Sensex Opens in Red; Asian Paints Top Loser

Tue, 12 Dec 09:30 am

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Majority of Asian indices are lower today as Chinese and Hong Kong shares fall. The Shanghai Composite is off 0.41% while the Hang Seng is down 0.05%. The Nikkei 225 is trading up by 0.02%. US stocks closed higher on Monday as market participants prepared for an expected Federal Reserve rate hike later in the week, while stocks rose around the world on continued solid global economic growth indicators.

Back home, India share markets have opened the day on a negative note ahead of November WPI data. The BSE Sensex is trading lower by 103 points while the NSE Nifty is trading lower by 27 points. The BSE Mid Cap index opened down by 0.1% while BSE Small Cap index opened the day on a flat note.

Barring healthcare stocks, metal stocks and energy stocks, all sectoral indices have opened the day in red with power stocks and bank stocks witnessing maximum selling pressure. The rupee is trading at 64.36 to the US$.

Dr. Reddy's share price rallied over 4% after its Bachupally formulations plant 3 received USFDA EIR.

All Paint stocks opened the day on a negative note with Asian Paints and Asahi Songwon leading the losses. As per an article in a leading financial daily, Asian Paints has acquired the remaining 49% stake in kitchen solutions provider Sleek International Pvt. Ltd from the Ahuja family for Rs 500 million.

In August 2013, Asian Paints had acquired 51% stake in Sleek International for around Rs 1.2 billion. With the latest acquisition, Sleek International has become a 100% subsidiary of Asian Paints.

Mumbai-based Sleek makes, sells and distributes kitchens, wardrobes and components. Sleek had reported a turnover of Rs 1.6 billion in FY17, a 16.7% increase over FY16.

One shall note that, Asian Paints has made several inorganic moves in the past to boost its home decor business. Earlier this year, Asian Paints purchased Sri Lanka's Causeway Paints Lanka (Pvt) Ltd to expand its overseas business.

In 2014, it had acquired the front-end sales business of Punjab-based bathroom fittings and accessories manufacturer Ess Ess Bathroom Products Pvt Ltd. The same year, the company bought a major stake in Ethiopia-based paint and adhesives maker Kadisco Chemical Industry Plc.

Going forward, whether Asian Paints' well diversified global presence continue to help the company deliver on both sales and profitability front will be the key thing to watch out for.

Asian Paints share price opened down by 2%.

Moving on to the news from the banking sector. As per an article in Livemint, Canara Bank is planning to raise capital by selling shares to financial institutions and is looking to hire merchant bankers for the same.

The bank is planning to raise up to Rs 35 billion through qualified institutional placement (QIP).

Last month, the bank's board had cleared raising capital by selling stakes in its asset management and housing finance units, either fully or partially.

Reportedly, Canara Bank is among the state-owned banks in which the government may infuse capital early.

With a capital adequacy ratio of 12.45% at the end of September, Canara Bank's capital position is well above the regulatory requirement 10.25%.

On 6 December, Urjit Patel, governor of the Reserve Bank of India had said recapitalisation bonds will be front-loaded for banks that have managed their balance sheet's strength more prudently, and can use injected capital to lend besides providing for legacy asset losses.

For other banks, the capital allocation will be based on their resolve and progress towards reform in a significant and time-bound manner.

In October, finance minister Arun Jaitley had announced an unprecedented Rs 2.11 trillion recapitalisation plan to strengthen public sector banks. This includes recapitalisation bonds of Rs 1.35 trillion.

Notably, PSBs are burdened by bad loans that have doubled in the past five years. This has led to a slowdown in the loan growth segment. Due to this, PSBs lost their market share from 70.9% in FY16 to 64% in FY17.

PSBs are in a big mess. They already have a huge amount of bad loans piled up. There is a sense of urgency towards the recapitalisation move. This is because banks have to be recapitalised by 2019 to be compliant with the Basel-III frameworks.

CAGR returns of PSBs in the past decade

While this might help in the short term, it is more important to focus on the lending and corporate governance processes followed by these banks. Unless that improves, we'll have to be content with the 'one day euphoria' instead of a decade of consistent performance.

In such an environment, it makes sense for investors to be selective while buying stocks. Focus on value and the underlying fundamentals of the business. Then, they need not worry about the market.

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Canara Bank share price opened the day down by 0.8%.

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