Sensex Finishes Marginally Lower; Capital Goods & Realty Stocks Fall
Closing

Indian share markets witnessed selling pressure in the final hour of trade to finish just below the dotted line. At the closing bell, the BSE Sensex closed lower by 71 points and the NSE Nifty finished lower by 18 points. The S&P BSE Mid Cap finished down by 0.1% while S&P BSE Small Cap finished down by 0.2%.

Losses were largely seen in realty stocks, capital goods' stocks and bank stocks.

Asian stock markets finished in red as of the most recent closing prices. The Nikkei 225 & the Hang Seng fell 1.01% and 0.78% respectively. European markets are mixed to lower. Shares in London are off as the FTSE 100 drops 0.35%. The DAX is down 0.07% while the CAC 40 in France is unchanged.

Rupee was trading at Rs 64.52 against the US$ in the afternoon session. Oil prices were trading at US$ 61.83 at the time of writing.

The Market cap to GDP ratio for Indian companies too is close to dangerously high levels. While this is still some way off the peak of FY-08, when it had once reached close to 150, it's relatively high.

FY17 saw this ratio reach close to 80. It is also expected to increase further given the moderate growth expectations in India's GDP for FY18. Warren Buffett once considered this as one of the best valuation metrics to gauge the markets.

Past history shows some correlation between the ratio and the share market. 2008 saw Sensex decline by 38%, when this ratio crossed the 100 mark. Also, the market has bounced back sharply when this ratio was low.

The Warren Buffett Indicator Suggests Indian Equity Market Is Overvalued

The basic assumption in this ratio is that whenever the GDP of the country grows, the market performance will reflect it. Also, when stocks do well, it can be extrapolated to assume the Indian economy is doing well.

In news from banking sector, as per an article in The Livemint, credit rating agency Moody's placed Punjab National bank (PNB) under review for downgrade following the biggest scam in the country's banking sector to the tune of Rs 113.4 billion.

The agency has a Baa3/P-3 rating on the bank now while it has a Baa3 rating on its foreign currency issuer rating. It has also placed the bank's baseline credit assessment (BCA) and adjusted BCA of Ba3 and the counterparty risk assessment (CRA) rating of Baa3(cr)/P-3(cr) under review for downgrade.

The bank stated that the primary driver for rating action is the risk of weakening standalone credit profile of PNB, as a result of a number of fraudulent transactions through fake letters of undertakings to other lenders worth US$1.8 billion over the past many years.

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In another development, IndusInd Bank stated that it has no direct or indirect exposures to firms floated by scam-hit Nirav Modi.

The bank, one of the most active lenders in the gems and jewellery sector, however has a "small" exposure to Gitanjali Gems, promoted by Modi's uncle Mehul Choksi.

The IndusInd statement said the fraud has taken place due to non-adherence of procedures and norms laid down.

IndusInd bank share price finished the day on a flat note.

Moving on to news power stocks. As per an article in The Economic Times, NTPC Ltd will call bids in a month to acquire hydropower plants of upto 1000-mw capacity.

The company in November called bids from developers and lenders to acquire coal-based power plants.

Jaiprakash Power Ventures Ltd has reportedly offered its Nigrie power project to NTPC for acquisition while State Bank of India has proposed stake sale in three stressed plants of Bajaj Lalitpur, Jaypee Infratech and Jindal India Thermal to NTPC.

This is part of the NTPC plan for inorganic growth as the corporation is eyeing the plants that are close to coal sources and running with an eye on cost of generation from these plants.

NTPC is currently working on new thermal projects totalling 21,000 mw for capacity addition in the next the 3-4 years. Going by the projection of 7-8% economic growth on an annualised basis, the company expects the demand for electricity is expected to grow up significantly.

NTPC share price finished the day up by 0.5% on the BSE.

In news from the economy, with an aim to provide fillip to exports and make global trade the foundation of Indian economy, the commerce minister Suresh Prabhu has said that the government will soon come out with a comprehensive strategy to increase the share of exports to 40% of the gross domestic product (GDP) and is expected to touch US$5 trillion by 2025.

According to the Federation of Indian Export Organisation (FIEO), the current share of exports in GDP is only 18-19%. Elaborating further, Prabhu said that out of the US$5 trillion, as much as US$3 trillion will come from the services sector, while US$1 trillion each will come from the manufacturing and agriculture sectors.

