A Positive Day for Indian Indices

After witnessing buying interest in the post-noon trading session, the Indian equity markets closed their day on a firm note. Stocks from sectors such as capital goods, realty and FMCG were leading the gains. The BSE Mid Cap and the BSE Small Cap indices however ended flat.

The BSE Sensex closed higher by about 160 points (up 0.6%). The NSE Nifty ended higher by about 29 points (up 0.4%).

On the global front, most of the Asian indices closed their day on a negative note with Hang Seng ending lower by 0.37%. The European indices witnessed a mixed performance. The FTSE 100 is down 0.1%, France's CAC 40 is down 0.08% and Germany's DAX is up 0.15%. The rupee was trading at Rs 66.56 to the dollar at the time of writing.

Crude oil is trading up by 3.6% at Rs 3,005 per barrel. Crude oil is in the limelight of late as prices for the commodity surged to 2016 peaks last week. The uptick in prices was led by signs of easing oversupply and falling US output. Also, the Fed's stance to keep its benchmark rates unchanged have aided this rally.

The above buying interest is preceded by fears two weeks ago that a sustained price rally would be damaged by the failure of the major oil producers to agree to limit oil production. Oil prices witnessed volatility after the summit in Doha among the world's largest oil producing countries turned out to be a complete wash. This came as oil producers failed to agree on a production cap that could have tightened supply.

However, the recent developments have provided some relief to the ongoing volatility in the crude oil prices. All eyes are now on June's meeting of OPEC countries that will decide the fate of crude oil production levels ahead.

Tanushree Banerjee, co-head of research at Equitymaster, has stated the impact of crude on oil and gas stocks in one of the editions of The Equitymaster Research Digest (subscription required).

Moving on from crude oil to gold, as per a leading financial daily, India's gold imports fell by 67.3% YoY to 19.6 tonnes in April 2016. The data from gold and silver refiner MMTC Pamp stated that gold imports declined to 19.6 tonnes in April, 2016 as against 60 tonnes in the year-ago period due to poor demand. Of the total imports, bullion shipments were at 13.14 tonnes in April this year, down from 54 tonnes in the year-ago period.

The fall in imports was seen as jewelers' strike opposing one per cent excise duty on non-silver jewellery significantly hit demand for the metal. Jewelers went on a strike on March 2, 2016. This lasted for nearly three weeks. The strike was against an excise duty of 1% on 'articles of jewellery [excluding silver jewellery, other than studded with diamonds and some other precious stones]' that the finance minister Arun Jaitley proposed in the budget of the government, for 2016-2017. The jewelers also protested against the mandatory quoting of the Permanent Account Number (PAN) for cash transactions of Rs 2 lakhs or more. Vivek Kaul, editor of Vivek Kaul's Diary, wrote an insightful piece around this issue that stated the reasons why the government should ignore jeweler's strike.

One shall note that India imports around 800 to 900 tonnes of gold annually. In FY16, the country is estimated to have imported 750 tonnes of gold, as against 971 tonnes in the preceding year.

The data has provided some relief for government's rising concern regarding the trade deficit. The country's current account deficit is likely to widen modestly to US$25 billion in the current fiscal from US$20 billion last year on rising demand for gold and sluggishness in exports. And this has helped to keep India trade deficit at manageable levels. In fact, in FY16 the trade deficit fell by 14% YoY.

Having said so, is this a good thing? Can we tolerate falling exports just because the trade deficit is in check due to falling imports? One of our editions from The 5 Minute WrapUp answers these questions.

In another news update, it was reported that severe water crisis in many parts of the country has forced several thermal power plants to shut down production. Power Minister Piyush Goyal said that many thermal power generating units in different states are temporarily under shut down due to non-availability of water.

Goyal said a number of steps have been adopted to overcome water shortage at such plants. These include installation of dry ash handling system, installation of ash water recirculation system and installation of zero water discharge system.

The above issue comes amid Indian Government's target of producing 175 GW of renewable energy capacities by 2022 with a capital outlay of US$ 160 billion including equity of US$ 40 billion. (1 gigawatt = 1,000 megawatts)

One shall note that the issue of water shortage comes as many parts across country are going through a water crisis on the back of below normal monsoons for two consecutive years. Recent data suggests that about 120 million hectares of India's total geographical area of 328.73 million hectares are endemically susceptible to droughts. This area spans through 185 districts in 13 states.

