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Strong Finish to the Week; Metal & Pharma Stocks Gain
Fri, 23 Feb Closing

Indian share markets finished the trading session on a strong note amid firm Asian markets after comments from a Federal Reserve official eased worries about faster rate hikes in US. At the closing bell, the BSE Sensex closed higher by 323 points and the NSE Nifty finished higher by 108 points. The S&P BSE Mid Cap finished up by 1.5% while S&P BSE Small Cap finished up by 1.3%.

Gains were largely seen in metal stocks, pharma stocks and power stocks.

Asian stock markets finished higher today with shares in Hong Kong leading the region. The Hang Seng is up 0.98% while Japan's Nikkei 225 is up 0.72% and China's Shanghai Composite is up 0.63%. European markets are mixed. The DAX is higher by 0.12%, while the FTSE 100 is leading the CAC 40 lower. They are down 0.22% and 0.02% respectively.

Rupee was trading at Rs 64.82 against the US$ in the afternoon session. Oil prices were trading at US$ 62.49 at the time of writing.

The Market cap to GDP ratio for Indian companies too is close to dangerously high levels. While this is still some way off the peak of FY-08, when it had once reached close to 150, it's relatively high.

FY17 saw this ratio reach close to 80. It is also expected to increase further given the moderate growth expectations in India's GDP for FY18. Warren Buffett once considered this as one of the best valuation metrics to gauge the markets.

Past history shows some correlation between the ratio and the share market. 2008 saw Sensex decline by 38%, when this ratio crossed the 100 mark. Also, the market has bounced back sharply when this ratio was low.

The Warren Buffett Indicator Suggests Indian Equity Market Is Overvalued


The basic assumption in this ratio is that whenever the GDP of the country grows, the market performance will reflect it. Also, when stocks do well, it can be extrapolated to assume the Indian economy is doing well.

PSU bank stocks finished on a strong note with Central bank of India share price and IDBI Bank share price leading the gains.

Fitch Ratings in its latest report has stated that the Reserve Bank of India's (RBI) new norms for overhauling the mechanism to deal with the bad debt, is likely to push up banks' credit costs and weaken earnings in the near term.

However, it believed that stronger regulatory efforts to deal with the problem of mounting bad loans in Indian banking system along with planned recapitalisation of state banks, could help support a recovery in the sector over the medium term.

It also noted that the new framework gives banks less discretion over the reporting and resolution of bad assets and attempts to address the complexities involved in resolving the stressed loans of large borrowers. Under the new framework for NPL resolution, it observed that banks will need to report defaults by large borrowers weekly, indicating a more invasive approach to tracking bad assets.

It added that more accounts are also likely to be pushed toward insolvency courts and into liquidation, particularly since the new guidelines require all of a borrower's lenders to agree on a resolution plan to keep it away from the courts.

In another development, as per an article in The Livemint, Mehul Choksi-promoted Gitanjali Gems Ltd has lost around Rs 4.35 billion or nearly 60% of its market value ever since the fraud at Punjab National Bank (PNB) came to light, the steep erosion has hammered other jewellery stocks as well.

Of the 46 listed jewellery stocks on the BSE, only 11 have logged gains since the close of 13 February, while 26 have shed value since the PNB fraud was made public.

Topping the list of losers was Gitanjali Gems, which has plummeted 58.5% to a record low of Rs 24.8 per share.

Following next were Sagar Diamonds Ltd, Asian Star Co. Ltd, Radhika Jeweltech Ltd, PC Jeweller Ltd, Lypsa Gems Jewellery Ltd and Tribhovandas Bhimji Zaveri Ltd, which have shed between 12.5% and 30.5% in the same period.

Moving on to news from telecom sector. Another major consolidation is on the cards in the telecom space.

According to a leading financial daily, Bharti Infratel Ltd and Indus Towers Ltd-two of India's largest telecom tower firms-are planning to merge their businesses.

Vodafone India Ltd and publicly traded Bharti Infratel Ltd hold 42% each in Indus Towers. Idea Cellular Ltd owns 11.15% and US-based private equity fund Providence owns 4.85%. Bharti Infratel was earlier planning to acquire a controlling stake in Indus Towers and make the latter a subsidiary.

According to that plan, Bharti Infratel was to acquire the stake it didn't own in Indus Towers in an all-cash transaction and later sell the combined business to external investors.

However, both Vodafone and Idea have decided to stay invested in the tower business and the original deal stands scrapped. Notably, Vodafone India and Idea Cellular are set to merge this year to create India's largest telecom operator, surpassing Bharti Airtel Ltd.

The whole telecom business has been an underwhelming story so far. While the telecom subscriber base has increased from 300 million in 2008 to 1.2 billion in 2017, investors have little to cheer. The BSE Sensex has gone up 3.25 times in nine years, but the BSE Telecom Index has not moved an inch from its levels of 2008.

With the entry of Reliance Jio, the competition has intensified further, with a lot of the current players opting for consolidation in order to remain competitive. Reliance Jio's low cost offerings and strategy of capturing market share will further dent the sector. The sector has been a classic 'value trap'. While it always looks cheap compared to other sectors, it has failed to provide any reasonable returns. We also believe the situation is unlikely to change in the near future. For an investor, it's important to differentiate between 'value' and 'value traps'.

Bharti Infratel share price finished the day up by 1.8% on the BSE.

In news from engineering sector, Larsen & Toubro's (L&T) construction arm -- L&T Construction -- has bagged orders worth Rs 1,266 crore across various business segments.

The Buildings & Factories Business has bagged orders worth Rs 9.28 billion. The order has been bagged from a reputed government client to construct 284 Residential towers of G+3 floors under the Prime Minister Awas Yojana Scheme.

Under Power Transmission and Distribution business & Transportation Infrastructure business, it has bagged an order from the Mumbai Metro Rail Corporation (MMRC) worth Rs 3.38 billion.

L&T share price finished the day up by 0.9%.

Jubilant Life Sciences share price slipped 10% to Rs 891 on the Bombay Stock Exchange in intra-day trade after more than 7% of the total equity of pharmaceutical company changed hands on the NSE and BSE till noon deal.

The exchanges data showing that a multiple block deals executed on the counter in early trade.

Jubilant Life Sciences had a strong run-up by gaining 26% thus far in the current calendar year 2018, against 0.7% decline in the benchmark Sensex.

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