Markets Finish the Week 6% Higher

Indian equity markets had a rather volatile trading session today. The indices began the day's proceedings on a cautious note and subsequent trading hours saw them oscillate to either side with the indices eventually closing the day in the green. While the BSE Sensex closed higher by 40 points, the NSE Nifty closed higher by 10 points. The S&P BSE Mid Cap and the S&P BSE Small cap finished on a strong note as respective indices finished higher by 1.1% and 0.8%. Gains were largely seen in metal and PSU stocks.

Asian markets finished the week broadly higher with shares in Hong Kong leading the region. The Hang Seng is up 1.18%, while China's Shanghai Composite is up 0.50% and Japan's Nikkei 225 is up 0.32%. European markets are trading higher today with shares in London leading the region. The FTSE 100 is up 0.4%, while Germany's DAX is up 0.19% and France's CAC 40 is up 0.11%.

Oil prices gained in the afternoon session and were trading at $34.82 a barrel. The rupee was trading at 67.27 against the US$.

Oil & Gas stocks finished mixed with Indian Oil Corporation and Petronet LNG leading the losses. According to an article in The Economic Times, the government plans to raise natural gas price by about 60% for their undeveloped gas discoveries in difficult areas. This would provide the much necessary boost to firms like ONGC and Reliance Industries.

Gas price in India is currently priced at US$3.82 per million British thermal unit, which will fall to US$3.15 in April, a rate not enough to make up for cost of deep-sea development. Reportedly, this rate is not enough to incentivize exploration, so the government plans to price undeveloped gas discoveries in deep-sea, ultra-deep sea and high-temperature, high-pressure areas using average of landed price of naphtha, fuel oil and LNG.

Several discoveries of ONGC, RIL and the Gujarat State Petroleum Corp (GSPC) in KG Basin on the eastern offshore alone are lying idle owing to the lack of a profitable price. Finance Minister Arun Jaitley, in the Budget for 2016-17, had announced a two-stage gas pricing freedom.

The script of ONGC finished the trading day up by 2% on the BSE. However, since the June 2014 highs, oil prices have crashed 70%. Meanwhile, ONGC's stock price has crashed 53%. In our recent edition of The 5 Minute WrapUp Premium, we have discussed what the future holds for ONGC (Subscription Required). The company recently announced results for the quarter ended December 2015. The topline for the quarter declined 1.7% year on year (YoY), while bottomline de-grew by 64% YoY, on a standalone basis (Subscription Required).

Moving on to news from the healthcare sector. Shares of Pfizer Limited finished the trading day on an optimistic note (up 0.6%) after it was reported that the company's Global Established Products (GEP) division has launched its largest selling antacid Gelusil liquid in a ready-to-drink, on-the-go sachet format in India. The sachet aims to reach out to consumers who are constantly on the go and have to rely on multiple elements of cure to settle the acidity attacks. It will be rolled out in metros, smaller towns and rural areas simultaneously. The Gelusil sachet is available across pharmacy stores and is priced at Rs 8 per sachet.

In another development, Aurobindo Pharma has received final approval from the US health regulator for generic version of an intravenous antidote to a pain-killer drug overdose. The product is expected to be launched in the first quarter of the next fiscal. Aurobindo now has a total of 242 ANDA approvals (207 final approvals including 10 from Aurolife Pharma LLC and 35 tentative approvals) from the US FDA (Subscription Required).

Buying activity was witnessed across majority of the pharma stocks with Glenmark Pharma and Divi's Laboratories leading the pack of gainers.

Markets Remain Range Bound
01:30 pm

Indian indices are trading slightly above the dotted line in the post noon trading session. Sectoral indices are trading mixed with stocks from the metal and PSU sectors leading the gainers. However, software stocks are witnessing maximum selling pressure.

The BSE Sensex is trading higher by 22 points and the Nifty is trading higher by 2 points (down 1.3%). The BSE Mid Cap index and the BSE Small Cap index are trading higher by 1% and 0.8% respectively. The rupee is trading at 67.38 to the US$.

Ashok Leyland is reportedly planning to expand its bus manufacturing plant in Ras Al Khaimah, Middle East in a bid to double its production capacity. Shaikh Saud bin Saqr Al Qasimi, Member of the UAE Supreme Council and Ruler of Ras Al Khaimah, laid the foundation stone for the US$10 million expansion project on March 3. The project also includes a Design and Service Training Centre.

Post the expansion, the capacity of the plant will increase from 12 buses a day to 24 buses daily by end of 2016. This comes on the backdrop of company's expansion in the global market. Meanwhile, the company also reportedly plans to set up assembling facilities in Kenya and Ivory Coast and also initiated plans to set up an assembly plant in Dammam, Saudi Arabia.

The company is currently trading with a negative bias (down 0.6%) on the BSE. The company has seen its stock price go up by 24% in the past one year meanwhile, the Sensex has lost 20%. In our recent edition of The 5 Minute WrapUp Premium, we highlighted the performance of Ashok Leyland.

