Sensex Finishes on a Weak Note; ICICI Bank Falls on SFIO Probe
Closing

Indian share markets continued to trade negative following losses in Asian and US stocks and as PNB fraud investigation widened. At the closing bell, the BSE Sensex finished lower by 284 points. While, the NSE Nifty finished lower by 95 points. Meanwhile, the S&P BSE Midcap Index and S&P BSE Small Cap Index ended down by 1.3% & 2.1% respectively.

Barring consumer durables stocks & FMCG stocks, all sectoral indices ended the day in red with capital goods stocks and power stocks leading the losses.

Overseas, Asian stock markets finished broadly lower today with shares in Hong Kong leading the region. The Hang Seng is down 1.03% while Japan's Nikkei 225 is off 0.77% and China's Shanghai Composite is lower by 0.55%. European markets are lower today with shares in Germany off the most. The DAX is down 0.47% while France's CAC 40 is off 0.39% and London's FTSE 100 is lower by 0.18%.

The rupee was trading at Rs 64.96 against the US$ in the afternoon session.

ICICI Bank share price fell 2.5% as the bank's senior officials were summoned by the Serious Fraud Investigation Office (SFIO) with regard to the PNB scam.

Automobile stocks ended the day on a mixed note with Force Motors share price & Escorts Ltd share price leading the losers. Tata Motors-owned Jaguar Land Rover (JLR) today reported 2.6% decline in global sales at 39,911 units in February.

Sales of Jaguar brand of vehicles in February were at 11,565 units, a fall of 5.2%.

Further, Land Rover range posted sales of 28,346 units in the month, down 1.5%.

Reportedly, solid demand in China (up 3.3%) and other overseas markets (up 1.5%) was offset by lower sales in the UK (down 15.2% for the month) and Europe (down 6.9%), where trading conditions remained challenging.

Tata Motors, on the consolidated level, derives ~80% of its revenue from JLR, which had witnessed EBITDA margin decline in FY16 and FY17 on account of weakness in volumes growth, model mix and forex losses.

During Q3FY18, JLR saw some weakness due to run out of two of its models Range Rover and Range Rover Sport. However, the standalone business saw more than 750bps y-o-y EBITDA margin expansion due to market share gains in CVs.

Tata Motors share price ended the day up by 0.4%.

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Moving on to the news from the economy. In the latest development, Finance Minister Arun Jaitley has stated that public sector banks (PSBs) have written-off loans worth Rs 816.8 billion in the financial year 2016-17, including Rs 203.4 billion by the State Bank of India.

Reportedly, the amount written off by nationalized banks was Rs 287.8 billion during the current fiscal (up to September, 2017). Besides, it was noted that writing-off of loans is done for tax benefit as well as capital optimization. However, borrowers of such loans continued to be liable for repayment.

As per the Reserve Bank of India (RBI) guidelines and policy approved by bank Boards, non-performing loans, including those in respect of which full provisioning has been made on completion of four years, are removed from the balance-sheet of the bank concerned by way of write-off.

The minister further stated that recovery of dues takes place on ongoing basis under legal mechanisms, which include, the Secularisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, Debts Recovery Tribunals and Lok Adalats. Therefore, write-off does not benefit borrowers, the reports noted.

Besides, in the five-financial years since 1 April 2013, banks have reported 13,643 cases of fraud involving a total amount of Rs 527.2 billion.

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

This has reflected in their stock performance too. The returns of PSBs over the last five years have underperformed at the Sensex.

That's the reason we at Equitymaster have been wary of PSU banks since 2014. This was well before the market had caught a whiff of the NPA problem.

PSB Underperformance vis a vis Sensex

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.

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And here's a note from Profit Hunter:

In today's session, the Indian indices continue to witness selling pressure, largely in banking stocks. ICICI Bank opened gap down and plunged 3% with strong volumes. In fact, it has been witnessing selling pressure for the past six trading sessions.

The last time we reviewed the stock, it was trading near the rising channel's resistance line placed at 350. This level also coincides with the life-high it made in January 2015.

This was the point from where the stock started its bear market phase and eroded half of its price. The life-time highs usually acts as a strong resistance.

The stock went slightly above the 350 level, but did not sustain its high for long. In today's session, it plunged to touch a low of 285, breaking the rising channel support line

In October 2017, it broke below the channel's support as well. But, it didn't sustain the low and recovered immediately to resume its uptrend.

So will the stock can once again recover? Will it trade back into the channel to resume its up move or will it continue to slid lower?

ICICI Bank Broke Channel's Support Line
ICICI Bank Broke Channel's Support Line 

Sensex Trades in Red; PSU Stocks Top Losers
01:30 pm

After opening the day in red, share markets in India witnessed choppy trading activity throughout the day and are presently below the dotted line. Sectoral indices are trading mixed with stocks in the PSU sector and stocks in the realty sector trading in red. While stocks in the consumer durables sector are trading in green.

