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Domestic bourses takes a breather; all eyes on Karnataka elections..

Benchmark indices dropped on Friday tracking global markets, while metal and pharma stocks pulled down the indices ahead of elections in the key state of Karnataka. The S&P BSE Sensex ended at 34,915, down 188 points while the broader Nifty50 index settled at 10,618, down 61 points.

Among sectoral indices, the Nifty Metal index was trading over 1% lower led by a fall in shares of Hindustan Zinc and Hindalco. The Nifty IT index, too, was down led by a fall in shares of Mindtree and Wipro. Among the FMCG counters, ITC, Emami, GSK Consumer slipped over 2% on the NSE. 

For the week, the Sensex witnessed a fall of 0.7 percent and Nifty shed 1.1 percent owing to profit booking, after hitting three-month highs, ahead of elections in the key state of Karnataka.

The Nifty VIX for the week closed at 12.99 percent and is expected to remain sideways.

On the macro front, Activity in India's dominant service sector accelerated in April thanks to a pick up in new business that encouraged firms to hire at the fastest pace in seven years, a private survey showed on Friday.

The Nikkei/IHS Markit Services Purchasing Managers' Index rose to a three-month high at 51.4 in April from March's 50.3, holding above the 50-mark that separates growth from contraction for a second month.

The Securities and Exchange Board of India (Sebi) on Friday allowed domestic stock exchanges to extend equity derivatives trading till 11.55 pm, in a move aimed at attracting investors dealing in Indian products on overseas exchanges in Singapore and Dubai. The new timings will also help in better alignment with commodity markets — amid implementation of universal exchanges — which function till 11:55 pm. Currently, the timings for both the equity cash and derivatives segments are 9 am to 3:30 pm. Since derivatives trading started in 2000, the trading timings of both futures and options (F&O) and cash market have remained linked. Longer hours for the derivatives market, which is typically used by investors for hedging, will cater to investors operating out of Europe and the US and will also provide a tool for domestic investors to price in the news flow that comes after the market hours.

 Sectors and Stocks

PC Jeweller had moved higher by ~45% to Rs 178 on the BSE on Friday in intra-day trade in an otherwise weak market. The stock of jewellery firm rallied 58% from its 52-week low of Rs 95 recorded on Thursday during intra-day trade after PC Jeweller denied reports of CBI search. “We would like to clarify that the abovementioned news item published in "BTVI" dated 3rd May, 2018 is factually incorrect and Shri Balram Garg, Managing Director of the Company has already appeared on Zee Business for a live interview and clarified the position,” the company said with reference to news appeared in Bloomberg TV dated May 03, 2018 quoting "CBI arrests owner of PC Jeweller."

The Company makes timely disclosures of all the events, information etc. that have a bearing on the operation / performance of the Company which include price sensitive information etc. Further, we wish to clarify that presently the Company is not having any such information, which requires disclosure as aforesaid. We do not find any justification or reason behind decrease in price of equity shares of the Company today, it added.

Despite of over 50% rally from its 52-week low, the stock is still down 52% in one month from Rs 313 and down 75% from its 52-week high level of Rs 600 recorded on January 16, 2018. Between April 20 and 30, funds managed by Fidelity International reduced their holdings in PC Jeweller by 6.02 percentage points. Direct and indirect subsidiaries of Fidelity and funds managed by the global asset manager sold 3.53 percentage points (13.9 million shares) stake of PC Jeweller on the stock market on Monday, April 30, cutting their stake to 3.51%. Fidelity funds held 9.58% stake in the company as of April 20.

Castrol India dipped 7% to Rs 181 on the BSE in early morning trade after the company reported single digit 2% year-on -year growth in net profit at Rs 1.82 billion in March quarter (Q4FY18), due to sharp rise in input costs. It had profit of Rs 1.79 billion in the same quarter year ago. On a comparable basis without the change in indirect tax treatment, net sales in the quarter under review increased by 5% over the same period last year at Rs 92.7 billion driven by volume growth across categories.

Street participants had expected profit of Rs 1.88 billion on net sales of Rs 95.7 billion for the quarter.

With the continued increase in crude oil price and depreciation of the Indian rupee there is likelihood of further volatility in the cost of goods, Castrol India said in a statement. Castrol India was quoting close to its 52-week low of Rs 172 touched on February 2, 2018 on the BSE in intra-day trade.