One of our article discusses how India can resolve the issue of water crisis.

Realty Stocks Lead the Gains
01:30 pm

Indian equity markets continue to trade well above the dotted line in the noon session amid strong Asian markets. Sectoral indices are trading on a mixed note with stocks from the realty and capital goods sectors leading the gains. Oil & Gas and metal stocks are leading the losses.

The BSE Sensex is trading higher by 74 points and the NSE Nifty is trading higher by 10 points. The BSE Mid Cap index is trading lower by 0.3% and while the BSE Small Cap index is trading flat. The rupee is trading at 66.54 to the US$.

Automobile stocks are trading on a firm note with Tata motors and TVS Motors leading the gains. According to a leading financial daily, Tata Motors' wholly-owned subsidiary Jaguar Land Rover (JLR) reported 2% fall in US sales in April 2016. Jaguar Land Rover North America April US sales for both brands hit 6,275 units, a 2% decrease from 6,390 units in April 2015. However, on a year-to-date basis in 2016, JLR US sales stood at 32,077 units, up 16% from 2015.

Meanwhile, rating agency Fitch affirmed Tata Motors' long-term foreign currency issuer default rating at a speculative grade 'BB' with a stable outlook. The company's small size in relation to global auto majors and its subsidiary Jaguar Land Rover is a key rating driver (Subscription Required). Fitch said the company's robust passenger vehicle lineup and strong commercial vehicle sales contributed to the profile.

Reportedly, it would be launching three new cars in 2016 - the Kite 5 compact sedan, the Nexon utility vehicle and the Hexa sports utility vehicle. Further, the company also plans to come up with an electric car and may be working with firms outside the group for the finished product. The script of Tata Motors is currently trading up by 2.5% on the BSE.

FY16 turned out to be a tepid year for the Indian auto industry. The only segment that managed to grow in double digits was commercial vehicles (CVs). But this was largely led by medium & heavy CVs . Growth for light CVs remained sluggish as strict financing options remained an issue for this segment and hampered demand.

Moving on to news from banking sector. According to a leading financial daily, Yes Bank has been granted an in-principle approval by Securities and Exchange Board of India (SEBI) for acting as custodian of securities. Yes Bank shall now invest in developing Operations, Technology and Human Capital capabilities and seek registration with SEBI as a Custodian of Securities. As per the in- principle approval, Yes Bank shall establish this business within 12 months of this approval. The approval from SEBI is subsequent to the Reserve Bank of India's approval granted to Yes Bank for the Custodian of Securities Business.

Custodian of Securities' is a license granted by SEBI to eligible entities allowing them to offer custodial services to financial market participants including Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs).

In the six months to April, Yes Bank has reportedly raised and lent US$225 million of foreign currency loans to foreign subsidiaries of Indian companies and their joint ventures abroad and expects to more than double it in the full fiscal year ending March 2017.

Yes Bank reported its results for the quarter ended March 2016 . The company's net profit grew by 27.4% YoY during the quarter to Rs 7 billion. Reportedly, the healthy growth was on account of improving loan demand, higher net interest and other income. However, there was a slight slippage in the asset quality owing to Reserve Bank of India's (RBI) directive to recognize visible stressed assets. At an absolute level, gross non-performing assets (NPAs) grew by 139% to Rs 7.4 billion. As a percentage of total loans, gross NPAs stood at 0.76%. The script of Yes Bank is currently down by 0.1%.

Banking stocks are trading below the dotted line with Indian Bank and IDBI Bank leading the losses.

Indian Markets Continue Their Uptrend
11:30 am

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

The BSE Sensex is trading up 146 points (up 0.6%) and the NSE Nifty is trading up 29 points (up 0.4%). The BSE Mid Cap index is trading up by 0.2% while the BSE Small Cap index is trading up 0.3%. The rupee is trading at 66.52 to the US$.

PSU banking stocks are trading on a mixed note with IDBI Bank and Indian Overseas Bank leading the losses. As per an article in Economic Times, India is considering setting up an independent panel to help state-owned banks negotiate settlements with big businesses on bad loans. The proposal would give the panel power to define the "haircut" a bank should face on a loan gone sour.

