Strong Start to the Week

After trading firm in the noon session, buying activity intensified in the final hour of trade as Indian indices finished on a strong note. At the closing bell, the BSE Sensex closed higher by 333 points, the NSE Nifty finished higher by 100 points. The S&P BSE Midcap and the S&P BSE Small Cap also closed firm with both the indices up by 1.4%. Gains were largely seen in capital goods, consumer durables and realty stocks.

Chinese markets stood out in a mixed trading session in Asia. The Shanghai Composite gained 2.15% and the Hang Seng rose 0.06%. The Nikkei 225 lost 1.25%. European markets too are mixed today. The DAX is up 0.63% while the FTSE 100 gains 0.10%. The CAC 40 is off 0.58%.

Oil prices were trading at US$40.77 a barrel at the time of writing. The rupee was trading at 66.61 against the US$.

National Aluminium Company (Nalco) is reportedly planning to invest over Rs 370 billion over the next 5-7 years. This comes at a time when the company plans to expand existing facilities, setting up of new smelter unit overseas, development of mines and diversification in power.

According to the reports, the company is undertaking the investment plan to reduce operational expenses and to beat the depressed market realizations. The company is in advanced stages of discussions to explore the possibility of setting up smelter of 0.5 million tonne a year (mtpa) capacity in Iran. The proposed smelter will come up at an estimated cost of Rs 120-130 billion. Note that Nalco has the largest integrated alumina-aluminium complex of Asia. Its integrated operations cover the entire aluminium production value chain from mining bauxite, refining alumina, smelting aluminium, captive power generation to a strong logistic network in terms of rail & port facilities.

On another note, global margins of aluminum companies have been under severe pressure due to concerns over Chinese aluminum exports and global meltdown in commodity prices (Subscription Required). Moreover, domestic aluminum companies are also struggling with higher fuel costs. Aluminium companies were forced to source coal from the open markets in the wake of cancellation of the captive coal blocks allotted to them by the Supreme Court last year. And price hikes taken to pass on the cost has further dented their competitiveness in the global markets. This has all been reflected in the weakening financial performance during the first half of FY16 (Subscription required).

The stock price of Nalco finished the trading day up by 0.3% on the BSE.

Capital goods sector finished the trading day on a strong note with BEML and Bharat Electronics leading the gains. According to a leading financial daily, Bharat Heavy Electricals (BHEL) has commissioned 270 MW coal-based unit at the same site in the state of Punjab within one month of the successful commissioning of a 270 MW thermal generating unit in the same state. The unit has been commissioned at the 2x270 MW Goindwal Sahib coal-fired Thermal Power Project of GVK Power & Infra (GVKPIL), located in Goindwal Sahib in Tarn Taran district.

BHEL has so far contracted 35 sets of 270 MW rating, out of which 13 sets have now been commissioned. Notably, all the operational sets of 210-270 MW class in the state of Punjab have been supplied, erected and commissioned by BHEL. In addition to thermal projects, BHEL has a significant presence in the state's hydro sector also, with 95% share in the hydro generating capacity of Punjab State Power Corporation (PSPCL). Presently, BHEL is executing Electro-Mechanical works for hydro-electric power plants at Shahpur Kandi in Gurdaspur (206 MW) and Mukerian (18 MW) in the state of Punjab. The company reported 14% YoY decline in sales, and a loss of Rs 11 billion (Subscription Required) during 3QFY16.

Many big companies from the capital goods space have seen their stocks move up quite sharply in the last couple of weeks or so. In short span of time since the budget, many of these have gone up by 15% to 18%.

Realty Stocks Lead the Gains
01:30 pm

After opening the day in the green, the Indian indices have continued to trade on a positive note during the post-noon trading session. Sectoral indices are trading firm with stocks from the realty, FMCG, and telecom sectors leading the gains.

The BSE Sensex is trading up 132 points (up 0.5%) and the NSE Nifty is trading up 39 points (up 0.5%). The BSE Mid Cap index is trading up 0.7%, while the BSE Small Cap index is trading up by 0.9%. Gold, per 10 grams, is trading at Rs 28,901 levels. Silver, per kilogram, is trading at Rs 37,590 levels. Crude oil is trading at Rs 2,708 per barrel. The rupee is trading at 66.50 to the US$.

Majority of the stocks in the food & tobacco space are trading on a positive note with Wadala Commodities and Ruchi Soya Industries witnessing maximum buying interest. As per a leading financial daily, FMCG major ITC has said that sales of its instant noodles brand 'Yippee' are recovering and its market share has risen to anywhere between 30-40%.

The company's management, speaking about the present instant noodles market, said that during pre-Maggi controversy, the industry sales were Rs 2.5-3 billion per month. It stated that the industry sales tanked to 5-10% after the controversy broke, but now has recovered to nearly 50% of the original industry sales.

For the above developments, the company had to run big campaigns to bring back confidence. While the management is encouraged by the recovery, it is still far from complete recovery to pre-crisis sales.

On a separate note, ITC will gradually expand its foray into the dairy sector rationally. One shall note that the company has entered the dairy segment with ghee in the southern market and is looking to introduce more products in the segment in the future including chocolates.

