Markets Continue to Rally
Closing

Buying activity was witnessed throughout the trading session today as Indian markets flourished in the green amid strong global cues. At the closing bell, the BSE Sensex closed higher by 481 points, the NSE Nifty finished higher by 142 points. The S&P BSE Midcap and the S&P BSE Small Cap finished up by 0.9% and 1.1% respectively. Gains were largely seen in auto and banking stocks.

Asian markets closed higher following a strong finish in US equities overnight. The markets were also upbeat after a Chinese trade data showed exports climbed in March and because of a rise in oil prices. The Hang Seng finished up 3.19%, while Japan's Nikkei 225 closed up 2.84% and China's Shanghai Composite was up 1.42%. European markets are trading sharply higher today with shares in France leading the region. The CAC 40 is up 2.57%, while Germany's DAX is up 2.22% and London's FTSE 100 is up 1.47%.

The rupee was trading at 66.43 against the US$ in the afternoon session. Oil prices were trading at US$ 41.56 at the time of writing.

According to an article in The Economic Times, National Aluminum Company Limited (Nalco) is considering setting up a 500,000 tonne per annum aluminium plant in Iran through a joint venture. The company's Chief Managing Director met Iran's Mines and Mining Industries Development and Renovation Organisation head Mehdi Karbasian in Tehran over the proposed JV for setting up the plant, which includes a smelter and a gas-based power plant in the Chabahar Free Trade Zone.

Reportedly, the discussions also emphasized on Nalco's interest to further expand its presence in Iran through more co-operation in bauxite mining and aluminum ingot production. The company faces a daunting challenge of keeping operational and raw material costs in check in its bid to stay competitive even as it aims to expand capacity to take advantage of the infrastructure boom in India. The scrip of Nalco finished firm (up 6.9%) on the BSE.

On another note, global margins of aluminium companies have been under severe pressure due to concerns over Chinese aluminium exports and global meltdown in commodity prices (Subscription Required). Moreover, domestic aluminium 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).

Moving on to news from the steel sector. According to a leading financial daily, Tata Steel and Germany's Thyssenkrupp are holding high-level talks on the possibility of combining their European steel operations in a joint venture, but are also looking at other viable options. Reportedly, under the model currently being discussed, Tata and Thyssenkrupp would each have shares in the joint venture proportional to the values of the businesses they were contributing. Also reportedly Tata Steel was very interested in acquiring Thyssenkrupp's Brazilian CSA steel plant. This comes at a time when Tata Steel is selling its Scunthorpe steel plant in UK to London-based Greybull Capital.

Meanwhile, Steel Authority of India, JSW Steel and Essar Steel India have filed a petition before the Directorate General of Anti-Dumping and Allied Duties (DGAD) for initiation of anti-dumping investigation of a certain variety of steel products by six countries, including China, Japan and Korea. The move assumes significance as the sector is facing challenges due to cheap steel imports. The government has already taken steps such as imposing minimum import price and safeguard duty to guard domestic producers.

Buying activity was witnessed across majority of the steel stocks with Tayo Rolls and Jindal Steel and Power leading the gains.


Auto Stocks Lead the Gains
01:30 pm

Indian Markets continued to rally in the post-noon trading session. Sectoral indices are trading on a mixed note with stocks from the banking and auto sectors leading the gains.

The BSE Sensex is trading up 433 points (up 1.8%) and the NSE Nifty is trading up 130 points (up 1.7%). The BSE Mid Cap index is trading up 1.3% while the BSE Small Cap index is trading up by 1.4%. Gold prices, per 10 grams, are trading at Rs 29,200 levels. Silver price, per kilogram is trading at Rs 38,100 levels. Crude oil is trading at Rs 2,754 per barrel. The rupee is trading at 66.50 to the US$.

Stocks in the banking space are trading on a positive note with Oriental Bank and Canara Bank witnessing maximum buying interest. As per an article in Economic Times, the Reserve Bank of India (RBI) is planning to put in place a system wherein banks have to comply with the irregularities pointed out in annual financial inspection (AFI) within a stipulated period. The banks will face regulatory action if they fail to comply with the pointed irregularities.

