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Key factors to watch: Q3 results, supportive RBI policy, Trump commentary & COVID-19.

Date: 22-02-2020
Subject: Key factors to watch: Q3 results, supportive RBI policy, Trump commentary & COVID-19
The market was on the sideline with a negative bias due to the increase in oil prices as the coronavirus (COVID-19) issue is getting under control reducing the risk of a slowdown in the Asian economies. The Supreme Court's order on adjusted gross revenue (AGR) impacted telecom and banking stocks.

The market was also dull due to long trading holiday and looking forward to United States President Donald Trump’s visit next week though no big deal is expected this time. But the commentary towards any signs of opening trade between the two largest democracies in the future will be watched for. Defence stocks might be in focus.

China is also expected to slowly limp back to normalcy as more factories resume work and the raw material constraints reduce, especially for the auto, pharma and electronics industry.

The third quarter FY20 (Q3FY20) is completed, all the companies in Nifty50 have given result apart than Yes Bank, net profit has grown at a healthy rate of 21 percent on a year-on-year (YoY) basis which is marginally below the expectation of 26 percent growth.

Budget 2020: 'Growth to be key agenda, supportive measures for industries expected'
From the 49 companies, 12 was above expectations, 12 inline and 25 below expectations. The best performing sectors were non-banking financial companies (NBFCs), while banks did well in terms of solid PAT growth but still it went below in terms of asset quality and higher provisioning.

Regarding cement stocks, the financial performance was marginally below expectation due to lower volume and realisations. But the sector was able to come out with decent numbers due to fall in costs like pet coke and fuel. Having said that the prices and volumes have started to improve recently and the performance is likely to get better in the coming quarters supported by improvement in the economy. The setback is that valuation is still on the higher side, so we are still selective.

In terms of Pharma, it was weak due to falling in demand and pricing power in the global market. We have a cautious view which we are continuing due to continuous price erosion in global market, weak demand in the US and Europe and high USFDA observations. In the short-term, it is likely to be impacted by the supply disruption of API from China due to coronavirus issue.

On a supportive note, Government has imposed restriction on 12 essential API and drugs which may support such stocks but the cost is still likely to be high impacting their profitability. Also, the breakdown in China is getting better on a day-by-day basis, hence we should not be concerned about it for the long-term. What can change in the long-term scenario of midcap pharma is the improvement of pricing in the US and if we have a strong deal with the US like free trade which can change the outlook on India Pharma.

We have a very supportive monetary policy in India in spite of very high inflation. CPI zoomed in the last two months to 7.35 percent and 7.59 percent in December 2019 and January 2020, respectively. The RBI forecasts around average rate CPI of 4 percent in FY20 and, 5.4-5.0 percent in the first half of FY21, indicating that RBI has to pause its rate cut plans in the medium-term.

Against the muted expectation, on a positive surprise, RBI has come out with additional constructive measures to increase financial liquidity of banking and economy. The steps undertaken were cut in CRR, open market operation of Rs 1 lakh crore and banks to not consider on-going real estate project as NPAs for a period of one year. This will reduce bond yield and very positive for stressed sectors like retail, automobiles, housing and MSMEs.

RBI states that consumer inflation in India is high due to short-term factors. It also states that inflation in India has peaked and expects a significant reduction in CPI in the coming months. RBI recognises that there is a space for more policy actions in the future and maintained its accommodative stance and will cut interest rate in the future as and when necessary. The monetary policy of India is very accommodative and supporting during the slowdown, it is very positive for the financial sector.

Source: moneycontrol.com

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