According to a leading economic daily, Yes Bank has acquired over 5% stake in Institutional Investor Advisory Services (liAS). The bank has acquired 500,750 equity shares of liAS from BSE. IiAS is a proxy advisory firm, dedicated to providing participants in the Indian market with independent opinion, research and data on corporate governance issues as well as voting recommendations on shareholder resolutions. The value of the transaction wasn't disclosed.

Investors in IiAS reportedly include Axis Bank Ltd, BSE Ltd, Fitch Group Inc., Housing Development Finance Corp. (HDFC), ICICI Prudential Life Insurance, Kotak Mahindra Bank Ltd, Tata Investment Corp. and UTI Asset Management Co. Ltd. The biggest shareholder is the Fitch Group with about 20% stake.

In another development, Yes Bank has launched its first Currency Chest and Small Coin Depot in Mumbai on March 03, 2016. The bank has established more than 110 Cash Deposit Machines across the country which is a self-service kiosk that enables deposit of cash directly into the bank account. It is to be noted that Yes Bank is the fifth largest private sector bank in the country.

The script of Yes Bank was trading down by 0.9% at the time of writing.

Indian Markets Trade Near the Dotted Line
11:30 am

After opening the day on a flattish note, the Indian Markets witnessed choppy trades and are presently trading near the dotted line. Sectoral indices are trading on a positive note with stocks from the metal, power and realty sectors leading the gains.

The BSE Sensex is trading up by 18 points (up 0.1%) and the NSE Nifty is trading up by 4 points (up 0.1%). The BSE Mid Cap index and the BSE Small Cap index are trading in the green, up by 0.9% and 0.8% respectively. The rupee is trading at 67.28 to the US$.

Mining stocks are trading on a positive note with Hindustan Zinc and Metals and Minerals Trading Corporation (MMTC) witnessing maximum buying interest. As per a leading financial daily, Coal India has been forced to temporarily stop production at several mines and suspend shifts in others. This is because there are no takers for their stock due to surplus position at all thermal power plants in the country.

The coal stocks now stand at 84 million tonnes (MT), with 48 MT at various Coal India mines and another 36 MT at power plants.

The company has been officially asked to stop production as there's a limit on the volume of coal that can be stores at any single location. The stock is so huge that transportation is becoming an issue. Further, with large stocks, there is the risk of catching fire.

It should be noted that the National Coal Distribution Policy (NCDP) stipulates that Coal India cannot supply to power plants without signing any fuel supply agreement. This is indeed an irony (subscription required) as despite being in a situation of surplus coal, some 57,000 MW of thermal units still starve for coal since they do not have any supply contract with Coal India. As reported, the only way out now for Coal India is to supply more than 65% of the annual contracted quantity to power plants which have fuel supply agreements.

Presently the stock of Coal India is trading up by 1.6%.

In another news update, traders body - Confederation of All India Traders (CAIT) has opposed the Union Budget's proposal to permit 100% FDI (foreign direct investment) in food processing segment. The body opposed the proposal and stated that the move would adversely impact farmers and will result into mass unemployment.

The body further stated that allowing FDI in food sector is nothing but a step in the direction of opening retail sector to FDI, much against the declared commitment of not allowing foreign players in the retail sector.

The body has urged Prime Minister Narendra Modi to give an audience and listen to their views. It has urged the government to issue a white paper on FDI in retail (subscription required). Lastly, the CAIT quoted that any move to allow multinational companies into Indian retail trade will amount to betrayal of confidence of the small businesses in India.

It was in 1993 when the then finance minister had changed the law to permit FDI in retail trade. But, it was banned in 1996 on political concerns of the ruling United Front government. In 1997, FDI in cash and carry business was allowed up to 100% under the approval of the government. In 2006, it was brought under the automatic route. In the same year, FDI in single brands was permitted with prior government approval and the limit was set to 51%. Since the past few years, the Indian government has been mulling over opening foreign investment in multi-brand retail. But, the political controversies along with the protests from unorganized sector (smaller kirana stores) have delayed the policy so far.

However, we believe that the move to oppose FDI does not make perfect economic sense. While FDI results in some job losses it will also create employment elsewhere. On the positive side, investment in back end retail infrastructure would mean that wastages and pilferages would reduce. Most importantly, the end consumer will be benefited the most as he will get the product at relatively cheaper prices. This shall increase his spending power and thus standard of living.

Indian Indices Open Flat
09:30 am

Major Asian stock markets have opened the day on a positive note. The stock markets in Hong Kong and Singapore are trading higher by 0.6% and 1.2%, respectively. Major indices in Europe ended their session on a negative note. US markets ended their previous session in the green. The rupee is trading at 67.25 per US$.

Indian stock markets have opened the day on a flat note. The BSE Sensex is trading lower by 15 points (0.1%) and NSE Nifty is trading lower by 12 points (0.2%). Both, BSE Mid Cap and BSE Small Cap are trading lower by 0.1% and 0.2% respectively. Sectoral indices have opened the day on a mixed note with stocks from consumer durables leading the gains and stocks from the telecom sector leading the losses.

