Markets close flat

Sensing the positive global cues, the Indian equity markets bounced back in the last hour of trading session, closing the day on an optimistic note. Stocks from sectors such as consumer durables, automobiles and banks were leading the pack of gainers today. However, the BSE Mid Cap index lost steam and was down by 0.2%; whereas the BSE Small Cap index was up by 0.2%. The BSE Sensex closed higher by 20 points and the NSE-Nifty stood flat and was up by 7 points.

On the global front, most of the Asian indices have closed the day in green. The European indices, however, have opened the day on a mixed note. The rupee was trading at Rs 59.96 to the dollar at the time of writing.

Barring few such as Dhanlaxmi Bank, DCB bank and Karnataka Bank, all the other stocks from the private banking space have closed the day in green. Leading the pack of gainers were the stocks of City Union Bank and South Indian Bank.

A leading daily has reported that City Union Bank has sold around Rs 100 m loans to asset reconstruction companies (ARCs). The management has also confirmed about the healthy track record of loan recoveries. This is indeed a good sign for the bank; given the tough environment. The bank's net restructured loans accounted for 1.9% of advances in December 2013. The gross NPAs were at 1.7% of advances in 9mFY14.

The news reports also state that the bank has got the regulatory approval to raise the foreign institutional investor (FII) limit to 35% from the current 25%. However no FII will be permitted to hold more than 5% without specific approval. The stock is up 5% today.

Majority of the stocks of public sector banks have closed the day in red. Leading the pack of losers were Union Bank and Andhra Bank. SBI and Bank of Baroda led the pack of gainers today.

As per a leading financial daily, state-owned lender Union Bank of India has reported a 27% decline in profitability for 4QFY14. For the full year FY14, the net profits have declined by 21.4% YoY. Higher provisioning costs and weak interest income have dragged the profits for FY14. The net interest income (NII) has grown by mere 3.7% YoY in 4QFY14, on the back of 10.1% YoY growth in advances. Even FY14 has reported meager 4.5% YoY growth in net interest income. Also, the provisioning costs for the quarter have shot up by 40.4% YoY during 4QFY14. The asset quality concerns have marred the profitability for the bank. The Net NPAs have moved upwards from 1.6% in FY13 to 2.3% in FY14. Gross NPAs too have stood on the higher side at 4.1% levels. The capital adequacy ratio for the bank stood at 10.1% at the end of 31st March 2014 as per Basel III norms. The company has declared a dividend of Rs 4 per share (dividend yield: 2.9%). Post results, the stock has plunged and is down by 9% today.

Is asset quality a major concern for the banking system? Will bad loans continue to impact the profitability of the banks? Share your views in the Equitymaster Club.

FMCG & pharma drag markets down
01:30 pm

After trading in the positive territory for the most part of the day's session, Indian equity markets slipped in to the negative territory led by selling among index heavy weight stocks. Stocks from the FMCG and healthcare sectors are leading the losses, while banking sector stocks are trading higher.

The BSE Sensex is down 32 points and the NSE-Nifty is down 12 points. The BSE Mid Cap index is trading lower by 0.2%, while the BSE Small Cap index is trading higher by 0.3%. The rupee is trading at 59.99 to the US dollar.

Majority of the mining stocks are trading in the red with MOIL being the biggest gainer. As per a leading financial daily, the Coal Ministry has categorically stated that companies which have been allocated mines for a specified purpose shall not have the right to market, sell or export the fuel to any third party. This development comes in the light of complaints of misuse by owners of captive mines. It has been alleged that Jindal Steel and Power Ltd (JSPL) has been selling coal from its captive mines in Chattisgarh. In February, the Coal Ministry had put three mines, two in Jharkhand and one in West Bengal, on auction after being pulled up by the Comptroller & Auditor General for delaying the auction process. As per the government auditor, allotment of 57 mines to private companies without an auction caused a notional loss of Rs 1.8 trillion to the exchequer. The Ministry has an estimated 500 million tonnes of reserves for captive use of steel, cement and sponge iron firms.

Energy stocks are trading mixed today. ONGC is leading the stock of gainers, whereas Chennai Petroleum and MRPL and trailing weak. As per a leading business daily, Oil & natural Gas Corporation (ONGC) is planning the third phase of drilling redevelopment of its prime Mumbai High oil & gas fields. This is in order to revitalize its ageing oil & gas in the Arabian Sea. The third phase of drilling is estimated to cost about US$ 1.1 bn which will start during FY15 and continue over 3 to 4 years. ONGC is targeting a production of about 132 - 147 m barrels of incremental crude oil through the investment. The company will also integrate its smaller reservoirs to the main reservoir to improve economies of scale in the production and development process. Earlier in the phase I of the redevelopment that completed in 2007, the company spent US$ 1.5 bn that led to 57 m tonnes of additional crude and 16 bn cubic meter of gas. The second phase is proposed to produce 36 m tonnes of incremental crude oil and 6 bn cubic meters of gas.

Indian markets remain buoyant
11:30 am

After opening firm, the Indian Indices have remained above the dotted line in the last two hours of trading. Apart from the IT index all sectoral indices are trading in the green. The buying interest is the highest in banking and automobile stocks.

