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Positive Finish to the Week

Indian indices began the day’s proceedings on a positive note and continued this trend throughout the day ahead of the Union Budget which is to be announced next week. At the closing bell, BSE-Sensex finished higher by 178 points, while NSE- Nifty closed higher by 59 points. The S&P BSE Mid cap also finished higher by 0.3%, while the S&P Small Cap continued its weak trend and finished lower by 0.5%. Gains were largely seen in metal and banking stocks.

Asian markets closed mostly higher in today’s trade, with Hong Kong leading the gains. The Hang Seng is up 2.52%, while China’s Shanghai Composite is up 0.95% and Japan’s Nikkei 225 is up 0.30%. European markets are trading sharply higher today with shares in Germany leading the region. The DAX is up 2.40%, while France’s CAC 40 is up 2.05% and London’s FTSE 100 is up 1.26%. The rupee was trading at Rs 68.78 against the US$ at the time of writing.

Shares of Dabur India finished on an encouraging note (up 0.8%) after it was reported that the company has signed a licence pact with the government to produce two new ayurvedic drugs, Ayush – 64 for treatment of malaria and Ayush- 82 for management of diabetes. The company is also planning to commercially produce the two drugs within six months and they will be available in various formats.

Reportedly, the company has also signed a memorandum of understanding with the Central Council of Research in Ayurvedic Sciences (CCRAS), an apex research body under the Ministry of AYUSH, for collaboration and cooperation in the pharmaceutical R&D for different novel dosage forms and drug development in ayurveda. The ayurvedic formulations for both medicines were developed by CCRAS. Also, the company has launched a sales training program for the rural youth which seeks to provide free technical training and skill development to improve employability of young people from villages.

In last few weeks, FMCG giants Hindustan Unilever (HUL) and ITC both announced their December quarter results. Both the companies reported sluggish growth and missed expectations. While FMCG volume growth has shown some signs of revival, pricing is becoming a challenge given the benign costs and the competitive intensity. In one of the recent articles published by Mutual Fund Corner, it has been explained how mutual funds have been reacting to the FMCG sector.

Hotel stocks finished on a mixed note with Taj GVK and EIH Ltd leading the losses. According to a leading financial daily, The Indian Hotel’s overseas arm Samsara Properties has sold over 1.27 million shares of Belmond for a consideration of US$11.96 million (over Rs 820 million). The sale proceeds are being utilised for retirement of debt. Post the above sale, Samsara Properties Ltd continues to hold 5.73% of the class ‘A’ common shares of Belmond Ltd. It is to be noted that Belmond Ltd has a collection of 46 hotels, river cruise, safari and luxury rail businesses in 23 countries. Indian Hotels Company Ltd and its subsidiaries are collectively known as Taj Hotels Resorts and Palaces.

Meanwhile, diversified group ITC is looking to invest Rs 8 billion in Odisha over the new few years to set up a hotel property and food processing park in the state. The hotel property will come up in Bhubaneshwar. Nearly, Rs 6.3 billion will be invested in the food processing park and the rest of the money will be invested in the hotel.

According to rating agency ICRA, the country’s hotel industry revenues are likely to improve by 9-10% in 2016-17, mainly aided by improved occupancy. It estimates the topline growth for the industry to be 8% during 2015-16. The last couple of years have not been too great for the hotels industry. The Indian economy slowing down has certainly weighed heavy on the performance (Subscription Required) of companies in the sector.


Banking Stocks Lead the Gains

After opening the day in the green, the Indian indices have continued to trade on a positive note during the post-noon trading session. Sectoral indices are trading on a mixed note with stocks from the banking and metal sectors leading the gains. Telecom stocks are however trading in the red.

The BSE Sensex is trading up 179 points (up 0.8%) and the NSE Nifty is trading up 49 points (up 0.7%). TheBSE Mid Cap index is trading up 0.2% while the BSE Small Cap index is trading down by 0.5%. Gold prices, per 10 grams, are trading at Rs 29,636 levels. Silver price, per kilogram is trading at Rs 36,987 levels. Crude oil is trading at Rs 2,293 per barrel. The rupee is trading at 68.72 to the US$.

Stocks in the power space are trading on a mixed note with Torrent Power and Neyveli Lignite leading the losses. The Reserve Bank of India (RBI) has clarified that bonds issued under discom package Ujwal Discom Assurance Yojana (UDAY) will not hit the markets and would be private placements. Further, it was stated that the RBI is open to give further relaxations on these bonds, such as allowing them to be held till maturity. This will mean that the investors do not have to incur market-to-market losses every quarter in valuing them in their books.

The announcement came in as a relief for the bond markets that have been seeing bond yields tightening every passing day. The bonds, to be issued by the electricity distribution companies (discoms) as non-SLR grade have been a major concern for the bond market.