He added that the more than doubling of shipments will demand that the economy massively increase the share of manufacturing in the overall GDP basket, which is around 14%. He also urged the business community to come up with a proper business plan to increase exports.

At present, the size of India's GDP is US$2.6 trillion, which is the fifth largest in the world after the US, China, Japan, Germany and Britain, while its share in global trade is paltry and is under 2% only.

And here's a note from Profit Hunter:

Coal India is among the top gainers in the Nifty 50 Index - up 2%. Let's have a look at its chart.

Last time we reviewed the stock, it had formed a double bottom pattern near the neckline of the head and shoulder pattern. It broke out of the double bottom pattern and the falling trendline (blue line) and rallied nearly 15% to achieve a high of 311 in January 2018.

It then consolidated for more than a month, where it again formed a double bottom pattern. Today, the stock rallied 2% to break above the neckline (red line) of the pattern with healthy volumes.

So can we see the stock resume its up move after the break-out? Let's track the stock closely.

Coal India Rallied 2% for the Day
Coal India Rallied 2% for the Day 

Sensex Trades Volatile; IT Stocks Lead Gains
01:30 pm

After opening the day flat, share markets in India witnessed choppy trading activity and are presently trading above the dotted line. Sectoral indices are trading mixed with stocks in the realty sector and stocks in the pharma sector trading in red. While stocks in the IT sector are trading in green.

The BSE Sensex is up by 95 points (up 0.3%) and the NSE Nifty is trading down by 22 points (up 0.2%). Meanwhile, the BSE Mid Cap index is trading up by 0.2%, while the BSE Small Cap index is trading up by 0.1%. The rupee is trading at 64.79 to the US$.

In news from the IT sector. Information Technology sector body Nasscom expects the IT and BPO industry in the country to grow around 7-9% in FY19.

Nasscom expects Indian IT industry's export revenues will grow to US$ 135-137 billion from the US$ 126 billion estimated for the current year.

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Whereas the domestic revenues are expected to grow by around 10-12% to US$28-29 billion in FY19.

For the IT sector as a whole, Nasscom sees a continuation of global headwinds and uncertainties.

The body Nasscom announces its annual growth forecast on the sidelines of its flagship event, NILF. It, however, deferred its announcement last year owing to global challenges and uncertainties in the business.

BSE IT Index vis-a-vis Sensex

The Indian information technology (IT) sector has been through the doldrums over the past few years. IT giants have seen flat to negligible growth in the past 3-4 years. However, going by the IT index performance in the past few months, there seems to be some fight left in the IT space. The BSE IT index has grown by 8% since August 2017 as compared to Sensex growth of 6% in the same time period.

This is in stark contrast to its performance over the past four years. The Indian IT Index has returned a meager 19% returns as compared to Sensex returns of 58% since 2013.

The sector has seen a major disruption in the business model. The shift from traditional IT services like application maintenance to analytics, cloud computing has hurt growth for almost all major IT companies.

Recent protectionist policies announced by the American government since Trump's appointment have further escalated their problems.

As a result, major Indian IT companies are trading at multi-year low valuations. Also, IT companies are moving towards an efficient business model whereby manpower for mundane tasks are being replaced by automation. It will be an interesting space to watch out for in the days ahead.

Moving on to news from the . According to a leading financial daily, state-run Energy Efficiency Services Ltd (EESL) will soon float another global tender for 10,000 electric vehicles to be deployed across the country for government use.

EESL, which is a joint venture of PSUs under the power ministry, will also sign a memorandum of understanding (MoU) with the government of Andhra Pradesh this week to supply 10,000 electric vehicles.

EESL has been instrumental in the government's push for EVs in India. With two global tenders of 10,000 electric vehicles each in less than a year, there has been enough interest from the state and central governments on adoption of e-mobility and making it mainstream.

Currently, electric vehicle sales too are low in India, rising 37.5% to 22,000 units in the year ended 31 March 2016 from 16,000 in 2014-15. Only 2,000 of these were cars and other four-wheelers, according to automobile lobby group SIAM.

The government wants to see 6 million electric and hybrid vehicles on Indian roads by 2020 under the National Electric Mobility Mission Plan 2020.

The government is targeting to have all cars propelled by electric engine by 2030. The target is more daunting than in many advanced countries.

