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Of Moody's Take on Excise Duty Cut, Duty on Aviation Turbine Fuel, and Top Cues in Focus Today

Thu, 11 Oct Pre-Open

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Indian share markets ended over 1% higher yesterday aided by a firm rupee against the dollar. At the closing bell yesterday, the BSE Sensex ended up by 461 points, while, the NSE Nifty ended up by 159 points.

Except IT stocks, all sectoral indices ended the day in green with realty sector and consumer durables sector surging over 4%.

Top Stocks in Focus Today

From the engineering space, BHEL share price will be in focus today as the company has bagged four orders for emission control equipment from NTPC. The orders are valued at about Rs 29 billion and will involve supply and installation of Flue Gas Desulphurization (FGD) systems for control of SOx emissions at NTPC's 3x660 MW North Karanpura, 2x500 MW Mauda Stage-I, 3x660 MW Barh Stage-I and 2x660 MW Barh Stage-II power projects.

To know more about the company, you can access to BHEL's Q1FY19 result analysis and BHEL stock analysis on our website.

Moody's Take on Government's Excise Duty Cut

In the news from the macroeconomic space, global rating agency Moody's Investors Service termed government's decision to cut excise duty on petrol and diesel as credit negative for the India.

Moody's stated that this will reduce government revenue and increase fiscal deficit by 0.1% to 3.4% of Gross Domestic Product (GDP) in the year ending March 2019.

It also said that the earning of public sector oil marketing companies (OMCs) would be negatively affected as they also absorbed Rs 1 per litre cut in their pricing. It added that these measures create downside risks to the central government's fiscal deficit target of 3.3% of GDP for financial year 2018.

The rating agency said as the government had already met 94.7% of the budgeted annual deficit by August 2018, to achieve its deficit target it will likely need to compress capital expenditure. Consequently, it expects the central government deficit target to slip modestly to 3.4% of GDP, while the combined general government deficit (central and state) should remain at about 6.3% of GDP.

It said that the government revenue from excise duties on petroleum products has more than doubled since financial year 2014. State governments charge value added tax (VAT) on fuel as a percentage of prices and have therefore benefited from rising oil prices.

On OMCs, Moody's said even as the government so far has been committed to market-based pricing, going ahead there are risks to going back on deregulation. However, with important state elections at the end of this year and the general election next year, the risk of backsliding on these commitments will increase if oil prices remain elevated.

On the economic growth, it said that the fuel excise cut is expected to have a limited effect on GDP growth. Although lower excise taxes will help offset some of the negative effect on household consumption from higher oil prices, a depreciating rupee and potential curtailment of government spending will likely mute the benefits.

It expects real GDP growth of about 7.3% in fiscal 2018 and 7.5% in fiscal 2019. However, it noted that there are some downside risks to its forecast with intensifying external headwinds (tightening global financial conditions, high oil prices and trade tensions) and tightening domestic credit conditions.

SBI to Buy Good Quality Loans from NBFCs

From the banking space, State Bank of India (SBI) share price will also be in focus today. Reports yesterday stated that the state-run banker is looking to buy out good quality loans from non-banking financial companies (NBFCs).

The bank yesterday said that it will increase its portfolio purchase of loans from NBFCs this year as it looks to provide the much-needed liquidity to the funds starved sector, and simultaneously fulfil its priority-sector obligations.

The bank said that it is looking for opportunities in both the priority and non-priority sectors. It had initially planned for a growth of Rs 150 billion through portfolio purchase, but now seeks to enhance it to Rs 200-300 billion.

The Reserve Bank of India (RBI) rules mandate banks to lend 40% of their deposits to small businesses, agriculture and home loans under a certain threshold. SBI plans to buy these loans from NBFCs active in this space.

Notably, NBFCs are facing liquidity pressures after infrastructure financier IL&FS defaulted on multiple payments since late August. Defaults by a systemically important NBFC have made investors wary about the sector, raising their cost of funds and making access to liquidity difficult.

SBI's portfolio purchases could add in much needed liquidity in the sector.

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

Duty Cut on Aviation Turbine Fuel

In the news from the airlines sector, reports yesterday suggested that the government may announce a duty cut on aviation turbine fuel (ATF).

As per a leading financial daily, the finance ministry is expected to submit a proposal to the Election Commission to cut excise duty on aviation turbine fuel (ATF) from 14% to 8%.

Note that the government had last month announced a hike in custom duty on 19 items including jet fuel to stabilize the falling rupee and keep the current account deficit (CAD) in check.

Also, speaking of airline sector, note that India's aviation industry is on a high-growth trajectory.

India's domestic air traffic has seen a prolific growth of 20-25% during 2015 and 2016. And in 2017, it tapered to 17.4%.

However, for the first time, domestic air traffic crossed an important landmark of 100 million passengers in a calendar year.

What's foreseeable for India's aviation traffic now is some pressure on the back of the consistent rise in crude oil prices.

Oil prices are closely monitored by the Indian air carriers, as aviation turbine fuel is their single largest input cost. A sharp rise in the cost of fuel puts pressure on margins, and consequently an increase in air fares.

Although air travel is becoming the new normal, investors need to understand the industry dynamics before buying up aviation stocks.

From the IPO Space...

In the news from IPO space, Garden Reach Shipbuilders and Engineers made a weak debut on the bourses yesterday as the scrip of the company opened at a discount to its issue price. The IPO debuted at Rs 104, a 12% discount to its issue price of Rs 118.

The IPO of the company was subscribed 1.02 times and the IPO received bids for 2,97,58,920 shares against the total issue of 2,92,10,760.

Garden Reach Shipbuilders and engineers is a shipbuilding company under the administrative control of the ministry of defense (MoD). The company was incorporated in 1934 and was later acquired by the Government of India from Macneill & Barry Limited on 19th May 1960.

The company primarily caters to the shipbuilding requirements of the Indian navy and the Indian Coast Guard. It is also engaged in engineering and engine production activities.

To know more about the company, you can read our IPO analysis of Garden Reach Shipbuilders and Engineers (requires subscription).

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

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