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Morning Insight
7 May 2015
For private circulation only
Equinomics’ View on the Market: On last Monday, the domestic equity market rose 1.8% and
as of that day the Brent oil price was up 47% from its this year’s low of $45 a barrel. Yesterday,
it moved up further above $67 a barrel, which is about 49% higher than the bottom and this
jumped is blamed by many analysts for the yesterday’s route in the domestic equity markets.
Interestingly the market didn’t worry 47% rebound in oil price on last Monday! In our
view, seldom the true causes of market fall are explained. According to a media source,
yesterday four large order in NIFTY May future worth Rs.1,470 crore in early trades
happened which created the panic in the market. The BSE Sensex plunged more than 700
points to break below its crucial psychological level of 27,000 and the Nifty broke its crucial
level of 8,100- for the first time since Dec 17, 2014. The Sensex ended at 26,717, lower by 722
points and the Nifty settled with losses of 227 points at 8,097. The broader markets also
melted in tandem with the benchmark indices, with the BSE Midcap index and Smallcap index
shedding 3.2% each at 10,265 and 10,829 respectively. The Sensex and the Nifty - after
gaining nearly 30% in 2014 are trading in the negative this year.
Yesterday the FIIs were net sellers of stocks worth Rs.1,699.6 crore while the DIIs were net
buyers of stock worth Rs.1,454.97 crore. FIIs have sold more than Rs.9,000 crore worth of
stocks in the last nine trading sessions and consequently, the markets have fallen by 3.5% in
these 9 days. The Indian equity markets do not have depth – the investment behaviour of
the FIIs dominates the trend in the markets. This is the perennial problem for the
domestic markets;
We believe that yesterday’s sharp fall is not on account of fundamental problems, rather
tactical in nature. In our view, oil prices are always highly cyclical and cheap oil doesn’t
remain long. Even post-Lehman crisis, the oil prices rebounded substantially. Cheap oil helps
India no doubt. But crash in the oil price also indicates deflationary scenario in the world
which is not good for the domestic equity markets. Surprisingly, the correlation between
the oil price and the Sensex for the period 2007 January to April 2015 is very low and
positive at 0.18!
Correlation Between Crude Prices &
Sensex
40000
150
30000
100
20000
50
10000
Sensex
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
0
Jan-07
0
Crude Price
The above graph throws an interesting insight – during the period 2007-2009 period while
rising oil price accompanied robust market outlook, the fall in oil price saw fall in the
domestic markets also. Similar positive trend is observed in 2010 as well. Only during the
period July 2014 till January 2015, we observe significant negative correlation between the oil
price and the equity market. However, this period also saw the benefits of strong political
mandate and its influence on the markets. In our view, any bubble in oil price above $85
could cause a major problem for the economy and the markets.
Founder &
Managing Director
[email protected]
Equinomics Research & Advisory Private Limited - Investment Adviser
7 May 2015
Equinomics
Morning Insight
|
Equinomics’ View (Continued)
We see credible improvements in many macro fundamental variables.
 According to the media reports, over 110 large companies have reported about 6% yoy growth in net sales, but
almost flat net profits in the March quarter. However, if we exclude the large IT companies, while the net sales
grew at just 4% yoy, net profits rose 16.6% yoy. We observe many sectors like private banks, capital goods,
manufacturing companies posting improved earnings for the January-March quarter;
 The country's foreign exchange reserves have surged by $1.4 billion to touch a new life-time high of $344.6
billion;
 The total revenues of the Indian Railways rose by 12.16% during FY2015 to Rs.157,881 crore;
 The Direct tax collections grew at 19% yoy and almost touched the revised target for FY2015;
 The poor GDP growth and soaring trade deficit in the US also augurs well for the Indian equities – the US FED is
unlikely to hike the interest rates in the near future;
 During the first 11 months of FY2015, the FDI inflows rose 39% yoy to $28.81 billion;
 To be fair, the government is accelerating the reform processes:
o Yesterday the Lok Sabha passed the Constitutional Amendment Bill that will bring in the goods and
services tax (GST), a single indirect tax that will come in place of a number of central- and state-level taxes
and levies. It is believed that the new tax regime would add 1.5% points to the economic growth;
o Earlier it cleared hurdle for 49% FDI limit in insurance and pension businesses, approved smart city
projects, cleared several environmental hurdles for coal production, mobilized over Rs.3 lakh crore
through auction of coal blocks and spectrum and proposed over 30% jump in the capex of public sector
undertakings
o Also initiated bold move of shutting down loss-making PSUs;
Many international analysts / fund managers, who remained silent while the Sensex was moving close to
30,000 have now suddenly discovered – after over 3,00 points fall - that “all is not well the Indian equities”. On
one-year forward earnings, the Sensex trades around 12x, which is very attractive. The investors need to live with this
kind of perception-driven volatility in the Indian equities. However, always betting on quality stocks with valuation
comfort would mitigate the risks. We believe that apart from perception-driven risk arising from the FII
outflows, any possible failure of forthcoming monsoon to the extent of over 20% of total area and the US
economy failing to improve its GDP above 2% in the remaining quarters of 2015 alone could be major risks to
the Indian markets. We continue to advise our investors to pick up stocks like JB Chemicals, WIPRO, Polaris
Consultants, etc today, considering the market volatility and pressures on rupee exchange rate.
