Indian Indices Continue Momentum; IT and Telecom Stocks Witness Buying

Thu, 24 May 12:30 pm

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Stock markets in India are presently trading on a positive note. Sectoral indices are trading on a mixed note with stocks in the telecom sector and IT sector witnessing maximum buying interest.

The BSE Sensex is trading up 152 points (up 0.5%) and the NSE Nifty is trading up 36 points (up 0.4%). The BSE Mid Cap index is trading down by 0.2%, while the BSE Small Cap index is trading down by 0.1%.

The rupee is trading at 68.39 to the US$.

GSK Pharma share price, GAIL share price, Jindal Drilling share price, Pidilite Industries share price, and V-Mart Retail share price are among the stocks in focus today as these companies are scheduled to report their results for the quarter ended March 2018.

In the news from the banking space, as per an article in the Economic Times, Financial services secretary Rajiv Kumar has said the government will provide capital support to public sector banks (PSBs) and not allow any one of them to default.

The government also said that one or two quarters of pain upfront is okay when lenders are cleaning up books, but the worst for state-run banks is over.

Note that most of the public-sector banks reported losses in their fourth quarter results on the back of higher provisions for non-performing assets (NPAs) and bad loans.

PSB's are in the spotlight for their growing bad loan problems and the painful issue of willful defaulters.

Banks, in principle, must be careful about not extending loans to borrowers with poor creditworthiness or payment track record. That too, irrespective of the size of the borrower.

However, the data from State Bank of India shows that when it comes to big corporate borrowers, our banks literally look the other way. The share of large corporates, in total advances of the banking sector, has almost remained unchanged over past three years (at an average of 55%).

However, their contribution to incremental slippages has been huge. At one point, the big corporate borrowers accounted for nearly 90% of total NPAs of the sector.

Therefore, according to us, banks with large corporate books deserve a lower valuation if they can't keep NPAs in check.

While the bad loans struggle at PSBs has been going on since a decade, bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of these state-run banks.

That's the reason we've been wary of PSU banks since 2014. This was well before the market had caught a whiff of the NPA problem. We've recommended just two large PSU banks in StockSelect since then...and already successfully closed both of them.

In other news, as per a leading financial daily, the government has said that India will take a long-term view on the retail pricing of petrol and diesel to protect consumers from volatility in global oil prices.

The development comes as petrol and diesel prices across the country hit their all-time high levels. Fuel prices across the four metropolitan cities were raised around 30 paise on Tuesday. As per the news, the government is likely to come out with some steps this week to deal with the above situation of record high petrol and diesel rates.

Presently, the government levies heavy taxes which account for about half the cost of petrol and 40% of the diesel price. So, one of the possible ways for the government to reduce the rates is change the way in which pump prices are calculated.

The above rise in fuel prices is seen on the back of rising crude oil prices, which shot above US$ 80 per barrel. This is the highest level seen since November 2014. In the past one year alone, oil prices have surged more than 50%.

Also note that rising crude oil prices not only affect fuel prices, but also has many other repercussions for the Indian economy.

They can be a big worry for the Modi government as well.

Have a look at the chart below. It shows India's total import bill of crude oil and petroleum products on an annual basis during the Manmohan Singh regime and the Narendra Modi regime.

Here's Why Crude Oil Was Modi's Best Friend So Far

It is clearly evident that the Modi government has been a big beneficiary of lower crude oil prices.

As Ankit Shah wrote in a recent edition of The 5 Minute WrapUp...

• During the UPA II regime, India's average annual oil import bill was US$ 133 billion. In fact, in the last three years of Manmohan Singh's leadership, the oil import bill exceeded US$ 150 billion. Compare that with an average annual oil bill of US$ 95 billion during the four years of Modi's leadership.
  
  The actual savings would have been even higher, because I believe the consumption of crude oil and petroleum products would have been quite higher in the Modi era than the Manmohan era.
  
  Last Thursday, Brent crude oil prices shot above US$ 80 a barrel.
  
  This is the highest level since 2014. In the past one year alone, oil prices have surged more than 50%.
  
  Now, what if oil prices go back to the levels during the Manmohan Singh regime? What would happen to India's current account and fiscal deficit? What would happen to inflation and RBI's stance on interest rates?
  
  With the next general elections just a year away, rising crude oil prices are going to be a big worry for the Modi government.
  
  It should worry you too...

Apart from that, what does rising crude oil prices mean for stock markets?

Richa Agarwal, editor of Hidden Treasure, tracks the oil and gas sector very closely. She believes the rise in crude oil prices is a bearish sign for stock markets globally. At the same time, any market correction, will throw up interesting buying opportunities in small-cap stocks.

This is what she wrote...

• After hitting a low of US$ 30 per barrel in January 2016, prices have more than doubled to US$ 68 in April 2018.
  
  The recent news of Saudi Arabia wanting crude oil prices to touch US$ 100 per barrel doesn't help. The 2008 recession was preceded by crude oil touching US$ 150 per barrel. Any movement upwards can result in a possible downturn for the global market.
  
  While the Hidden Treasure team looks for long-term wealth creators, such macro situations can help to recommend such stocks at a bargain. The ones who keeps calm, when everyone else is losing their heads, will gain the most when the tide turns.

How the government handles this situation of rising crude oil and fuel prices remains to be seen. Meanwhile, we will keep you posted on all the developments from this space. Stay tuned.

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