In its monetary policy, the RBI said that it plans to put in place a supervisory enforcement framework wherein action against banks would be taken for non-compliance of RBI instructions. The framework is said to be formalised by June this year.

The above move is initiated to standardize bad loan recognition across all banks and to put an end to decade-old volatility in banks' earnings.

One shall note that the rising bad loans has been a serious concern for Indian banks, especially for the PSUs. According to RBI's website, the Indian public sector banks account for 72% of total banking sector assets, but they accounted for only 42% in total profits during 2014-15.

For this, Finance Minister Arun Jaitley had announced that the government will provide sufficient funds to recapitalise public sector banks (PSUs) to ensure that they play a significant part in boosting growth. The announcement made in the Union Budget 2016-17 was an allocation of Rs 250 billion towards the recapitalization of PSU banks. Apart from this, Rs 100 billion each will be infused in 2017-18 and 2018-19 by the government for the recapitalisation of PSU banks. In one of our editions of The 5 Minute Wrap Up Premium we had highlighted what the budget holds for the future of PSU banks (subscription required).

With all these developments one can say that the government is doing all it can to bring down the level of bad loans in Indian banks. Also, it is using its mandate as a great opportunity to unlock the untapped value from its PSU assets. If the government succeeds, then PSU shareholders could multiply their wealth in such stocks. Only time will show the practicalities that these reforms will bring.

Stocks in the IT space are trading on a positive note with Wipro and Info Edge leading the gains. In another news update it was reported that Wipro is planning to buyback its equity shares. For this, the company's board will consider a proposal for buyback of equity shares on April 20, the day of its fourth quarter results.

The current promoter holding stands at 73.35% while institutions and non-institutions hold 15.52% and 10.53% each in the company.

In a buyback, the company purchases its own shares from the market; the result of which is that the number of shares outstanding for the company is brought down. The general perception is that companies tend to buyback their shares when they are available at cheap prices.

Reportedly, an article in Business Standard states that share buybacks have seen an uptick in FY16 as the benchmark indices witnessed a decline of 10% during the same period. A total of sixteen companies went in for buybacks in FY16. The count a year before stood at ten -when the Sensex rallied by as much as 25%.

Buyback of shares allows a company to use its adequate cash to buy its own shares, thereby lowering the equity base, which leads to higher profit per share for the balance. This tends to bring about an improvement in financial ratios.

However, should investors fall for companies that announce buyback? Are these companies buying opportunities? We believe that forming your investment decisions by simply relying on the above activities can be risky. Buyback of shares can be seen as a healthy development for that particular company. However, that should be only one of the criterion that investors should consider.

Ultimately, it boils down to management integrity, the nature of the business as well as the health of the company's balance sheet. In case these are not as per one's comfort levels, investors would do well to exercise caution while investing in such companies.

Wipro is a global information technology, consulting and outsourcing company serving clients in over 175 cities across 6 continents. The company has picked up a minority stake in US-based Emailage Corporation. The company stated that it has made a strategic investment in and signed a partnership with Emailage Corporation, a risk assessment and fraud prevention company. Also, the company has entered into a five-year partnership with Jubilant FoodWorks, the country's top food service company. These developments augurs well for the company. As we had stated in our result analysis report of the company (subscription required) ... "The company's focus on these new areas as well as on productivity enhancing measures like automation will hold it in good stead."

Presently its stock is trading up by 2.2%.


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 auto and banking sectors leading the gains.

The BSE Sensex is trading up 411 points (up 1.6%) and the NSE Nifty is trading up 121 points (up 1.6%). The BSE Mid Cap and the BSE Small Cap indices are also trading in the green, both up by 1.3%. The rupee is trading at 66.42 to the US$.