Global Economies and Equities
 Yesterday the US FED Chair said that “…equity markets at this point generally are quite high..”. In the past also we
observed such comments from the US FED Chair and then the global equities falling significantly. However, within
a couple of months the global equity markets rebounded nicely. We continue to believe that after some correction
once again the global equities would recover significantly as the global economy is expected to recover in the next
two years as per many international institutions. Thanks to this strong comment, most Asian stock indices opened
in red this morning;
 Productivity in the U.S. fell in the first quarter, triggering the first back-to-back decline in more than eight years
and pushing up worker costs as the world’s largest economy almost stalled. The measure of employee output per
hour decreased at a 1.9% annualized rate after a revised 2.1% drop in the prior three months;
 Oil prices rose more than $1 to $69.12 - fresh 2015 highs on Wednesday, continuing a month-long rally that has
been supported by a weaker dollar and a disruption to crude exports from Libya. However, by this morning it
corrected by about $2 and trades around $67 a barrel;
Indian Economy and the Equity Markets
 Continuing its decline for the fourth trading session in a row, the rupee on Wednesday dipped by 10 paise to close
at one-week low of 63.54 against the US dollar, following
the weak trend in local equities amid sustained capital
EquiNomics Research & Advisory Private Ltd | For private circulation only
outflows;
 The yield on Indian sovereign bonds due 2024 rose to the highest level since January and the rupee weakened as a
surge in oil prices raised concern over inflation and the central bank’s ability to cut interest rates. The yield on the
8.4% notes due July 2024, the current 10-year benchmark, rose four basis points to 7.89%;
 Cash-strapped promoters of India Inc have increasingly pledged their stakes to raise funds during the last fiscal.
Data from Prime Database showed a 27%increase in pledges to Rs.1.94 lakh crore as on March 31, 2015, by 495
NSE listed companies compared to Rs.1.52 lakh crore as on March 31, 2014 by 482 companies. The percentage of
promoters holding pledged shares has also gone up from 41.75 to 43.36 during the period;
 The Lok Sabha on Wednesday passed the Constitutional Amendment Bill that will bring in the goods and services
tax (GST), a single indirect tax that will come in place of a number of central- and state-level taxes and levies;
Equinomics Research & Advisory Private Limited - Investment Adviser
7 May 2015
Equinomics
Morning
Insight
| EquiNomics Research & Advisory Private Ltd
Morning
Insight
Corporate Developments
 Hindustan Zinc (HZL) is set to invest Rs.8,000 crore in Rajasthan over the next three years. HZL will invest
Rs.6,600 crore in mining and Rs.1,400 crore in Greenfield fertiliser plant. The company has close to Rs 30,000
crore cash in books. We consider Hindustan Zinc as one of the most attractive large cap stocks due to huge
cash holdings (which is 41% of its current marketcap), significant rebound (about 10%) in the international zinc
prices in the last one month and cheap valuation (trades at 8.5x FY2017E EPS of Rs.21);
 State Bank of Bikaner & Jaipur (SBBJ) has reported 18% increase in net profit at Rs.280 crore in the fourth
quarter ended March 31, 2015 against Rs.238 crore in the year-ago period. During the quarter, the bank reported
a lower net interest income of Rs.701 crore compared to Rs.740 crore in the year-ago period. However, other
income grew by 16.5% to Rs.392 crore compared to Rs.336 crore in the year –ago period. The bank managed to
reduce the Net NPAs for the quarter stood at 2.54% vs. 2.64% qoq and 2.76% yoy which is quite
significant achievement for a PSU bank. We suggest the medium to long-term investors to accumulate the
stock considering its decent performance and also its attractive valuation - as it trades below its adjusted
book value of FY2015 at 0.9x;
We reiterate our “BUY” recommendation on JB Chemicals and Pharmaceuticals Ltd. (JB Chem.)
