Sensex Opens Flat; Power Stocks Top Losers

Tue, 5 Jun 09:30 am

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Asian share markets are positive today as Japanese and Hong Kong shares rise. The Nikkei 225 is up 0.1% while the Hang Seng is up 0.1%. The Shanghai Composite is trading up by 0.2%.

Back home, India share markets opened the day on a flat note with a negative bias. The BSE Sensex is trading lower by 35 points while the NSE Nifty is trading down by 14 points. The BSE Mid Cap index and BSE Small Cap index both opened the day down by 0.1% & 0.6% respectively.

Sectoral indices have opened the day on a mixed note with energy stocks and stocks in the pharma sector witnessing buying interest. While, power stocks & realty stocks have opened the day in red. The rupee is trading at 67.12 to the US$.

In news from the banking sector. According to a leading financial daily, the government is mulling a move to merge four state-run banks to create the country's second largest bank.

The government is considering merging at least four state-run banks, including Bank of Baroda, IDBI Bank Ltd, Oriental Bank of Commerce and Central Bank of India. If government follows through, it will create the country's second largest bank, after State Bank of India, with combined assets of over Rs 16 trillion.

With the merger, the government hopes to help stem the rise in bad loans in their books at a time when poor asset quality has crippled the lending ability of some of them. The merger will also allow the weak banks to sell assets, reduce overheads and shut money-losing branches.

The four banks that are being proposed to be merged have combined losses of Rs 216 billion in the year ended 31 March.

In a move to garner similar expected results, the government had merged SBI with five of its associate banks and Bharatiya Mahila Bank in April 2017.

Notably, Public Sector Banks (PSBs) have had a difficult year, to put it mildly.

PSBs Struggle Despite Government Help

After the euphoria of recapitalisation, bad loans have come to haunt them. Post the Gitanjali Gems fiasco, PSBs are yet to fully recover from its impact.

This underperformance was despite the huge boost they got from the government last year. On 24 October 2017, the government announced a Rs 2.11 trillion public sector bank (PSB) capitalisation plan. This move was aimed at reviving the PSBs from the bad loan mess.

The next day was a field day for investors in PSBs. PSB stocks went up between 30% and 47%. Despite this, the return in the year was way below average. PSBs like Punjab National Bank (PNB) have crashed more than 45% over the last one year.

Have we reached the bottom? Or there are more Nirav Modi stories waiting to come out?

We believe, rather than bottom fishing, one should look at banks run by strong management and a differentiated lending strategy available at reasonable valuations.

Moving on to news from stocks in the telecom sector. Idea cellular share price is in focus today after the Department of Telecom (DoT) cleared a hurdle for the proposed Idea-Vodafone merger.

The DoT approved Idea Cellular's proposal to increase foreign direct investment (FDI) limit in the merged entity to 100%, paving the way for the proposed merger. Idea currently has a 67.5% FDI limit.

This is a milestone in the proposed merger as only the final approval from DoT remains. The two entities have already secured other statutory approvals from the stock markets regulator, exchanges, The Competition Commission and the National Company Law Tribunal.

Notably, Vodafone India and Idea Cellular are set to merge this year to create India's largest telecom operator, surpassing Bharti Airtel Ltd.

Idea has called an extraordinary general meeting on June 26 to consider the proposals, including changing the name of the merged entity and raising funds of Rs 150 billion through debentures. The top operator will have a revenue market share of around 37% and over 433 million subscribers.

Note that 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'.

Idea Cellular share price opened the day by 3.2%.

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