Housing and Urban Development Corporation (HUDCO) hit its lowest level since listing at Rs 63.45, down 1% on the BSE. The stock of state-owned housing finance company was quoting lower for the ninth straight trading days, falling 7% during the period. It is trading close to its issue price of Rs 60 per share. Since listing on May 19, 2017, HUDCO underperformed the market by falling 12% as compared to 15% rise in the S&P BSE Sensex.  HUDCO had made a strong debut on the stock exchanges. The shares listed at Rs 73.45, a 22% premium over its issue price of Rs 60 on the BSE. The stock gained as much as 30% to Rs 77.80 intraday but settled with a gain of 21%, closing at Rs 72.50 on first day of listing. The stock corrected 38% from its 52-week high of Rs 102 touched on July 14, 2017 in intra-day trade. Post December 2017 quarter results, the stock down 20% from Rs 80 on February 2, 2018, after the company reported 10% year on year dropped in net profit at Rs 1.63 billion, due to higher provision for loans. It had profit of Rs 1.82 billion during the same quarter last year.

Global Markets

On Friday, Asian shares stepped back, while the dollar ran into some profit-taking after a strong week of gains as financial markets turned their attention to looming US payrolls data for fresh catalysts. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.26 per cent, while Japan’s Nikkei stock index slid 0.16 per cent.

US shares fell over the last week owing to profit taking and inflation fears. However, Eurozone, Japanese, Chinese and Australian shares rose. Bond yields fell, particularly in Europe on the back of low April inflation. The oil price rose as worries about the return of sanctions on Iran continue to build, but the US dollar continued to rise, and this weighed on metal prices and the Australian dollar.

Last week, global cues were also weak as investors eyed the outcome of US-China trade talks as well as the US jobs report. There were no surprises from the Fed, which remained on hold but is on track for more hikes. The Fed is upbeat on growth and recognises that inflation is close to its 2 per cent target and will soon run above it. Its new reference to the inflation target being “symmetric” indicates it won’t slam on the brakes just because inflation is above 2 per cent.

Ajcon’s view

As far as Bond markets are concerned, the Reserve Bank of India (RBI) has moved to address pressure points in both currency and bond markets. The central bank’s foreign exchange reserves dipped by US$3.22 billion in the week to 27 April, after having fallen by US$2.5 billion in the week before, according to the RBI data. This is the sharpest fall in forex reserves since the week ended October 7, 2016, when the reserves had dipped by US$4.3 billion. Acccording to us, the dip is owing to check the rupee’s rapid slide.  The central bank has also tried to soothe the frayed nerves of bond dealers by announcing a secondary market bond purchase of Rs 100 billion. This, coupled with the recent measures taken to allow foreign investors to pick up any security they want without any maturity restriction, should help boost bond market sentiment by adding liquidity. This is also an indication that the central bank will be there to help cool off yields in the future too, and should help boost the sentiment. The rupee closed at 66.87 a dollar, while the 10-year bond yield closed at 7.73 per cent, more than one percentage point increase in about six months. The 10-year bond yield has moved up sharply after the minutes of the recent RBI’s Monetary Policy Committee’s meeting displayed a much more hawkish tone than what the April policy had stated. RBI Deputy Governor Viral Acharya suggested withdrawal of monetary accommodation starting June, which would mean that rate hikes could be imminent. This, coupled with continued outflow by foreign investors, pushed up bond yields. Banks, fearing rising mark-to market losses, have stayed out from the market in large measures. In April alone, foreign investors have taken out $121.17 billion from the local debt market.

 We believe Q4FY18 and FY18 Corporate earnings and outcome of the Karnataka poll are two big events at the domestic level that are likely to keep markets choppy in May. Overall, we believe the economic revival has started and is visible in the form of improving monthly sales of auto sector, increasing fuel consumption and discretionary demand. The only concern for us is the rising crude oil prices which will put pressure on crude oil dependent sectors and also raise inflation. With increase in inflation, the central bank may be forced to hike interest rates. In addition, the rupee has become volatile against the dollar. Globally, factors like newsflow regarding US – China Trade war, rising bond yields, rsing crude oil prices, geopolitical tensions can impact market participants’ sentiments and can affect domestic investors and FII inflows. 

For the year 2019, the equity markets could be driven by a mix of domestic and global factors. Indian economy is likely to go through a political and structural shift in the next few months. It needs to expand spending ahead of elections but needs to keep its fiscal deficit and inflation expectations under control. How the government manages to balance the demands of economics and the reality of politics will eventually determine how the Indian markets pan out during the year.

The valuations of the Companies especially midcaps and smallcaps were expensive in January 2018. With significant correction after the Union Budget and Nirav Modi – PNB scam, there arelot of opportunities available but one has to be prudent in selecting companies after considering management integrity and business prospects.  We believe volatile markets would present investors with a good opportunity for investors with a long term horizon to start building a portfolio of quality stocks to ride the next phase of the larger uptrend. We recommend investors to be stock specific and consider companies with good earnings visibility at a decent valuation. Although mid- and small-cap companies are trading at higher P/E multiples as compared to large-cap peers, one can find value in select sectors such as pharma, IT, fertilisers, NBFCs, Banks retailing, real estate, and infrastructure.

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Your friendly advisor since 1986,
Ashoka Ajmera
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