The BSE Sensex is down by 202 points (down 0.6%) and the NSE Nifty is trading down by 70 points (down 0.7%). Meanwhile, the BSE Mid Cap index is trading down by 1.2%, while the BSE Small Cap index is trading down by 1.7%. The rupee is trading at 64.98 to the US$.

Among the most active stocks in the BSE Sensex today are SBI (down 3.4%), Tata Motors (up 0.6%) and ICICI Bank (down 2.7%). Among the BSE 500 stocks, the most active stocks include Jaiprakash Associates (down 8.7%), Suzlon Energy(down 4.7%) and Reliance Communications (down 5%).

While this should do for the wrap on active stocks, we notice that many of you are tracking low priced shares as well. Low priced shares are not necessarily cheap or attractive. But then, there's a lot of interest in them.

Go ahead, have a look at the most active ones here:

NSE Rs 10 to 20 most active stocks

BSE Rs 10 to 20 most active stocks

NSE above Rs 20 most active stocks

BSE above Rs 20 most active stocks

In news from stocks in the telecom sector. Reliance Communications (Rcom) share price fell over 7% in today's trade after the debt laden company faced a blow in attempts to dig itself out of its mounting debts.

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An arbitration court has restrained Rcom and two of its companies from transferring or selling any assets without its permission. The tribunal passed the order after Ericsson moved tribunal to recover its unpaid dues.

The order came as a big blow to RCom which had unveiled a plan in December 2017 to sell its wireless assets to Reliance Jio Infocomm Ltd, in an effort to trim debt.

RCom owed banks US$ 7 billion as of March 2017 when it last made public its debt numbers, and more to vendors.

Companies in the debt-laden telecom sector have been witnessing a double whammy after the entry of Reliance Jio Infocomm Ltd which brought tariffs to rock-bottom and hit the revenue streams of other operators.

Telecom Sector: A decade of Underperformance

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. The BSE Sensex has gone up 3.25 times in nine years, but the BSE Telecom Index has not moved an inch from its levels of 2008.

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'.

Moving on to news from stocks in the metals sector. Coal India share price is witnessing selling pressure today after the state-run miner missed its production target for the eleventh straight month.

Coal India's output from April 2017 to February 2018 stood at 495 mt, 7% lower than the 531 mt target set by the coal ministry.

Similarly, sales volume during this period is set to fall 3% short of the 541.6 mt target.

With less than a month left in the present financial year, the world's largest coal miner looks set to miss its 600 mt annual target for 2017-18.

This has implications on the economy as the import of thermal coal is likely to increase in the coming month to match the fuel demands of the country's thermal power plants.

As on February 28, 2018, as many as 51 power plants were classified as critical or super critical, with the average coal stock standing at 10 days' requirement, as against the prescribed norm of 22 days.

At the time of writing, Coal India share price was trading down by 1%.


Indian Indices Extend Losses; Metal Sector Down 1.9%
11:30 am

After opening the day on a negative note, Indian share markets have extended their losses and are presently trading in the red. Sectoral indices are trading on a negative note with stocks in the capital goods sector and metal sector witnessing maximum selling pressure.

The BSE Sensex is trading down 202 points (down 0.6%) and the NSE Nifty is trading down 70 points (down 0.7%). The BSE Mid Cap index is trading down by 1.2%, while the BSE Small Cap index is trading down by 1.8%. The rupee is trading at 64.97 to the US dollar.

As per a leading financial daily, US President Donald Trump today said that the US, which has US$ 800 billion deficit with other countries, is ready for a trade war with them if they retaliated against his decision to impose an import tariff on steel and aluminum.

The comments follow Donald Trump's plan to impose across-the-board tariffs on steel and aluminum imports to which the European Union (EU) proposed to apply a retaliatory tariff of 25% on a range of goods imported from the US.

Trump proposes to slap a 25% tariff on imports of steel and a 10% tariff on imports of aluminum. The formal announcement is expected to be made this week.

As for domestic markets, the above announcement by Trump also sent Indian metal stocks in the red, with SAIL share price, NMDC share price, JSW Steel share price, and Tata Steel share price witnessing most of the selling pressure.

Note that India's steel industry was just coming out of a rough patch. Demand was picking up. Steel prices were on the rise. Buyers were lining up to pick up stressed assets. With the expected pick up in the investment cycle, the sector was on the upswing. And steel exports were on a roll, as can be seen from the chart below:

Is the Steel Sector's Recovery Under Threat?

However, Donald Trump has now spoiled the party with his plans to impose the above tariffs. India produces a lot of both commodities but internationally, we are not a big player. The US imports only 2.4% of steel and 2% aluminium from India.