In tandem with the sharp fall in the domestic market the stock price of JB Chem. has corrected about 20% from its
peak. We recommend our investors to use this correction to accumulate the stock. Our firm conviction in the
stock emanates from the following reasons:
 JB Chemicals & Pharmaceuticals (JB Chem) has reported quite decent performance for the December 2014 quarter
– while its net sales have gone up 9.6% yoy, its operating profits have increased 13% yoy. Its reported net profit
stood at Rs.24.16 crore in December 2014 as against a net loss of Rs.6.47 (which was primarily on account of
exceptional items). For the current fiscal, its revenues are expected to cross the benchmark figure of Rs.1,000 crore;
JB Chem. is highly investor-friendly company – in 2011, it sold its OTC business in Russia and paid a special
dividend to the tune of over Rs.340 crore from these proceeds;
At the current market price, its free cash (net of debt) is about 24% of its market cap.
JB Chem. has been growing faster than the industry growth on the domestic markets in the recent
times. After selling its OTC Business in Russia in 2011, the company reported ~9% decline in its sales turnover in
FY2012. However, the company was able to maintain quite impressive sales growth post this sale and expected to
cross Rs.1000 crore of sales in FY2015. The domestic formulation business which is one of the key business area for
the company achieved robust growth of 16% during 2013-14, against industry growth of 10%;
JB Chem. has a presence in 22 major therapeutic groups with 108 brands in the domestic market. JB Chemicals ’
niche product portfolio with brands such as Metrogyl, Rantac and Nicardia, endeavor to differentiate in the crowded
market place. The company’s 5 brands viz. Rantac (anti-peptic ulcerant), Rantac D (antipeptic ulcerant), Metrogyl
(amoebicides), Nor-Metrogyl (anti-diarrhoeal) and Nicardia Retard(calcium channel blocker) feature among top 300
brands sold unit wise. JB Chem has 7 manufacturing sites (in Gujarat and Maharashtra) for formulations and APIs and
exports (45% of sales) to over 30 countries across the world
The company’s South African joint venture, Biotech Laboratories (Pty.) Ltd. (“Biotech “) is among top 15 Pharma
companies of South Africa, which has helped the company to increase its footprint in South Africa and SADC
countries;
JB Chem. plans to invest about Rs.140 crore in the new capacity and related infrastructure for manufacturing
lozenges, Diclofenac API, tablets, etc. in the next 12-18 months through internal accruals;
This cash-rich pharma company with a turnover of Rs.1,000 crore is trading at 12.7x FY2016E EPS of
Rs.16.80, which we consider as very attractive. Its net enterprise value also is mere 1.3x its FY2015 sales,
whereas many small cap pharma companies are trading at 2 to 4x their sales. Hence, we reiterate our BUY
recommendation on the stock at current market price of Rs.214 with our revised target price of Rs.285 which is 17x
its FY2016E EPS of Rs.16.80;
Disclosure: I. G.Chokkalingam, personally do not hold shares of JB Chemicals & Pharmaceuticals Ltd. directly or
indirectly through friends, relatives or any proxies.
Equinomics
Morning Insight
Stock Disclosure: Whether Stock Held By:
JB Chemicals & Pharmaceuticals Ltd.
G.Chokkalingam & Family
Equinomics
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Equinomics Research & Advisory Private Ltd
Investment Adviser
CIN:U67190MH2014PTC252252
SEBI REG. NO. INA000001712
G. Chokkalingam - Founder & Managing Director
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