Sensex up 300 Points; FMCG Stocks Gain

Fri, 27 Jul 12:30 pm

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After opening the day in green, share markets in India witnessed positive trading activity throughout the day and are presently trading above the dotted line. Sectoral indices are trading on a mixed with stocks in the FMCG sector and stocks in the consumer durables sector leading the gains, while stocks in the IT sector are trading in red.

The BSE Sensex is up by 295 points (up 0.8%) and the NSE Nifty is trading up by 84 points (up 0.8%). Meanwhile, the BSE Mid Cap index is trading up by 1%, while the BSE Small Cap index is trading up by 0.9%. The rupee is trading at 68.62 to the US$.

In news from the banking sector. Bhushan Steel's successful resolution under the Insolvency and Bankruptcy Code (IBC) seems to have hit a snag, as the National Company Law Appellate Tribunal (NCLAT) said it will re-examine Tata Steel's eligibility as a bidder.

The NCLAT reserved its order over plea filed by former promoter of Bhushan Steel challenging the sale of the debt-ridden company to Tata Steel under the IBC.

The appellate Tribunal has also reserved order over pleas of engineering firm Larsen & Toubro, an operational creditor of Bhushan Steel, which has supplied goods worth Rs 9 billion to the company.

Notably, the Principal bench of the National Company Law Tribunal (NCLT) had approved Tata's Rs 325 billion acquisition of Bhushan Steel along with 12.3% equity to the lenders.

This was challenged before the NCLAT by the promoters, including Neeraj Singhal, and operational creditors of the company.

Nearly 1,700 other operational creditors of Bhushan Steel have also moved the appellate tribunal seeking to know how Tata Steel, which has committed to pay Rs 12 billion would pay them. The lenders took 36% hair cut in the Tata Steel transaction.

At the time of writing, Tata Steel share price was trading up by 1.9%.

India Lags in Resolving Insolvencies

Last year, India jumped up 30 places and into the top 100 on the World Bank's 'ease of doing business' index.

However, when it comes to resolving insolvency, India's rank is still low at 103, much below our neighbouring countries.

On both factors (i.e. recovery rate and the time to resolve a bankruptcy), India is slower than even its poorer neighbours.

However, going forward, the IBC framework will change India's position as it is a time-bound process.

Cases once admitted are to be resolved within 270 days; if not, companies go into liquidation.

We already had a taste of success with the successful conclusion of the Bhushan steel case.

Enthused by this success, the finance ministry expects banks to write back more than Rs 1 trillion after the resolution of all 12 big NPA cases that have been referred for insolvency proceedings by the RBI.

We believe, this can be a big boon for the banking sector and the Indian economy. This will not only help banks recover bad loans to an extent but also help bring back credit growth.

Moving on to news from stocks in the telecom sector. Bharti Airtel share price was in focus today after the company reported its quarterly results.

The telecom major reported a consolidated pre-tax loss for the first time in years, thanks to continued erosion in the profitability of its telecom business.

The mobile business reported a loss before interest and tax of Rs 8.8 billion, or 8.4% of revenue. A year ago, the segment had an EBIT margin of 9.8%.

On a consolidated level, the company posted a loss of Rs 3 billion before exceptional items, as compared to a profit of Rs 4 billion last year.

Pricing pressures were visible as Airtel's India average revenue per user (ARPU) for voice and data - a key operational metric - fell 8.8% sequentially to Rs 105.

At the time of writing Bharti Airtel share price was trading up by 1.2%.

The entry of Reliance Jio and the fierce tariff war it has triggered has set off brisk activity in the telecom industry for fundraising and consolidation, as the incumbents look for ways and means to fend off the competition.

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.

Telecom companies are straddled with high debt, intense competition, and lack of pricing power. High spectrum costs and regulatory issues have hampered the sector. While consumers have benefited from low costs and new players fighting for their share, investors have suffered.

With the entry of Reliance Jio, the competition has intensified further. 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'.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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