But it's not that simple.

With the new US tariffs, major exporters like South Korea will look to sell in other countries. This would lead to a glut and as a result, lower prices across the industry.

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This would mean lower revenue and profitability for Indian metal companies as well and threaten the nascent recovery in the industry. As Ankit wrote in a recent edition of the Equitymaster Insider...

  • If metal producers are deterred from selling their goods in the US, they will come looking for other markets to sell their produce. This is likely to create an 'excess-supply' situation in those markets.

    What happens when there's too much supply? Basic economics says that when supply increases more than the growth in demand, prices decline. So, Indian metal producers are likely to be faced with the possibility of lower metal prices. This will impact their revenues and profitability.

How exactly this trade war will unfold is something to watch out for. We'll keep you updated on all the developments from this space.

Banking stocks are trading in the red today with Karnataka Bank share price and Punjab National Bank share price witnessing maximum selling pressure.

Losses are seen as the Serious Fraud Investigation Office (SFIO) summoned top bankers, including ICICI Bank CEO Chanda Kochhar and Axis Bank CEO Shikha Sharma, in a case related to Rs 50 billion loan extended to Mehul Choksi's Gitanjali Gems.

As per the news, the SFIO was said to have summoned senior executives from 31 banks with business dealings with the firms promoted by Nirav Modi and Choksi.

As per an article in the Economic Times, the officials of the private banks were asked general questions on their loan disbursements, which they answered. The SFIO is now likely to send a more detailed questionnaire to banks asking for more information.

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 $ 2 billion. That's the last thing these banks needed after the crisis they've had in the past few years. This has reflected in their stock performance too.

Note that the returns of PSBs over the last five years have underperformed at the Sensex. Barring State Bank of India, the margin of underperformance has been huge. This is despite the recent run in their stock prices post the government's announcement of the recapitalization plan.

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.

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.


Sensex Opens 120 Points Lower; Bank & Metal Stocks Lead the Losses
09:30 am

Asian stock markets are lower in morning trade following news that Gary Cohn would resign as President Donald Trump's top economic adviser after he lost a fight about tariffs. Cohn was one of several voices in the White House arguing against the planned tariffs on imports of steel and aluminum. The Nikkei 225 is off 0.19% while the Hang Seng is down 0.18%. The Shanghai Composite is trading up by 0.14%. Overnight, the US stocks closed slightly higher.

Meanwhile, Indian share markets too have opened the day in red. BSE-Sensex is trading lower by 120 points and NSE-Nifty is trading lower by 16 points. S&P BSE Mid Cap is trading lower by 0.3% and S&P BSE Small Cap is trading down by 0.4%.

Losses are largely seen in bank stocks, metal stocks and PSU stocks. The rupee is trading at Rs 64.99 against the US$.

The Market cap to GDP ratio for Indian companies 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.

The Warren Buffett Indicator Suggests Indian Equity Market Is Overvalued

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 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 pharma sector, as per an article in The Livemint, Torrent Pharmaceuticals Ltd is readying a €2 billion (Rs 160 billion) bid for Zentiva N.V., the generic drugs unit of France's Sanofi.

Torrent Pharma has reportedly tied up funding from several domestic and foreign banks for the bid, the deadline for which ends on 28 March.

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If Torrent is successful, it will be the biggest outbound transaction by an Indian drug maker, the previous largest being Lupin Ltd's acquisition of Gavis Pharmaceuticals Llc. and Novel Laboratories Inc. for US$880 million in 2015.

Torrent has been fairly active in the M&A space in the recent past. In January, Torrent announced the acquisition of US-based generic pharmaceuticals company, Biopharm Inc (BPI) through its US subsidiary.

In November last year, it acquired the domestic business of Unichem Laboratories for close to Rs 36 billion. In 2014, Torrent acquired the branded domestic formulations business of Elder Pharma for Rs 20 billion and acquired select brands of Novartis, and manufacturing plants of Zyg Pharma and Glochem Industries in 2015.

Torrent Pharma share price opened the day down by 0.3% on the BSE.

Moving on to news from telecom sector. As per a leading financial daily, Bharti Airtel on Tuesday said it has acquired India leg of Gulf Bridge International submarine cable which will boost its data carrying capacity.

Airtel and GBI have also agreed to formulate joint 'Go to Market' strategies and leverage the footprint of their respective global networks to serve global customers.

This will also complement Airtel's existing global network spanning 2,50,000 Rkms (of networking cable) with presence in 50 countries.

With this new investment, Airtel has further consolidated its leading position as a global capacity provider. It now has large capacities, owned and leased, on multiple international submarine cable systems and offers the maximum number of routes between India and Europe.

Bharti Airtel share price opened the trading day down by 0.2% on the BSE.

