Sensex Opens Lower; Indigo Continues to Slide

Fri, 30 Jun 09:30 am

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Asian stock markets are lower today as Japanese and Hong Kong shares fall. The Nikkei 225 is off 1.09% while the Hang Seng is down 0.89%. The Shanghai Composite is trading down by 0.23%. US equities fell on Thursday as technology's latest drop washed out strong gains from the big banks.

Meanwhile, share markets in India have opened the day on a negative note. The BSE Sensex is trading lower by 156 points while the NSE Nifty is trading lower by 43 points. The BSE Mid Cap Index and BSE Small Cap index opened the day down by 0.4% & 0.6% respectively.

Barring healthcare stocks and information technology stocks, all sectoral indices have opened the day in red with realty stocks and capital goods stocks leading the losses. The rupee is trading at 64.47 to the US$.

Cement stocks opened the day on a mixed note with JK Lakshmi Cement & India Cements witnessing maximum selling pressure. In perhaps the biggest asset resolution in the country, a consortium of lenders, led by ICICI Bank, concluded the sale of Jaypee Cement to Ultratech Cement.

The transaction, valued at Rs 161.89 billion (US$2.5 billion), is the largest deal to be concluded so far, involving a major financial restructuring programme, conducted by the ICICI-led consortium of lenders to Jaiprakash Associates. Alongside, SBI and Axis Bank actively supported this programme.

Ultratech now has 18 integrated plants, 1 clinkerisation unit, 25 grinding units and 7 bulk terminals, augmenting its grey cement manufacturing capacity to 93 mtpa.

Reportedly, a decision to reduce Jaiprakash Associates and Jaypee Cement's debt was taken more than a year ago and its subsidiary ICICI Securities was appointed to manage the sale process. The company's debt currently stands at Rs 600 billion, which prompted lenders to force the deal.

The deal involves transferring a part of the debt of Jaiprakash Associates and Jaypee Cement from a stressed account to an AAA-rated new company.

Speaking of the cement sector in India, this space was always in a need of revival considering its importance role in India's growth story. The logical route seemed to be consolidation. India, with 550 companies, is the second-largest producer of cement in the world.

Consolidation is expected to increase the pricing power of the top producers and lead to better margins.

Cement Companies Increasing Leverage

There's been one downside though. All this consolidation has weakened the balance sheet of these top cement companies. However, once the synergy benefits kick in, debt levels are expected to reduce from FY19. This will provide respite to cement producers who have been engaged in price wars with small players for a long time.

Ultratech Cement share price opened the day up by 0.1%.

Moving on to the news from airline stocks. As per an article in a leading financial daily, IndiGo has expressed its interest in buying the troubled national carrier Air India which is about to be put on sale by the government, probably beating the Tata Group to a formal approach.

Reportedly, IndiGo is interested in preferably buying only Air India's international operations and its low-cost airline Air India Express. Given IndiGo's leadership in the domestic market with a whopping 41% share and its aggressive plans to expand overseas, it makes sense.

The Air India has a debt of Rs 520 billion and is surviving on a bailout package of Rs 300 billion approved in 2012.

Finding a way to deal with Air India's debt load will be the main challenge. How this process goes will be vital not just for Air India. If it goes relatively smoothly, that would make the task of moving forward on the disinvestment of other public sector units that much easier.

Indigo share price opened the day down by 4.5%.

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