ITC Ltd is one of India's foremost private sector companies. The company operates through four segments viz., fast moving consumer goods (FMCG), hotels, paperboards, paper and packaging, and agri-business. Presently, its stock is trading up by 1.9%.

Mining stocks are trading on a positive note with MMTC and MOIL leading the gains. In another news update, Coal India Ltd (CIL) has supplied 370.8 million tonnes (MT) of fuel to the power sector during April-February period of this fiscal. This is higher by 6.4% than that in the same period last year.

Also, the dispatches by CIL in February increased by 1.8% to 33.92 MT compared to 33.33 MT in the same month of 2015.

It was reported that coal dispatched rose on the back of increase in CIL's production and improvement in evacuation of the dry fuel.

One shall note that Coal India has achieved 9.2% increase in production this year so far, against an average of 3% growth over the last five years. Further, out of the government's targeted coal production of 1.5 billion tonnes by 2020, Coal India is looking at an output target of one billion tonnes.

Coal India Ltd is a 'Maharatna' Public Sector Undertaking (PSU) under Ministry of Coal, Government of India. The company is the largest coal producing company in the world based on its raw coal production. Also, it is the largest coal reserve holder in the world based on its reserve base. We believe that the company remains committed to strong volume growth. As we had stated in our result analysis report of the company (subscription required), 'Globally coal prices continue to remain under pressure. However, with the rising output, the company can sell more coal through the more profitable e-auction route. In 3QFY16, the company's e-auction quantity increased from 14.7 million tons in 2QFY16 to 15.1 million tons with improving realizations by 4.4% QoQ basis.'

Presently the stock of the company is trading down by 0.6%.

Indian Markets Continue Their Uptrend
11:30 am

After opening the day on a positive note, the Indian Markets have added to their early gains. Sectoral indices are trading on a positive note with stocks from the realty, FMCG and capital goods sectors leading the gains.

The BSE Sensex is trading up 132 points (up 0.5%) and the NSE Nifty is trading up 41 points (up 0.5%). The BSE Mid Cap index is trading up by 0.8% while the BSE Small Cap index is trading up 1%. The rupee is trading at 66.50 to the US$.

Steel stocks are trading mixed with Tayo Rolls and Gujarat Mineral Development leading the gains. As per a leading financial daily, Tata Steel is in discussion with foreign companies for investments up to Rs 200 billion in heavy industries over the next five years at its Special Economic Zone (SEZ) project at Gopalpur in Odisha. The investments will be in defence, metal downstream and electronics as well as chemicals and pharmaceuticals among others.

The management of the company said that all master-planning for the investment has been done, the entire area has been cleared and there is no encumbrance. For the investments, the company is in discussions with 13 to 14 different investors.

One shall note that Tata Steel is the anchor tenant for the multi-product 2,970-acre SEZ at Gopalpur in Odisha. The SEZ will be based on a Singapore model for industrial development which offers land parcels of various sizes for industries. Basic utilities and road infrastructure has already been built in early development of the zone which has Tata Steel's ferrochrome plant.

Moreover, the company is also discussing a possible investment in expansion of Gopalpur port which is about five kms away from the zone.

Tata Steel Group is among the top-ten global steel companies with an annual crude steel capacity of over 29 million tonnes per annum (MTPA). It is now the world's second-most geographically-diversified steel producer, with operations in 26 countries and a commercial presence in over 50 countries. On standalone basis, Tata Steel looks attractive. This is because, the government has imposed a minimum Import price (MIP) for six months on 173 steel products ranging between US$ 341/tonne and US$ 752/tonne. Imposition of MIP is likely to result in firming up of domestic steel prices. This will improve realisations. However, at the consolidated level, Tata Steel is bleeding. To know more, read our analysis of the third quarter results here (Subscription required).

Presently the stock of Tata Steel is trading up by 0.8%.

Stocks in the PSU banking space are trading on a positive note with IDBI Bank and Punjab National Bank (PNB) witnessing maximum buying interest. State Bank of India (SBI) has raised Rs 30 billion on a private placement basis. The bank has issued 30,000 Basel-III compliant, Tier-II bonds in the nature of debentures. The debentures have a face value of Rs 10 lakh each at par, with a 10-year tenure, bearing 8.45% per annum coupon payable annually and with a call option after 5 years.

The fund raised is part of the bank's Rs 120 billion debt capital. Note that earlier, on March 9, the SBI board had approved raising the remaining Rs 50 billion of the Rs 120-billion fund-raising programme.

The programme for raising Rs 120 billion was announced by the bank earlier in December. The bank has so far raised Rs 40 billion and Rs 30 billion in two tranches through issue of debt instrument as a part of the programme. On February 19th, the bank had informed BSE that it raised Rs 30 billion from Basel-III compliant bonds to fund business growth. Further, the bank on December 24th announced that it raised Rs 40 billion by issuing Tier-II bonds on private placement basis under the Basel-III norms.