It should be noted that about Rs 600 billion of UDAY bonds are expected to be issued during this fiscal year (2015-16). Further, an additional bond issue of Rs 300-400 billion is scheduled for the next fiscal year.

The UDAY scheme was brought up by the government to bring a turnaround in the State Electricity Boards (SEBs) that have been caught up in a vicious cycle of high debt and operational losses. The scheme allows power distribution companies (discoms) in select states to convert their debt into state bonds.

The above rescue package for discoms bodes well for health of SEBs. Having said that, one shall have to watch out for further steps that government takes to make the scheme successful.

Energy stocks are also trading on a mixed note with Indraprastha Gas and Cairn India leading the gains. In another news update, GAIL is looking at trimming its US$ 7 billion shopping list for 11 LNG ships due to the changed market structure in the wake of a sharp fall in global gas prices. Further, the company may also have to extend the tender for the vessels which is scheduled to close on Monday. The extension would be to address several concerns raised by prospective bidders with a view to ensuring wider participation.

It must be noted that with shipping rates down to US$ 30,000 per day, it may not make economic sense to tie up long-term charters that would be more expensive. Instead, it would be suitable for the company to split its charter portfolio between long-term, mid-term and spot charters as supplies from the two US projects are slated to start in January 2018.

GAIL is India’s flagship Natural Gas Company, integrating all aspects of the Natural Gas value chain (including Exploration & Production, Processing, Transmission, Distribution and Marketing) and its related services. Presently the stock of GAIL is trading down by 0.6%.


Indian Markets Trade in the Green

After opening the day on a positive note, the Indian Markets have continued to trade in the green. Sectoral indices are trading on a mixed note with stocks from the energy, capital goods and consumer durablessectors leading the gains. Telecom stocks are trading in the red.

The BSE Sensex is trading up 72 points (up 0.3%) and the NSE Nifty is trading up 19 points (up 0.3%). TheBSE Mid Cap index is trading down by 0.1% while the BSE Small Cap index is trading down 0.7%. The rupee is trading at 68.77 to the US$.

Most of the PSU banking stocks are trading on a negative note with Indian Bank and Bank of Barodaleading the losses. As per a leading financial daily, public sector lender IDBI Bank has priced its equity shares to be issued to Life Insurance Corporation of India (LIC) at Rs 53.44 per share. The size of the equity on offer is Rs 15 billion. This comes as the bank plans to issue 280.6 million shares of Rs 10 each at a premium of Rs 43.44 a share to LIC on a preferential basis.

The bank has stated that the above price has been fixed according to the Securities and Exchange Board of India’s (SEBI) formula. Further, the bank will be seeking shareholders’ nod for the offering at a meeting scheduled in March 2016.

After the issue, LIC would hold 19.18% stake in IDBI Bank, up from 7.24%. The Indian government’s shareholding would decline to 69.84% from the present level of 80.16%.

It should be noted that the bank is raising money through fresh issue of equity shares in order to meet the capital requirements for business growth. Further, the funds will also help the bank maintain its capital adequacy ratio, especially after making provision for non-performing assets and stressed loans. The capital adequacy ratio for the bank was 13% with Tier-I capital of 8.71%, at end of December 2015.

On a separate note, the bank has also got board’s approval for raising up to US$ 500 million through tier I bonds. The issuance of bonds is aimed at enhancing the tier 1 capital of the bank.

IDBI Bank is one of India’s largest commercial banks. During the third quarter ended December 2015, the bank reported a net loss of Rs 21 billion as against a net profit of Rs 1 billion in the corresponding period a year ago. This was due to provisions for bad loans for the bank quadrupling during the quarter. The bank’s provisions for the quarter rose to Rs 37 billion from Rs 9 billion in the same period a year ago.

The bloating bad loans and the provisioning for the same have kept the public sector lenders (PSUs) in dire need of capital to meet not just incremental credit demand but also Basel-III norms. To find a way through this, many PSUs have been raising capital from the bond market through tier-I and tier-II bonds. As such,bond issuances have risen since October during this fiscal (subscription required). Private agencies such as ICRA and CARE Ratings have estimated that banks need Rs 1.8 trillion in Tier-I capital, out of which Rs 700 billion will be through government infusion.

Stocks in the telecom space are trading on a negative note with Reliance Communications and AGC Networks leading the losses. In another news update it was reported that telecom service providers have installed 65,000 cellular sites in the last six months in 2G and 3G services across the country. The same was undertaken to arrest call drops.

It was noted that around 20,000 additional sites were added for 2G (GSM) services across India while around 45,000 sites have been added for 3G services during the last six months.