As per a leading financial daily, Indian companies are seen on a dividend payout spree on the back of the new 10% tax on dividend income that is going to kick in on April 1. The new tax was announced on the Budget day and some 50 companies listed on the BSE have declared that they are considering payment of interim dividend before the month ends to avoid the tax.

Finance Minister Arun Jaitley has proposed in Budget 2016-17 that if the dividend income earned by a resident individual, Hindu Undivided Family (HUF) or firm exceeds Rs 10 lakh, it will be taxed at the rate of 10% in the hands of the recipient. This additional 10% tax is over and above 15% DDT (Dividend Distribution Tax) paid by companies. Up to March 31, 2015, companies paid DDT at the rate of 15% of the net dividend payable to shareholders. Though the rate of DDT has been kept unchanged in the subsequent year, the computation mechanism has changed and the effective rate of dividend stands increased to 20.36% (including surcharge and cess).

The additional 10% tax will be applicable from April 1, 2016. This means that the dividends declared before March 31, 2016 will not be taxable. The promoters, who earn huge dividend income, are likely to encourage companies to declare dividends before March 31, 2016. So, companies with high promoter shareholding are preferring to pre-pone most of the dividend pay-out before March 31, 2016 so that they do not end up paying 10% tax on their dividend income.

To beat the April 1 deadline, companies such as Suven Life Sciences, Allcargo Logistics, Godrej Industries, Zydus Wellness, Divi's Laboratories and Navneet Education have already announced plans to offer dividends this month.

And a BusinessLine analysis revealed that investors are also clamouring to buy these dividend stocks. It noted that about 16 of the total sample of 50 scrips have seen a sudden price surge in the range of 8-33%. Further, in the same period, the broader market moved up between 5-8%.

However, we would like to remind you not to fall for this folly. Investors should not blindly buy stocks of high dividend paying companies. In fact, dividends should not be the sole criterion for investment decisions. One should, instead, question if such payments are sustainable and whether the dividend policy is maintained or not. If high dividends are due to better cash generating capability of the business, investors should then pay attention to fundamentals and management quality. Only then they should commit their money to any company. Here's an article from the premium edition of The 5 Minute WrapUp that explains the point clearly (subscription required).

In another news update, HCL Technologies (HCL) has signed a five-year Next Generation Information Technology Outsourcing (Next - Gen ITO) contract with Husqvarna AB. Husqvarna AB is a leading manufacturer of outdoor power products including robotic mowers, garden tractors, chainsaws and trimmers.

HCL has been providing application management services to Husqvarna in the past. With this deal, HCL will now provide end-to-end integrated infrastructure and applications services, covering data center services, network services, security services, applications operations and support services.

The company will be utilising its transformational infrastructure and applications services and global delivery model to drive data-center consolidation and assets optimization for Husqvarna. This is said to allow a high degree of flexibility and enable Husqvarna to adopt future technologies for delivering an enriched end-user experience to end customers.

HCL Technologies is a leading global IT services company. Presently its stock is trading down by 0.6%.

A Move Towards Bolstering Capital of Banks...

Banking is no easy business. At least, that can be said for the Indian banks that have been in the doldrums for quite a while now. The rising bad loans have dragged the Indian banking sector to a depressed state. The heat is being felt everywhere, across borrowers in various sectors, lenders in public and private banks and in the economy as a whole.

The RBI too is concerned about this. Accordingly, it has come up with few measures to pull the banks out of their misery. The Central bank announced three key changes to the capital adequacy norms for Indian banks. These were-

  • Revaluation reserve, which arises from revaluing banks' property, to be considered as common equity Tier-I capital, versus the earlier Tier-II classification.
  • Foreign currency translation reserves, at 25% discount, to be considered as Tier-I capital.
  • Deferred tax assets may also be recognized as Tier-I capital.

The above move was hailed by many banks. This is because it would lead to substantial unlocking of their resources.

As stated in Economic Times, the move is said to free up to Rs 400 billion that banks will be able to count as equity capital. It will free up to Rs 300-350 billion for PSU banks and Rs 50 billion for private banks.

The impact of the move will be different for different banks. Banks sitting on huge real estate will benefit the most. Those following the lease model obviously won't. Further, the impact of foreign currency translation reserves will depend on how big the foreign operations of a particular bank are.

The development comes at a time when banks are struggling to meet capital adequacy norms due to soaring provisions for bad loans. One shall note that the government had estimated last year that lenders would need to raise about US$ 17 billion from markets over four years to meet total funding requirements of about US$ 28 billion beyond projected profits.

However, after the above announcements, some relief is evident for most of the banks.

In all, these measures bode well for the banking industry. They will boost the capital requirement and can bring the much needed revival in banking sector in the coming days.

Having said that, investors can look out for investment opportunities in this sphere going forward (subscription required). And our research team at Equitymaster continues to remain dedicated to help you find these opportunities. So stay tuned!