A Volatile Day of Trading

The Indian equity markets witnessed volatility throughout the day and ended marginally in the red to finish their session. At the closing bell, the BSE Sensex closed lower by 47 points, the NSE Nifty finished lower by 16 points. The S&P BSE Midcap & the S&P BSE Small Cap lost 0.1% and 0.6% respectively. Losses were largely seen in auto and FMCG stocks.

Asian markets finished mixed as of the most recent closing prices. The Shanghai Composite gained 0.94% and the Hang Seng rose 0.61%. The Nikkei 225 lost 0.64%. European markets are trading higher today with shares in Germany leading the region. The DAX is up 0.40%, while France's CAC 40 is up 0.18% and London's FTSE 100 is up 0.17%.

The rupee was trading at 67.58 against the US$ in the afternoon session. Oil prices were trading at US$ 50.45 at the time of writing.

Shares of Siemens Ltd finished the trading day on a positive note (up 0.2%) after it was reported that the company has won an order worth Rs 830 million from the Indian Railways' Diesel Locomotive Works. The order is to design, supply and install 40 alternating current (AC) traction systems for dual-cab high horsepower diesel engine locomotives.

The AC traction systems will be produced at Siemens' Nashik factory in Maharashtra. The systems have been developed based on the insulated gate bipolar transistors (IGBTs) technology. The advent of IGBTs has yielded strong efficiency gains in electric drive technology.

This news comes at a time when Siemens recently signed an agreement with Spain's Gamesa to combine their wind energy businesses to create the world's biggest builder of windfarms. Siemens has struggled to turn its wind energy business profitable and its business in India, through its listed subsidiary, is an inexperienced one. Siemens will hive off its wind energy business and merge it with Gamesa. Siemens will hold 59% stake in the merged entity, while Gamesa will hold the balance 41%.

Engineering stocks finished the day with negative bias. TRF Ltd and Punj Lloyd led the losses.

The engineering industry in India has grown tremendously over the years. But that growth has been marked by extreme volatility. Over the last eight years, the sector has seen numbers ranging from an output growth of 48% YoY in one year, to a contraction of 6% YoY in another. In our recent edition of The 5 Minute WrapUp Premium, we have discussed the factors one should look for when picking an engineering stock (Subscription Required).

Moving on to news from the mining sector. According to a leading financial daily, Coal India's (CIL's) first tranche of linkage auction for the non-regulated sponge iron sector posted a booking of 2.05 million tonne (MT) against the offer of 3.78 million tonne. The booking has been done for a contract period of 5 years, which can be extended to 10 years with mutual agreement between the supplier and taker.

A total of 23.75 MT of coal has been put on the block for FY17 for auctioning of linkage to all consumers belonging to the non-regulated sector, of which only 3.78 MT was offered exclusively for sponge iron. Booking for sponge iron was 55% of the quantity offered. The next linkage auction would reportedly be for the cement sector where an offer of 2.15 MT would be made.

Non-regulated sector consumers account for approximately 25% of CIL's entire off-take and this includes captive power plants, cement plants, sponge-iron plants, fertilizer, chemical and many other industrial units. Coal India finished the day up by 1.2% on the BSE.

Meanwhile, the government has decided to allot 16 coal blocks to state utilities for commercial use by August. Eight blocks will be awarded to state utilities within the state, while the remaining eight will be allotted to state utilities other than those in the host state.

Realty & Healthcare Lead Gains
01:30 pm

Indian Indices continue to trade near the dotted line in the post-noon trading session after opening flat. Sectoral indices are trading on a mixed note with stocks from the realty and healthcare sectors trading in green while metal and auto stocks are trading in red.

The BSE Sensex is trading down by 27 points (down 0.1%) and the NSE Nifty is trading down by 11 points (down 0.1%). The BSE Mid Cap index is trading down by 0.1%, while the BSE Small Cap index is down by 0.2%. Gold prices, per 10 grams, are trading at Rs 30,143 levels. Silver price, per kilogram, is trading at Rs 41,190 levels. Crude oil is trading at Rs 3,411 per barrel. The rupee is trading at 67.51 to the US$.