Banking stocks are trading on a positive note with ICICI Bank and Kotak Mahindra Bank witnessing maximum buying interest. As per a leading financial daily, Axis Bank has announced a cut in its lending rate by 0.15%. Announcing its maiden MCLR (Marginal Cost Lending Rate) on March 31, the bank had set the overnight rate at 9.10%. However, with the above 0.15% cut, the same will be reduced to 8.95% effective from April 18, 2016.

This will be recorded as the first review introduced by a lender since the introduction of the MCLR with effect from April 1. The MCLR mechanism is introduced to ensure effective transmission of policy rates. The Reserve Bank of India (RBI) has announced that from April 1, 2016, banks must review their lending rates frequently, and reflect changes in their cost of borrowing.

The new lending rates, named Marginal Cost of Funds-based Lending Rate (MCLR), have to be computed based on banks' marginal cost of borrowing, or incremental cost of funds. This is as against the computation based on the average cost of funds that banks have used so far.

What this means is that if a bank's cost of borrowing is 8% now but tomorrow the incremental cost of funds becomes 7.5%, the marginal cost of borrowing for the computation purpose will be 7.5%, rather than the average of the two.

With this regime in place, a fall in deposit rates will be quickly reflected in the lending rates. Also, a rise in deposit rates would mean lending rates going up quickly too. In all, the process will mean quick transmission of policy rates by banks.

Going by the past experience, the direct correlation between RBI cutting the repo rate and banks passing on that cut at the same rate in the form of lower lending rates, is rather weak.

The reason why banks are not willing to cut their lending rates is because it will reduce their income from interest charged. Further, the concern is that public sector banks (PSUs) are staring at a huge amount of corporate bad loans. And in order to handle this, banks are hoping to make a greater profits by cutting their deposit rates, but not passing the cut in lending rates. The MCLR regime should help to address this issue.

Along with Axis Bank, State Bank of India (SBI) and HDFC Bank have their MCLRs at 8.95%.

Stocks in the automobile space are trading on a positive note with Maharashtra Scooters and M&M leading the gains. In another news update it was reported that Mahindra & Mahindra's (M&M) farm equipment sector has launched new range of tractor Yuvo in Madhya Pradesh.

The Yuvo range comes in five models - 265 DI (32HP), 275 DI (35HP), 415 DI (40HP), 475 DI (42 HP), and 575 DI (45 HP). It will be available in 15 states at a starting price of Rs 4.57 lakh for 265 DI (32HP) in Bhopal.

The model is said to offer many new technology features to farmers in the country, who are looking for tractors in 30-45 Horse Power (HP) range. It is designed to deliver superior performance in farming operations in any soil condition and offers versatility to carry out over 30 applications, thus making it ideal for using in any part of the country.

On a separate note, M&M has launched its latest SUV - the NuvoSport earlier this month. The launch has given a further boost to the company's leadership position in the UV segment.

One shall note that the company has completed nine product launches in FY16. The impact of this, along with the above launches, will be reflected in the financials of FY17. We have discussed this in our result analysis report of the company here (subscription required).

Stock of M&M is trading up by around 6.8%. Most of this buying interest came after the Indian Meteorological Department (IMD) yesterday predicted above normal rains in the upcoming monsoon season. This comes as a welcome breather for M&M. The above normal monsoon could improve agricultural incomes which would further improve consumption and boost tractor sales.


Indian Indices Opens Strong
09:30 am

Major Asian stock markets have opened the day on an encouraging note. Stock markets in Japan and China are trading higher by 1.6% and 2% respectively. Benchmark indices in Europe and US ended their previous session on a positive note with stock markets in US ending the day higher by 0.9%. The rupee is trading at 66.49 per US$.

Indian stock markets have opened the day on a bullish note. The BSE Sensex is trading higher by 297 points (up 1.2%) and NSE Nifty is trading higher by 85 points (up 1.1%). Both, BSE Mid Cap and BSE Small Cap are trading higher by 0.9%. Major sectoral indices have opened the day in green with stocks from banking and telecommunication sectors witnessing buying interest.