According to the industry, the 2030 target would require eight to ten times the global stock of such vehicles. India would need to sell more than 10 million electric cars in 2030, compared to 5,000 electric vehicles India had on the road in 2016.

As you can see from the chart above, India is barely visible compared to other developed countries when it comes to battery cars.

As an article in Business Standard suggests, such a big jump in scale for the auto industry in 13 years seems difficult. The basic infrastructure is missing. There are not enough charging stations. For this massive shift, the charging stations will need to be as ubiquitous as petrol pumps.

Another issue is the price of the lithium ion battery, which constitutes 30% to 40% of the cost of the car. For this plan to succeed, the price of the battery needs to come down.

The auto industry is already facing regulatory headwinds. The shift from BS-IV emission norms to BS-VI has been two years ahead of schedule without an intermediate stage. The government, if it is serious about such ambitious targets, should offer the necessary infrastructure support and do its bit for a smooth transition.


Indian Indices Trade Marginally Higher; IT Stocks Witness Buying Interest
11:30 am

Stock markets in India are presently trading marginally higher. Sectoral indices are trading on a mixed note with stocks in the IT sector and consumer durables sector witnessing maximum buying interest. Realty stocks are trading in the red.

The BSE Sensex is trading up 73 points (up 0.2%) and the NSE Nifty is trading up 17 points (up 0.2%). The BSE Mid Cap index is trading flat, while the BSE Small Cap index is trading down by 0.1%. The rupee is trading at 64.52 to the US dollar.

In the news from the banking sector, Fitch has placed Punjab National Bank (PNB) on 'Rating Watch Negative' (RWN), reflecting a possibility of downgrade following the US$1.77 billion fraud.

Fitch said that the fraud has raised questions on both internal and external risk controls as well as the quality of management supervision considering that the fraud went undetected for several years.

The PNB fraud case involves bank employees issuing unauthorized LoUs to three companies and four people, including Nirav Modi and Mehul Choksi.

The fraud is essential that Nirav Modi did not pay the security deposit needed to raise an LoU. These LOUs were used to obtain short-term credit from overseas branches of other Indian banks.

The detailed investigation found that Nirav Modi had not been putting in enough of security deposit since 2011; the value of LoUs without these deposits is now around Rs 114 billion.

The above scam has put the public-sector banks (PSB's) in the limelight for all the wrong reasons. PNB is defrauded to the tune of US $ 1.77 billion. That's the last thing these banks needed after the crisis they've had in the past few years.

While their bad loans struggle has been going on since a decade, there are other issues that have recently cropped up adding to their pile of misery. Bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of these state-run banks.

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That's the reason we've been wary of PSU banks since 2014. This was well before the market had caught a whiff of the NPA problem. We've recommended just two large PSU banks in StockSelect since then...and already successfully closed both of them.

In other news, as per an article in the Economic Times, the Income Tax (IT) Department has attached seven properties of the Gitanjali Group and its promoter Mehul Choksi in Mumbai in connection with a tax evasion probe against them.

The department has issued an order for provisional attachment of flats and buildings of these entities, which are located in the Opera House, Bandra, Andheri, Wadala and Walkeshwar Road areas of the Maharashtra capital, under the provisions of the Income Tax Act, 1961.

Note that the stock of Gitanjali Gems has nosedived on several occasions since 2013, eroding market capitalisation by over 80%. Its promoter's role in aiding Nirav Modi carry out one of the biggest frauds in the banking history has damaged the stock's position and credibility. Reportedly, Gitanjali Gems and its two subsidiaries fraudulently acquired letters of undertaking and letters of credit worth Rs 48.9 billion issued through Punjab National Bank.

Gitanjali Gems, the Fall Guy

It has emerged that Gitanjali Gems' receivables position has been outstanding far longer than that allowed by the RBI. Auditors have pointed out the overdue loans/debentures and overdrawn working capital limits by the company in the latest annual report. In fact, the company has said that it does not even have funds to honour debenture redemption liability of as low as Rs 14.8 m.

We had stuck our necks out, warning investors that Gitanjali Gems' shiny exterior is a sham. Being in a working capital business of importing gold and exporting jewellery, regulatory restrictions on gold imports in FY13 pushed the company in deeper debt. But the company's weak management, integrity, and ethics were completely unacceptable to us. Therefore, despite Gitanjali Gems attracting institutional interest during the gold rally, we had clearly asked investors to steer clear of this value-trap.