The move is aimed at protecting bankers from a majority of criticism that they say is hobbling efforts to clean up their balance sheets. The debt pile of Indian banks, especially in the public sector banks, is in the limelight across mainstream media, prosecutors, and politicians. According to banking sources, fear of bad headlines was one reason why state-run banks declined to consider Vijay Mallya's offer to pay up to US$900 million in tranches to settle about US$1.4 billion his defunct Kingfisher Airlines owed. In case you missed, do check out this interesting piece by Vivek Kaul, editor of Vivek Kaul's Diary, on the moral hazard of settling with Vijay Mallya.

The above development will lessen up the stress for banks and also the level of bad loans.

One shall note that the issue of rising bad loans has made Prime Minister Narendra Modi repairing bank balance sheets his administration's top-most priority. Earlier, in April, the Supreme Court had asked the government to overhaul the banking system to prevent bad loans and hasten recovery from defaulting borrowers.

The Supreme Court stated that had the system been working, the public sector banks would not have had to write off more than Rs 1,140 billion of bad loans.

The court insisted that the government should carry out reforms in order to solve the problem of rising bad loans. It also insisted to set up a committee that will debate how to improve the ongoing system.

Stocks in the finance space are trading on a mixed note with Prime Securities and Power Finance Corporation leading the losses. In another news update it was reported that Housing Development Finance Corporation (HDFC), the country's largest mortgage lender, will be raising Rs 11 billion by issuing debentures.

The object of the issue is to augment the long term resources of the company. The proceeds of the issue would be utilized for financing/refinancing the housing finance business requirements of the corporation.

The issue of the Non-Convertible Debentures (NCDs) will be done on a private placement basis and will be open for a day on May 6. The NCDs will carry a coupon rate of 8.34%. ICICI Bank and SBI Capital Markets are the arrangers to the issue.

Last year, HDFC Bank had raised Rs 30 billion by issuing bonds on a private-placement basis. Reportedly, the bank is raising money to enable it to participate in the pickup in credit demand that was expected both from the corporate and the retail sector. The management had earlier stated that the bank will be looking at lending to projects in the infrastructure space which approximately accounts for up to 15% of the bank's book.

To know our view on the stock of the company, you can read our analysis of the fourth quarter results (subscription required).

Presently the stock of HDFC is trading up by 3%.

Indian Indices Open Strong
09:30 am

Major Asian stock markets have opened the day on a negative note. The stock markets in Hong Kong and Japan are trading lower by 0.35% and 3.11%, respectively. Major indices in Europe ended their session on a negative note. US markets also ended their previous session in the red. The rupee is trading at 66.56 per US$.

Indian stock markets have opened the day on a firm note. The BSE Sensex is trading up by 112 points (up 0.5%) and NSE Nifty is trading up by 25 points (up 0.3%). The BSE Mid Cap and the BSE Small Cap indices are trading in the green, up by 0.1% and 0.2%, respectively. Sectoral indices have opened the day on a positive note with stocks from realty, healthcare and metal sector leading the gains.

Banking stocks have opened the day on a positive note with Dhanlaxmi Bank and Karur Vysya Bank leading the gains.

As per an article in Economic Times, scheduled commercial banks credit grew by 9.7% YoY in the quarter ended December 2015. This was helped by higher growth in advances of private sector banks. Further, in terms of total number of credit accounts, banking sector witnessed a growth of 12.2% during the quarter on a YoY basis.

The Reserve Bank of India (RBI) stated that more than four-fifth of the total credit accounts of the banking sector was concentrated in agriculture and personal loan segment. However, the concentration in terms of outstanding credit in these segments was only 30%.

The central bank further stated that the proportion of credit in terms of the amount outstanding to industry was highest at 42% during the third quarter of FY16.

So while the credit growth has witnessed an uptick, the problem of bad loans has got worse than earlier. The reason behind the issue of rising bad loans can be attributed to the increase in wilful defaulters. It was noted that the number of wilful defaulters' who have not repaid their loans to public sector banks (PSBs) despite having the ability to do so shot up by 38% in 3 years. The number of wilful defaulters stood at 7,686 at the end of December 2015 as against 5,554 in December 2012.

Further, the amount involved in these cases too shot up by 2.4 times to Rs 661 billion, compared to around 277 billion earlier.