As reported in a financial daily the weather forecast department of India, Indian Meteorological Department (IMD) predicted above normal rains in the upcoming monsoon season. This could help revive the rural demand which has remained subdued since long.

Further, the agency stated that the monsoon rainfall will be 106% of the long period average and there is a 94% probability that monsoon will be normal to excess. Reportedly, the monsoon is considered normal when the rainfall is 96 to 104% of the Long Period Average (LPA) and is considered above normal when it is 105% to 110% of LPA.

The news comes as a relief considering that the country has faced a deficit rainfall in the preceding two years. Eleven states declared a drought in the country after last year's failed rains which have also led to depleting water levels in reservoirs.

A normal monsoon will lead to higher disposable income in the hands of farmers, which in-turn will boost the rural consumption. To add to this, a normal monsoon will also help to keep the inflation at low levels. The possibility of a good monsoon would also increase the chances of the country's central bank retaining its easy money policy. However, there have been many instances in the past wherein the forecasts have gone wrong. Provided, they are accurate it will help to revive the rural sentiments.

In another news update, Tata Steel agreement to sell one of its main steelwork to investment firm Greybull Capital Llp. This is expected to reduce the company's large debt just marginally.

Reportedly, the deal did not include a transfer of debt associated with the division which is estimated to be in the range of Rs 120-150 billion. As of September 2015, Tata Steel had a consolidated debt of Rs 717 billion-most of it associated with the global operations.

However, the company will not be under immediate repayment pressure as a majority of the debt has been restructured. Restructuring has led to a stretch in the repayment period. As reported in Livemint, the refinancing ensures that there is no repayment of principal due from Tata Steel UK Holdings Ltd until 2019. Tata Steel is trading up by 1.4%.


Buybacks: Good Enough Reason to Invest in a Stock?
Pre-Open

As reported by Business Standard, share buybacks saw an uptick in FY16. During the year, the benchmark indices witnessed a decline of 10%.

A total of sixteen companies went in for buybacks in FY16. The count a year before stood at ten - when the Sensex rallied by as much as 25%. The chart below shows the value of shares purchased through buybacks over the years. FY16 was comparatively a poor year in this regard. But on a YoY basis, the figure was higher by about 4x.

FY16 Sees an Uptick in Buyback of Shares
FY16 Sees an Uptick in Buyback of Shares

Moving on promoter activity, the total value of promoter buying stood at Rs 194 billion between April-December of FY16; during the same period, promoter selling stood at Rs 141 billion.

Clearly, there was an uptick in promoter driven action. But does this uptick in buyback and promoter buying signal higher business confidence? Let us better understand how buyback and promoter holding actually works.

In a buyback, the company purchases its own shares from the market; the result of which is that the number of shares outstanding for the company is brought down. The general perception is that companies tend to buyback their shares when they are available at cheap prices.

Logically, the same should be the case for goes for promoter buying. In bear markets, promoters tend to raise stakes. In bull markets, they tend to shed a portion of their stake by taking advantages of the market forces.

Both this moves - the buyback and promoter buying - are seen as positive signs. Buyback of shares allows a company to use its adequate cash to buy its own shares, thereby lowering the equity base, which leads to higher profit per share for the balance. This tends to bring about an improvement in financial ratios.

Similarly, rising promoter stake in a company reflects his confidence and commitment towards the business. When promoters buy shares of their own companies, they do so because they believe their shares are mispriced and that the outlook looks promising.

This brings us to the focal question on whether such companies are always buying opportunities.

We believe that forming your investment decisions by simply relying on the above activities can be risky. Buyback of shares can be seen as a healthy development for that particular company. However, that should be only one of the criterion that investors should consider. This we say because there could be instances of promoters buying shares to mislead the market. One has to be prudent and diligent in separating the wheat from the chaff and invest only in fundamentally sound businesses run by a committed managements.

Ultimately, it boils down to management integrity, the nature of the business as well as the health of the company's balance sheet. In case these are not as per one's comfort levels, investors would do well to exercise caution while investing in such companies.