The BSE Sensex is trading up 60 points and the NSE-Nifty is trading up 18 points. The BSE Mid Cap index is trading up 0.3% and the BSE Small Cap index is trading up 0.6% today. The rupee is trading at 60.01 to the US dollar.

Most real estate stocks are trading higher today. Brigade Enterprises and Ansal Properties are leading the gainers. According to a leading financial daily, realty firms are reducing their land banks to improve their margins. Large realtors have begun tying up with landowners to reduce the cost of their projects. Companies like Godrej Properties and Tata Housing are leading the way with this new format of property development. This method reduces the investment requirement from the developers and thus improves the return on investment. According to realtors the new land acquisition bill has made it difficult to acquire large parcels of land and the joint development model may be the best way for the industry to move forward.

Food and Tobacco stocks are trading mixed today. Golden Tobacco and Sterling Biotech are leading the gainers. GSK Consumers and Agro Tech Foods are leading the losers. As per a leading business daily, ITC is in an advanced stage of negotiations with Bangalore-based Balan Natural Foods to acquire its juice brand B Natural. This acquisition shall mark the group's entry into the beverage market. The acquisition is expected to cost less than Rs 800 m for ITC. It is believed that ITC's entry into the Rs 12 bn packaged-juice market can stir up a stiff competition with leaders like Dabur India and PepsiCo. ITC with its strong brand equity in the past has challenged companies like Nestle in the instant noodles segment. Balan is expected to act as the manufacturing partner for ITC and the latter will only acquire the brand. Balan's estimated annual sales are around Rs 400 m and its main market is in the South. ITC is trading down 0.3% today.

Indian share markets open firm
09:30 am

Barring Indonesia (down 0.1%), the major Asian stock markets have opened the day in the green with stock markets in Japan (up 1.4%) and Hong Kong (up 0.6%) leading the gains. The Indian share markets have also opened the day on a positive note. All sectoral indices have opened in the green with stocks in software and metal space leading the gains.

The Sensex today is up by around 60 points (0.3%), while the NSE-Nifty is up by about 17 points (0.3%). The midcap and smallcap stocks have also opened in the green with BSE Mid Cap and BSE Small Cap indices up by around 0.5% each. The rupee is currently trading at Rs 60.0 to the US dollar.

Indian Pharma stocks have opened mainly in the green with Panacea Biotech Ltd and Orchid Chemicals Ltd leading the gains. Lupin Ltd has announced results for the quarter ending March 2014. The company has reported a growth of 20.7% YoY in the consolidated revenues during the quarter. The operating profit for the quarter was up 33.2% YoY during the quarter with operating margins at 28.7% , as compared to a margin of 26% in 4QFY13.The operating margin improved due to 3.5% decline in the raw material cost (as a % of sales), slightly offset by 1.6% (as a % of net sales) increase in the manufacturing and other expenses. The net profits for the quarter grew 35.5% YoY. For FY14, the Indian market contributed 22% of the company's overall revenues.

Engineering stocks have opened the day on a mixed note with KSB Pumps Ltd and Welspun Corporation Ltd leading the gains. However, TRF Ltd and Everest Kanto Cylinder Ltd were witnessing losses. As per a leading financial daily, the Maharashtra cabinet has approved Bharat Heavy Electricals Ltd's (BHEL) project to produce solar photo voltaic cells in Bhandara district. The project is worth Rs 27.3 bn and will provide employment to 3000 people. The company will produce 240 MW solar photo voltaic cells and 100 MW photo voltaic modules at its plant in Bhandara district. This will be the Central government's first project in Vidarbha . It will be allowed subsidies from the National Clean Energy Fund (NCEF).

Will bad loans paralyze India's growth?

The general election outcome is being watched by bated breath by millions this time around. That it will have positive implications for the economy is almost certain by now. It's fair to assume hence that India stands on the threshold of recovery; albeit a gradual one. And that's rightly corroborated by the Paris-based think tank. OECD estimates 4.9% growth for the Asian economy for calendar year 2014. It also expects it to accelerate to 5.9% the following year. The uptick in capital investments and consumption boost is expected to lift the growth. That's indeed good news! But it is no small feat to have strong economic recovery. That's because there is trouble brewing at the banks.

The OECD has also raised fears of the vulnerability of the Indian economy to the spurt in bad loans of the banking system. As reported by Reuters, the Indian economy has growing threats from the bad loans pile-up that could arrest the economic recovery. Thanks to the prolonged economic downturn and higher interest rates, Indian companies have failed to honor the loan commitments to the lenders. This has resulted into a steady rise in non-performing assets; especially among state-run banks. Reportedly the amount of stressed loans (non-performing + restructured loans) in the system stands at 10% of the total loans. Fitch ratings expect this number to spike to 14% by March 2015.

With bad loans jumping record high, the profits and stocks of the state -owned banks have taken a toll. This has threatened the fresh lending in Asia's third largest economy! Consequently this could slow down new investments and hurt economic growth. And let's not forget that no economy can be strong unless it enjoys the support of a strong and healthy banking system.