements, Hindalco, HPCL, and M&M. Stock-specific activity will thus continue. Developments around Adani Group stocks will remain in focus.
As long as Nifty trades below 18,130, the risk of testing 17,000 still remains. Markets from hereon are likely to take cues from international markets, especially when Dow Jones Index is flirting with key resistance of 34,343 and if it is unable to cross these levels in the next few trading session, we may see a 6-7 pct downside reaction in a quick span of time. A sharp drop in India VIX in the past few sessions indicates complacency but it would be important to see whether it can cross below the 14 mark or trigger a Double bottom reversal.
Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.