In news from FMCG sector, as per a leading financial daily, ITC's Aashirvaad atta has become a Rs 40 billion brand in the wheat flour market, with around 28% share in the branded segment.

The company as part of its expansion plans is also expanding brand Aashirvaad into new segments as milk and ghee in the dairy category, besides spices, instant mixes, ready meals etc.

The company has extended Aashirwad brand into cow ghee and also launched Aashirwad milk last month in Munger at Bihar. The company is also evaluating some other segments like maida, suji, besan for expansion of Aashirwad brand.

ITC share price is trading down by 0.8%.


Of the Fall in Banking Stocks, EU's Retaliatory Tariff Proposal, and Top Cues in Focus Today
Pre-Open

Share markets in India closed on a negative note yesterday. Losses were seen across most sectors with stocks in the realty sector and stocks in the banking sector leading the losses.

At the closing bell yesterday, the BSE Sensex stood lower by 430 points (down 1.3%) and the NSE Nifty closed down by 110 points (down 1%). The BSE Mid Cap index ended the day down 0.8%, while the BSE Small Cap index ended the day down by 1.3%.

Top Stocks in Focus Today

Axis Bank share price will be in focus today as the Reserve Bank of India has slapped a Rs 30 million penalty on the bank.

From the cement sector, market participants will be tracking Ramco cements share price. The company has reported entering into an agreement with Ramco Industries, a Related Party, for acquisition of their clinker grinding unit situated at Kharagpur, West Bengal.

Market participants will also keep tabs on JSW Energy share price as it was yesterday reported that the company acquired JSW Electric Vehicles Private Ltd. The JSW Electric Vehicles is part of diversification strategy of JSW Energy Ltd to foray into electric vehicles, energy storage systems and charging infrastructure.

SFIO Summons Top Bankers

Banking stocks witnessed selling pressure yesterday after the Serious Fraud Investigation Office (SFIO) summoned top bankers, including ICICI Bank CEO Chanda Kochhar and Axis Bank CEO Shikha Sharma, in a case related to Rs 50 billion loan extended to Mehul Choksi's Gitanjali Gems.

As per the news, the SFIO was said to have summoned senior executives from 31 banks with business dealings with the firms promoted by Nirav Modi and Choksi.

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EU Proposes Retaliatory Tariff Against US Goods

As per a leading financial daily, the European Union (EU) has proposed to apply a tariff of 25% on a range of consumer, agricultural, and steel goods imported from the US.

The proposal is a retaliatory measure against President Donald Trump's plan to impose a 25% tariff on foreign steel.

Note that US President Donald Trump announced plans to impose across-the-board tariffs on steel and aluminum imports. He proposes to slap a 25% tariff on imports of steel and a 10% tariff on imports of aluminum. The formal announcement is expected to be made this week.

The above announcement by Trump also sent Indian metal stocks in the red. Companies such as SAIL, NMDC, JSW Steel, Nalco, and Tata Steel witnessed selling pressure and cracked around 5% due to the announcement.

One of the recent editions of Equitymaster Insider explains what the above salvo means for global trade and the Indian metal stocks. You can read the same here (requires subscription).

Govt. to Receive Over Rs 100 bn Interim Dividend from RBI

According to a leading financial daily, the government is set to receive over Rs 100 billion as interim dividend from the Reserve Bank of India (RBI).

As per reports, the amount has been calculated for the six months through Dec 31 as RBI's financial year runs from July to June.

The RBI had paid Rs 306 billion worth of dividend to the government in August 2017. The amount was almost half the normal rate, as the RBI cited costs related to demonetisation for the lower figure.

The central banker had earlier declined requests from the government for an additional payment after the dividend payout dropped to a five year low. However, an interim dividend worth Rs 100 billion looks to be on the cards.

The above revenue from the RBI could boost the government's chances of meeting its fiscal deficit target.

RBI Slaps Rs 30 mn Penalty on Axis Bank

Moving on to news from stocks in the banking sector. The RBI slapped a Rs 30 million penalty on Axis Bank.

The banking regulator fined the bank for violation of non-performing asset (NPA) classification norms. The regulator said it found discrepancies in the lenders assessment of non-performing assets which warranted a monetary penalty.

Axis Bank which is currently struggling under the burden of its legacy infrastructure loans reported divergence of Rs 56.3 billion for FY17 while this number was at Rs 94.8 billion for FY16.

The regulator in its statement also said that its action was based on deficiencies in regulatory compliance. It also said that the action by the regulator does not cast any view on the validity of any transaction or agreement entered into by the bank with its customers.

Also note that Axis Bank is not the only bank to have been penalised by the RBI for divergences in NPA classification. Last October, Yes Bank was slapped with a Rs 60 million fine for the same reason.