One shall note that the Basel-III norms are aimed at bolstering banks' resilience. Further, according to Fitch Ratings Report, Indian banks need US$ 140 billion worth of capital to ensure full compliance with the Basel-III norms by 2018-19. Several PSU banks have in the recent past announced capital raising by way of bond issue. This is because they would need to hold more capital for every new loan they give in order to absorb any losses that may arise if the borrowers default on the loan, according to the Basel III accord. One should also note that earlier in August last year the government had announced fund infusion of Rs 201 billion into 13 PSU banks. SBI cornered a hefty sum of Rs 55 billion in the same.

Presently the stock of SBI is trading up by 2.2%.

Positive Start to the Day
09:30 am

Barring Japan, major Asian stock markets have opened the day on a positive note. The stock markets in China and Taiwan are trading higher by 1.8% and 0.9% respectively. Major indices in Europe and US ended their previous session in green. The rupee is trading at 66.6 per US$.

Indian stock markets have opened the day on a firm note. The BSE Sensex is trading higher by 112 points (up 0.5%) and NSE Nifty is trading higher by 34 points (up 0.4%). Both, BSE Mid Cap and BSE Small Cap are trading higher by 0.3% and 0.5% respectively. Major sectoral indices have opened the day in green with stocks from banking and fast moving consumer goods (FMCG) sector witnessing maximum buying interest.

As per an article in a leading financial daily, Torrent Pharmaceutical plans to raise funds through various instruments including qualified institutional placements (QIP). However, the company did not specify the quantum of funds it intends to raise.

Further, the company has stated that its board on 23rd March will consider the proposal for raising funds by way of issue of equity shares, including convertible bonds or debentures through qualified institutional placements or any other modes.

Earlier, the company had stated that its third manufacturing plant in Gujarat had obtained the Establishment Inspection Report (EIR) from the US health regulator USFDA. With the approval, this plant is now the third plant of Torrent Pharma to receive the USFDA approval, out of its 5 manufacturing plants.

In the coming fiscal, Torrent has targeted to launch 7-8 products out of which 1-2 could be in niche segments. This is likely to be an important growth driver for the domestic business, going forward. The stock is trading up by 0.3%.

As per Business Standard, Dabur India published an article stating the virtues and positives of using its ayurvedic cough syrup named Dabur Honitus. This product is positioned as an alternative to other cough syrups, many of which have been banned by the government recently. The ban is to put a clampdown on fixed dose combination drugs (subscription required). Reportedly, the ban will dent the overall revenues of pharma players by 2-3%.

By publishing the article, Dabur has moved quickly to take advantage of the ban. Reportedly, other ayurvedic drug majors too could cash in by pushing their products in the market. Next week, the Ayurvedic Drug Manufacturers Association (ADMA), the apex body of the sector will meet in Mumbai. The manufacturers are expected to discuss their prospects to exploit this opportunity. It will be interesting to see how the ayurvedic players cash in on this huge opportunity going forward.

How to Deal With Willful Defaulters

Willful Defaulters are a hot topic of debate these days. The Vijay Mallaya episode has brought this issue to forefront. The crack down on such people is inevitable. Pressure is on the government to deal with this issue with an iron fist. We too, believe that the e should be no leniency shown to willful defaulters.

Such a crackdown, coupled with banks cleaning up their books, will go a long way in boosting India's credibility as an economy. However, the question now arises, has a witch hunt begun? As per an article in the Business Standard, this could be the case. Any senior PSU bank official is now a suspect, if he has cleared a loan to a troubled corporate.

It is true that the banks have brought this upon themselves. Their credit appraisal process has been disastrous. But what is the best way to deal with this situation? Should the government go after these corporates aggressively? Or should past issues be ignored and only prospective changed be enforced? We have no doubt which side of this debate we are on. However, let us examine both arguments.

On one side there are folks (ourselves included) who believe that crony capitalism is a cancer and must be eradicated. A short term hit to growth can be tolerated in the cleanup process. As the demand for credit is at historic lows anyway, this is the perfect time to clean up.

The other side urges more caution. They worry about what will happen to growth. If large corporates stop putting up new projects, then private investment could freeze up. This will result in no job growth and hence mass unemployment. In such a crackdown, even honest entrepreneurs and bankers will think a hundred times before going ahead with even a viable project.

We believe the time has indeed arrived to end India's crony capitalist system. This transition to a 'real' capitalist economy will be difficult. No country has managed it easily, just look at China. It will be especially tough in those sectors where crony capitalism rules: commodities, infrastructure, real estate, etc. But it must be done. However, a system must be put in place where existing viable project continue to receive support from the banking system.

At the same time, the government must ensure that honest entrepreneurs are never targeted. In addition, Start Up India must now become the government's primary focus. It cannot be allowed to degenerate in to a slogan. These small entrepreneurs will be India's next generation of innovators and job creators. They must be supported at every step of the way.

This is the way forward we believe. Unfortunately, the Modi government hasn't come out with a clear plan yet. It still seems to be reeling under the sheer scale of the problem. They are aware that Vijay Mallaya is just the tip of the iceberg. We are not sure what the government's decision will be, now that the full magnitude of the crisis has come out into the open. But we remain hopeful. We are sure of one thing though. The crony capitalist era of India's economy, is permanently behind us. And that is a very good thing.