Stocks in the banking sector are trading on a mixed note with Dhanlaxmi Bank and Lakshmi Vilas Bank trading in the red. As per a leading financial daily, Yes Bank recently got the nod from Indian government to increase its FDI to 74%. It is likely to raise US$ 1 billion from overseas investors in the ongoing fiscal. This increase in the FDI limit will provide the bank with vital flexibility in raising global capital.

The bank claims to have become the first bank in India to have received such an approval for a fully fungible composite foreign investment limit of 74%. YES Bank intends to expand across Asia. Once RBI approves its application, YES Bank targets to get a full banking license in Singapore.

Yes Bank is trading up by 0.5% at the time of writing.

Moving on to the news from software sector. As per an article in Business Standard, Tech Mahindra has announced the acquisition of The BIO Agency (BIO). It is headquartered in the UK. The BIO agency specializes in digital transformation and innovation, helping organizations change the way they engage with their customers. The acquisition is an all-cash deal for an enterprise value of up to 45 million pounds.

Reportedly, this move will augment Tech Mahindra's digital services portfolio. The acquisition will help open up more clients globally, mainly in Europe and US and help scale their offerings.

BIO, currently has strong presence in UK with 25-30 strong clients. Tech Mahindra has embraced the future with its focus on Digital and sees this as an important strategic move.

Tech Mahindra is trading down by 0.6% while writing.

Indian Indices Marginally Negative
11:30 am

After opening the day on a flat note, the Indian stock markets witnessed choppy trades and continued to trade near the dotted line. Sectoral indices are trading on a mixed note with stocks from the banking and realty sectors leading the gains.

The BSE Sensex is trading down by 8 points (down 0.03%) and the NSE Nifty is trading down by 4 points (down 0.04%). The BSE Mid Cap index is trading down by 0.1%, while the BSE Small Cap is trading flat. The rupee is trading at 67.56 to the US$.

Stocks in the automobile space are trading on a mixed note with Tata Motors leading the losses and Escorts leading the gains. As per an article in the Economic Times, the voluntary vehicle fleet modernisation programme (V-VMP) will initially focus on incentivising buyers of new commercial vehicles. The V-VMP programme is in the working and is aimed at providing tax benefits and discounts to people who junk old vehicles and replace them with new ones. Its primary aim is to reduce emissions and get polluting trucks off the road.

As for now, the programme will keep passenger vehicles and two-wheelers out of its ambit. The proposed policy will allow vehicles bought prior to March 31, 2005 or those below BS IV emission standards for incentives if those were scrapped and replaced by new ones. The incentives are said to reduce the cost of new vehicle for a buyer on an average 8-12%.

Reportedly, a Cabinet note on the above programme will be sent for clearance in the next three months. The road transport ministry has received an in-principle approval from relevant government departments to proceed with the scheme.

The above development bodes well for the automobile industry. It would also boost sales of commercial vehicles. Investors can look out for investment opportunities in this space going forward.

One shall note that FY16 turned out to be a disappointing 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.

Moving on to the news from global markets. Minutes of Bank of Japan's (BoJ) April policy showed that the central bank's policymakers believe overseas economies continue to pose downside risks to Japan's economy and prices.

It was reported that the BOJ could soon be facing extra challenges. This would be from slowing emerging markets, volatility caused by US monetary policy, and Britain's vote on European Union membership.

One must note that the BoJ, during last week, refrained from expanding its monetary policy stimulus. The bank kept the annual target for expanding the monetary base at 80 trillion yen ($764 billion). Further, it held its key interest rate at minus 0.1%.

Dan Denning, in one of the recent articles from the Vivek Kaul's Diary, explains why Japan is unable to stimulate any growth with new money tricks.

Indian Indices Open Flat
09:30 am

Major Asian stock markets have opened the day on a positive note with stock markets in Singapore and China are trading higher by 0.7% and 0.4% respectively. Benchmark indices in Europe and US ended their previous session in green with stock markets in Germany ending the day higher by 0.6%. The rupee is trading at 67.47 per US$.

