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Of IL&FS Crisis, FDI Growth in the Telecom Sector, and Top Stocks in Focus Today
Thu, 27 Sep Pre-Open | Monish Vora, TM Team

Share markets in India ended their trading session marginally lower yesterday. Losses were largely seen in the FMCG sector and IT sector, while metal stocks ended the day higher.

At the closing bell yesterday, the BSE Sensex stood lower by 110 points (down 0.3%) and the NSE Nifty closed lower by 13 points (down 0.1%). The BSE Mid Cap index ended the day up by 0.4%, while the BSE Small Cap index ended the day up by 0.1%.

Top Stocks in Focus Today

From the banking space, Yes Bank share price will be in focus today as the company's board yesterday said that it would ask the Reserve Bank of India (RBI) to grant an extension of eight months to managing director (MD) and chief executive Rana Kapoor.

Punjab National Bank share price will also be in focus today as the bank has informed bourses that it will consider capital infusion of Rs 54.3 billion by the government of India today.

From the airlines sector, market participants will also track SpiceJet share price as reports suggested that the airline is in talks with Airbus to buy its A330neo wide-bodied planes.

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FDI in Telecom Sector Grows Nearly 5x in Last 3 Years

In the news from the telecom sector, as per an article in a leading financial daily, the foreign direct investment (FDI) in the telecom sector has grown nearly five times in the last three years, from US$ 1.3 billion in 2015-16 to US$ 6.2 billion in 2017-18.

As per the Union Telecom Minister Manoj Sinha, the new sectoral policy in works envisages the FDI in the telecom space to reach US$ 100 billion by 2022. He added that FDI would be key to unleash the full potential of upcoming modern technologies.

Sinha stated that the government is keen on providing 5G services in India at a par with global standards in 2020, which will play a key role in harnessing new emerging technologies like machine-to-machine communications, internet of things, artificial intelligence, etc.

The minister further said that India needs massive investments in developing newer technologies which are accessible and affordable to the people and at the same time create productive employment.

Further, he also said that India is poised to become the third largest economy in the world over the next two decades and it is the most opportune moment for the investors across the world to invest in India.

Speaking of telecom sector, 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.

Here's what we wrote about the struggling telecom sector in one of our issues of The 5 Minute WrapUp:

  • 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 'valuet 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'.

LIC's Comment on IL&FS Crisis

Shares of IL&FS Group companies were trading on a positive note yesterday after state-owned insurer Life Insurance Corporation of India (LIC) said it will not allow debt-ridden IL&FS to collapse and explore options to revive it.

The above announcement comes as earlier this month, it came to light that IL&FS group defaulted on a short-term loan of Rs 10 billion from SIDBI, while a subsidiary has also defaulted Rs 5 billion dues to the development finance institution.

While IL&FS has nearly Rs 350 billion consolidated debt, IL&FS Financial Services has Rs 170 billion of debt, which sits as standard asset for most of the lenders, the reports noted.

The group has seen its various long-term and short-term borrowing programmes downgraded to 'default' or 'junk' grades by credit rating agencies, even as the regulators are also probing alleged delay in disclosure about certain loan defaults.

According to Moody's Investor Services, IL&FS's outstanding debentures and commercial paper accounted for 1% and 2%, respectively, of India's domestic corporate debt market as of 31 March 2018. Its bank loans made up about 0.5% to 0.7% of banking system loans.

There are concerns that the defaults by IL&FS could cause a contagion in the Indian financial sector.

It would be interesting to see how this pans out. Meanwhile, we will keep you updated on all the developments form this space.

From the Macroeconomic Space...

According to data published by the Comptroller General of Accounts (CGA), India's budgetary fiscal deficit for April-August at Rs 5.91 trillion accounted for 94.7% of the full year's target of Rs 6.24 trillion.

Till August this year, the government's total expenditure stood at Rs 10.70 trillion (43.85 per cent of the budget estimates) while the total receipts were Rs 0.0479 billion (26.38 per cent of the budget estimates).

Notably, fiscal deficit during the corresponding five months of the previous financial year was 96.1%.

The government missed its fiscal deficit target for FY18 by 30 basis points. Against a target of 3.2%, the government managed to keep fiscal deficit at 3.5% in FY18. It has also outlined the projected fiscal deficit target of 3.3% in FY19 in its budget.

Maintaining this deficit target in FY19 won't be easy. Fiscal deficit basically means the amount a government earns minus the amount it has to spend. The lesser the fiscal deficit, the better the government has performed.

In the past, the government has relied on reducing expenditure to keep the fiscal deficit in check.

For this year, the government is banking on earning much more than it has in the past. It expects a major portion of the revenue to be collected through GST tax collections. Also, the recent rise in crude oil prices has cast a doubt over how much the government will be to curb its spending.

The dual pressure of increasing expenditure and lower inflows makes this FY19 deficit target an uphill challenge.

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