Connecting the dots in the aftermath of the fraud undoubtedly confirms that the dubious management is responsible for the company's downfall, something we had seen coming long back. Clearly, management integrity is one aspect that shareholders cannot afford to compromise in their frenzy to ride the bull run.


Sensex Opens Flat; PSU & Healthcare Stocks Top Losers
09:30 am

Asian equities are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is up 1.20% while the Hang Seng is up 0.61%. The Shanghai Composite is trading up by 0.45%. The US markets were closed on Monday for a holiday.

Back home, Indian share markets have opened on a flattish note. The BSE Sensex is trading higher by 27 points while the NSE Nifty is trading higher by 1 point. The BSE Mid Cap Index and BSE Small Cap index both opened the day down by 0.2%.

Sectoral indices have opened the day on a mixed note with metal stocks and capital goods stocks witnessing maximum buying interest. While, PSU stocks and healthcare stocks leading the losses. The rupee is trading at 63.91 to the US$.

Automobile stocks opened the day on a mixed note with M&M & Escorts leading the losses. In light of the government's strong push for electric vehicles, Mahindra & Mahindra is planning to invest Rs 9 billion over next four years as it seeks to bring out efficient electric vehicles (EVs).

Reportedly, the company has already invested Rs 6 billion in EVs over the past five-six years and has decided to invest Rs 4 billion in Karnataka and Rs 5 billion in Maharashtra over the next four-five years.

Further, the company will be doing all parts of the EV play, except batteries, which require greater volumes for local manufacturing and so they will have to be imported. This investment is likely to ramp up its first installed capacity to 5,000 units a month, the company stated.

The auto major has a capacity of 400 units a month, which would go up to 1,500, including three-wheelers by this September-end and the company should be capable of rolling out 4,000 units by December 2019, the reports noted.

Rahul Shah, Co-head of Research, offered his views on electric vehicles segment recently. Here's an excerpt of what he wrote:

  • "If you think car companies are resisting this change, you will be surprised. Volvo, the Swedish/Chinese car company has announced it will only offer electric or hybrid vehicles by 2019.

    Mercedes is planning on launching two SUVs and two sedans as EVs by the end of this decade. Volkswagen has big electric plans too. It has set a goal of 30 new EVs and two to three million plug-in sales by 2025. MM, India's largest EV manufacturer, recently forged a partnership with Ford to work on electric cars."

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So, how should you play this trend? What are the companies best positioned to extract the maximum mileage?

Stay tuned. Rahul Shah has got a close eye on this megatrend - and he doesn't plan to miss a thing.

Moving on to the news from the banking sector. Listed Indian banks have lost nearly US$11 billion (Rs 697.5 billion) in market capitalisation after the US$1.8 billion fraud at Punjab National Bank (PNB) came to light. PSU banks continued to bleed on Monday, after more lenders reported exposure to the scam.

Recently, PNB reported that it has detected a scam where billionaire jeweller Nirav Modi allegedly acquired fraudulent letters of undertaking (LoUs) from a branch in Mumbai to secure overseas credit from other Indian lenders.

UCO Bank on Saturday said it has an exposure of US$411.82 million to PNB's Nirav Modi LoUs. Earlier, State Bank of India and Allahabad Bank disclosed Rs 13.6 billion and Rs 20 billion, respectively.

As per the reports, the fraud will lead higher provisioning and may further impact the profitability of banks, which are already struggling under mounting non-performing assets (NPAs).

PNB shares have fallen 28% since the scam was reported, eroding nearly Rs 109.8 billion of its market cap. State Bank of India lost around Rs 180 billion in market value while Bank of Baroda erased Rs 56.3 billion.

PSB Underperformance vis a vis Sensex

Among private banks, Axis Bank, Yes Bank and ICICI Bank lost nearly Rs 56.3 billion, Rs 48.2 billion and Rs 40.1 billion, respectively. The PSU Bank index slumped nearly 10.4%, while BSE benchmark Sensex index fell 1.5% in this period.


Of PNB Fraud, Rising Troubles at PSBs, and Top Cues in Focus Today
Pre-Open

Share markets in India closed on a negative note yesterday.

At the closing bell yesterday, the BSE Sensex stood lower by 236 points and the NSE Nifty closed down by 74 points.