Minister of state for finance Jayant Sinha said that there were 1,365 borrower accounts having outstanding of Rs 5 billion and more at the end of December 2015. He said the government has taken specific measures to address issues in sectors such as infrastructure, steel and textiles, where instances of NPAs are high.

The number of rising wilful defaulters is seen rising as lenders finally started issuing the tag amid rising bad loans troubling the Indian economy. The issue came to the fore after a surge in NPAs in October-December 2015 due to the recognition of certain stressed accounts by banks as per RBI norms.

One of our articles discusses how the government can deal with wilful defaulters.

One shall note that the banking industry witnessed a slowdown in FY16, impacted by the swings in the economy. On one hand, the dampened credit offtake reduced its interest rate income. At the same time increased loan defaults led to increased provisioning and reduced earnings for the banks. Not to forget piling up of bad debts, particularly of public sector banks, that constrained their capital strength.

In another news update, it was reported that outstanding dues of state utilities payable to central generating power stations have increased 16% in the last one year. With this, the amount of dues has touched around Rs 222 billion.

This was witnessed despite about 18 states agreeing to join Ujwal Discom Assurance Yojana (UDAY) and eight states issuing bonds of about Rs 1,000 billion recently.

One shall note that the UDAY scheme was brought up by the government to bring a turnaround in the State Electricity Boards (SEBs) that have been caught up in a vicious cycle of high debt and operational losses. The scheme allows power distribution companies (discoms) in select states to convert their debt into state bonds. Further, the part of debt not taken over the DISCOMs shall be converted by banks into bonds with a cap on the interest rates.

The effect of this initiative will take time to reflect on the financial of power utilities. However, the above data points out that it has failed to provide the much needed relief so far. Having said that, one shall watch out further steps that the government takes to make the scheme successful.

How Can India Resolve the Drought Issue?

Over decades, India has managed to solve the problem of shortage of food grains during periods of drought. However, problem has not entirely gone away as the distress of drought gets worse day by day. As noted in an article from Business Standard, about 120 million hectares of India's total geographical area of 328.73 million hectares are endemically susceptible to droughts. This area spans through 185 districts in 13 states. This surely means that many states are desperately praying for rain.

The issue has gained much popularity in mainstream media. The urgency of water conservation was seen when the Indian Premier League (IPL) T20 cricket tournament was moved out of the state of Maharashtra in order to save water.

This makes us ask - what measures are being put in place to solve this debacle?

The current approach towards drought management is based broadly on the 'drought code'. The code gyrates around launching ad hoc relief measures to provide drinking water, food, fodder and employment in drought-affected areas. While this code provides the much required relief, it isn't the one that solves the problem in entirety. The same article states that the present code is basically a recipe for meeting the problem on hand. It doesn't take into consideration the measures needed to lessen the impact of drought in the long run.

India thus needs to focus on drought mitigation measures that would solve the problem for the long-run. It needs to consider actions that must be taken in years of normal rainfall to build lasting resilience against droughts. There are many ways to go about this. One is to preserve rainwater during non-drought years. For this, there must be added more water storage facilities. Vivek Kaul, editor of Vivek Kaul's Diary, states that lack of water storage facilities is the real problem for water shortage across the country.

Further, there must be introduced conservation agriculture techniques. Also, preventing the waste of water can help out a lot.

All of these measures, if adapted efficiently, can work out a great deal for the drought affected areas in the nation. They will also lessen the damage of poor rainfall on the Indian economy.

All in all, things look tricky for the Indian economy as of now. Unless the government comes up with some solid drought mitigation measures, the ill effects of drought are here to stay.

Presently, drought conditions have hit consumption levels in rural markets. Household consumption in rural areas has come down from 10% in the April-June 2015 quarter to 3% in the October-December quarter.

This has also weighed on many sectors in the economy. The most affected is the FMCG sector where the companies are eyeing rural consumption to fuel demand. With rural consumption slowing down, volume growth for these companies has declined closer to single digit levels. Not to mention that the intensifying competition has taken a toll on the market leaders' volumes as well. And these factors have also led to a major shift in valuations of FMCG companies. However, we are not much concerned about that. As one of our recent editions of The 5 Minute WrapUp states that monsoons don't influence our valuations of FMCG stocks.