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Sensex Trades in Green; Capital Goods Stocks Gain

Fri, 9 Mar 01:30 pm

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After opening the day firm, share markets in India have continued the momentum and are trading comfortably above the dotted line. Sectoral indices are trading on a mixed note with stocks in the auto sector and stocks in the IT sector leading the gains, while stocks in the metal sector are trading in red.

The BSE Sensex is trading up by 100 points (up 0.3%), and the NSE Nifty is trading, up by 25 points (up 0.3%). Meanwhile, the BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading up by 0.1%. The rupee is trading at 65.15 to the US$.

In news from stocks in the banking sector. According to a leading financial daily, in a respite, The Reserve Bank (RBI) may provide four quarters to Punjab National Bank (PNB) for making provisions against the country's biggest ever banking fraud of Rs 127 billion.

Although there is a direction of the RBI on provisioning to be made in case of loan fraud, the bank is taking pre-emptive action to deal with extraordinary situation created by unearthing of this mega fraud.

As there is no precedent relating to fraud through Letters of Undertakings (LOUs) the RBI is likely to allow PNB to make provision against the fraud not exceeding over four quarters.

Last month, PNB had lodged an FIR with CBI stating that fraudulent LoUs worth Rs 2.8 billion were first issued on January 16 this year. At the time, PNB had said it was digging into records to examine the magnitude of the fraud.

The RBI's move may provide some interim relief to PNB.

CAGR Returns of PSBs in the Past Decade

On 24^th October, the government announced its Rs 2.11 trillion public sector bank (PSB) capitalization plan. This move is aimed at reviving the PSBs' drowning in a bad loan mess.

The next day was a field day for investors in PSBs. Stocks went up from 30% to 49% in a day. But long- term investors might as well ignore this, since it was just one good day amongst a decade of underperformance. The top 5 stocks that went up the most on October 25th have given meager returns over the past decade.

Punjab National Bank, which went up by 49% in one day, has given annualized returns of 6.8% in the past decade even after including the 49% gain. The same goes for the other PSBs. Compare this with HDFC bank which has given a 19.3% annualized return in the last 10 years.

The underperformance can be attributed mainly to bad loans. It is no secret, PSBs have been struggling with their collections on corporate loans. As a result, they have been reluctant to even lend to healthy companies. As a result, growth of these companies has suffered.

The Indian government has recently stepped up its efforts to address the problem. As part of this, the government has amended the Banking Regulation Act through an ordinance, giving more teeth to the RBI to deal with NPAs.

The recent recapitalization plan is one more attempt to bail out PSBs and infuse liquidity into the banking system.

While this might help in the short term, it is more important to focus on the lending and corporate governance processes followed by these banks. Unless that improves, we'll have to be content with the 'one day euphoria' instead of a decade of consistent performance.

Moving on to news from . is among the most active stocks on the bourses today, and rose over 3% in early trade. The surge came after the company announced that it won an order worth RS 117 billion.

BHEL won a Rs 117 billion order for setting up a 3x800 MW supercritical thermal power plant in Jharkhand from Patratu Vidyut Utpadan Nigam (PVUNL - a subsidiary of NTPC, in Joint Venture with Jharkhand Bijli Vitran Nigam).

Key equipment for the project will be manufactured BHEL's Trichy, Haridwar, Hyderabad, Ranipet, Bhopal, Bengaluru and Jhansi plants, while the company's Power Sector-Western Region division will be responsible for construction and installation activities at the site.

BHEL said the commissioning of the project would also lead to phasing out of the old fleet of sub-critical units presently installed at Patratu.

At the time of writing, BHEL share price was trading up by 0.5%.

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