Losses were also seen for mid-cap and small-cap stocks. The BSE Mid Cap index ended the day down by 1.1%, while the BSE Small Cap index ended the day down by 1%. Selling pressure was seen across most of the sectors with stocks in the metal sector, capital goods sector and PSU stocks leading the losses.

Top Stocks in Focus Today

Banking stocks will be in focus today as PSU banks continued to bleed on Monday, after more lenders reported exposure to the PNB scam. Many believe the fraud will lead higher provisioning and may further impact the profitability of banks, which are already struggling under mounting non-performing assets (NPAs).

Airlines stocks will be in focus today as it is reported that domestic air traffic grew 20% in January. On the back of this news, Jet Airways share price and SpiceJet share price witnessed buying interest yesterday.

Market participants will also be tracking Gitanjali Gems share price. The stock of the company plunged 10% after the Central Bureau of Investigation (CBI) filed a First Information Report (FIR) against the Mehul Choksi-run Gitanjali Group yesterday.

Siemens share price will be in focus today as it is reported that the company is planning to sell its Mobility business and Mechanical Drives business. The meeting of the Board of Directors of the company is scheduled to be held on February 21, 2018, to consider the same.

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Rs 150 Billion Plan for MSP in the Works

As per an article in the Economic Times, the government may soon unveil a Rs 150 billion plan to ensure farmers get the minimum support price (MSP) for their crops even when market prices fall below the benchmark rate.

Accordingly, Niti Aayog will soon call a meeting of central and state governments to discuss this issue and find a suitable mechanism to compensate farmers and ensure MSP.

Note that Finance Minister Arun Jaitley, in this year's Budget, had announced that the government has decided to fix MSP for kharif at at least one and a half times of their production cost.

How the above decision pans out need to be seen. We'll keep you updated on all the developments from this space.

Mutual Fund Inflows Through SIPs Hit US$ 1 Billion Mark

Inflows through Systematic Investment Plans (SIPs) in Indian mutual funds (MFs) hit the US$ 1-billion mark in January.

Data by industry body AMFI showed that Rs 66.4 billion came into mutual funds in January, capping ten months of robust inflows as benchmark equity indices repeatedly scaled new heights.

The above development indicates sustained retail interest in equities and listed securities as an asset class against the traditionally favored real estate and gold investments.

The mutual fund industry in India provides huge scope for growth and development. Real estate and gold have become less attractive forms of investments post notebandi. Even the reduction in bank deposit rates in the past year has led to a shift in investment to mutual funds and the stock markets.

Going forward, the real test would be to see if the fund flow continues in the ongoing volatile market. Should the inflow slow down, it will impact MF investment flowing into Indian markets. It will be interesting to see how mutual fund investors react under these conditions.

Crude Oil Witness Buying Interest

In the news from commodity space, crude oil started its week on a positive note yesterday. Most of the gains were seen as market participants raised bets in the commodity on the back of positive global cues.

Note that besides the one-off daily gains as above, crude oil prices have corrected by about 10% in February. Rising US oil production and crude stockpiles, as well as a stock market sell-off, heaped pressure on oil prices this month.

It will be interesting to see how the OPEC and Russia react to the increasing oil supply from the US in the coming days.

PNB Fraud Case

The Central Bureau of Investigation (CBI) has filed a First Information Report (FIR) against the Mehul Choksi-run Gitanjali Group. The FIR is based on a fresh complaint made by Punjab National Bank (PNB) on February 13th.

This marks as the second FIR filed in the alleged fraud involving overseas payments to jeweler Nirav Modi, his uncle Choksi and entities belonging to them based on guarantees issued by PNB.

As for the Nirav Modi case, the Reserve Bank of India (RBI) said it has not asked PNB to pay counter-party banks against the letter of undertakings (LoUs). The central banks stated that it has begun its assessment and will take action as needed.

The above scam has put the public-sector banks (PSB's) in the limelight. PNB is defrauded to the tune of US$ 1.77 billion.

While the bad loans struggle has been going on since a decade at PSBs, there are other issues that have recently cropped up adding to their pile of misery. Bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of these state-run banks.

That's the reason we've been wary of PSU banks since 2014. This was well before the market had caught a whiff of the NPA problem. We've recommended just two large PSU banks in StockSelect since then...and already successfully closed both of them.