The Communications and IT Minister Ravi Shankar Prasad has stated that the government has actively worked in recent months to reduce the instances of call drops and further improve the quality of mobile network coverage.

It should be noted that most of the development in this sphere came in after Telecom Regulatory Authority of India (TRAI) asked mobile operators to compensate consumers for every call drop which takes place.

Indian Indices Open Strong

Major Asian stock markets have opened the day on a positive note. The stock markets in Japan and Singapore are trading higher by 1.1% and 1.2% respectively. Major indices in Europe and US ended their previous session on an encouraging note too. The benchmark indices in US and UK ended the day higher by 1.3% and 2.4% respectively. The rupee is trading at 68.56 per US$.

Indian stock markets have opened the day on a firm note. The BSE Sensex is trading higher by 222 points (up 1%) and NSE Nifty is trading higher by 72 points (up 1.1%). Both BSE Mid Cap and BSE Small Cap are trading higher by 1% and 0.7% respectively. Major sectoral indices have opened the day in green with stocks from capital goods and pharmaceutical sectors witnessing maximum buying interest.

As reported in a leading financial daily, Reserve Bank of India (RBI) announced certain changes to thestrategic debt restructuring scheme (SDR). According to the scheme banks were allowed to convert loans into majority equity shareholding (atleast 51%) in case of a default by the borrower.

Once loans were converted into equity, banks had to dilute the majority shareholding and find a new buyer within a period of 18 months. However, it was challenging for the banks to dilute such a big portion of shareholding within the specified time of 18 months.

Considering this, RBI revised the guidelines and stated that banks can upgrade an asset to the standard asset category if they divest at least 26% of the stake to the new promoter within the specified period of 18 months. The balance equity shareholding could be divested at a later stage. Reportedly, this is a significant departure from the norms released on June 2015, when the regulator had asked banks to divest their entire 51% holding within the same time-frame.

This may give some relief to banks as they will get additional time to find the right buyer.

In another news update, Mahindra and Mahindra has firmed up plans to invest Rs 10 billion in developing petrol engines over the next two to three years. Reportedly, there are four engines that will be available in petrol- 1.2 litre, 1.5 litre, 1.6 litre and 2.2 litre. The 1.5 litre and 1.6 litre will be developed in-house. Whereas, the 2.2 litre petrol engine will be developed in collaboration with its South Korean subsidary Ssang Yong Motor Company (SMC).

The 1.2 litre petrol engine is already strapped in its newly launched compact sports utility vehicle (SUV) ‘KUV 100’. The company has intensified the focus on development of petrol engines ever since Supreme Court suspended registration of vehicles strapped with diesel engines bigger than 2 litres in the National Capital Region (NCR).

Do Investors Have a Way Out of this Chaos?

The global economy is in doldrums. There is widespread uncertainty. Earlier economic forecasts have gone for a toss. The situation we are talking about here is fueled by several factors. China is facing chaos now and then. The US Federal Reserve seems on course to gradually increase interest rates. Oil prices have slumped and global demand remains low.

Back home, banks are hit with the rising NPA levels and their provisioning. Deficient monsoons have hindered economic growth. Domestic demand scenario appears to be weak.

In a recent report on future economic challenges, the International Monetary Fund (IMF) said world growth had slowed and could be derailed by market turbulence, the oil price crash and geopolitical conflicts. It warned that the world economy is highly vulnerable and new mechanisms are required to protect the most vulnerable countries.

This makes us think – Where does Indian stand and how vulnerable is it to global headwinds? The turbulence in the global financial markets and weak global growth have made India’s economic growth prospects vulnerable. The ongoing sell-off in the Indian stock markets is a reflection of it.

In order to come out of the current pessimism and uncertainty, India does need growth-revival policies. We hope our Finance Minister Arun Jaitley pulls out some reform-rabbits from his hat in the upcoming Union Budget 2016-17. In order to reduce the fiscal deficit, the government needs to shut down loss-making public sector enterprises. It should sell the assets these public sector enterprises have been sitting on for many years now. We also need a stronger effort to revive infrastructure growth. Banks need to strengthen their internal control and risk management system for timely detection of NPAs. Moreover, fiscal policy should support economic recovery and focus on reviving the investment cycle in the economy.

For investors, it boils down to one important question. With the upcoming Union Budget, should there be a marked change in the way an investor should go about investing? Well, we don’t really think so. You see, making macroeconomic projections and getting the big picture right is one thing. However, to really translate them into profitable stock picking decisions is a different ball game altogether. One shall note that events like the Budget or the one stated earlier are barely a blip in the long term intrinsic value of stocks. And therefore, when markets over-react to such events, the risk-reward equation turns in our favour, making stocks an attractive long term proposition.