Indian stock markets have opened the day on a flattish note. The BSE Sensex is trading marginally higher by 12 points (up 0.05%) and the NSE Nifty is trading higher by 3 points (up 0.04%). However, BSE Mid Cap and BSE Small Cap are trading higher by 0.2% and 0.3% respectively.

Major sectoral indices have opened the day on a positive note with stocks from realty and pharmaceutical sector are witnessing buying interest.

As per an article in Livemint, government on Monday opened up the automatic route in the pharma sector for attracting foreign direct investment (FDI).

As per the new provisions, government has decided to increase FDI limits to 74% in existing pharmaceutical companies through the automatic route. Earlier, 100% FDI was permitted through the government approval route.

The government approval route was a cumbersome process wherein there was uncertainty whether the deal would be approved or not.

Opening up of the automatic route is expected to boost mergers & acquisitions (M&A) and private equity investment in the sector in future. India is known for its low production cost owing to its cheap labour. While, selling products in the US, the Indian companies earn high margins. This is one of the factors which would attract investments in the pharma sector.

Reportedly, the move is also expected to stimulate more investments in the CRAMS segment (Contract Research and Manufacturing Service). Increased M&A deals will help unlock potential value of the existing companies in pharma space and could possibly add to the shareholders wealth.

In another news update, India continued to be among the top ten countries in terms of foreign direct investment (FDI) inflows globally. Moreover, it ranked fourth in the same amongst the Asian economies.

The FDI inflows have increased by 25% YoY to US$ 44 billion in the fiscal year 2015. Reportedly, the surge is mainly on account of the Make in India initiative, alongside liberalization measures and reforms initiated by the government.

In the past few days the government opened the doors wider on the foreign direct investment (FDI) front. The government has increased the cap in FDI in seven sectors ranging from civil aviation and defence to food products and pharmaceutical. This too will increase the FDI flows going forward. Increased foreign investments would help boost the economic growth as well as create employment opportunities in the country.

Govt Relaxes FDI Norms to Boost Growth and Sentiment

The government on Monday announced fresh round of foreign direct investment (FDI) liberalisation. The sectors to benefit will be single brand retail, civil aviation, airports, pharmaceuticals, animal husbandry, and food products. This is the second big reform in FDI since those announced in November 2015. The move comes a day after RBI governor Raghuram Rajan, announced he would not seek another term. It seems that by relaxing FDI norms, the government has tried to contain any fallout of investor confidence on Rajan's exit and this week's vote on Britain's future in the European Union (EU).

For more than two decades, India has moved cautiously on relaxing FDI norms in the belief that a quick relaxation of FDI norms would disadvantage domestic producers and force them to sell out to foreign players. The cautious FDI policy has been counterproductive. The struggling Aviation sector which long lobbied for a liberalised FDI regime is a good example of this.

The government has taken following key decisions regarding relaxing FDI norms:
  • Allowed up to 100% FDI in defence through the approval route.
  • 100% FDI in 100% FDI under government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India.
  • 100% FDI in greenfield pharma via the automatic route, 100% in brownfield pharma - of which 74% will be through automatic route.
  • 100% FDI in domestic airlines, with FDI up to 49% permitted under automatic route and FDI beyond 49% through Government approval. 100% FDI under automatic route in brownfield Airport projects.

The government has also decided to relax local sourcing norms for FDI in single-brand retail for products having "state of art" and "cutting edge" technologies. This will likely make it easier for companies like Apple to set up manufacturing units in India. Other single-brand retailers like furniture giant IKEA are also expected to benefit.

Foreign investment is crucial for India, which needs around US $1 trillion for overhauling its infrastructure sector such as ports, airports and highways to boost growth. A strong inflow of foreign investments will help improve the country's balance of payments situation and strengthen the rupee value against other global currencies, especially the US dollar. FDI inflows for the financial year ending March 2016 stood at US$ 40 billion, up from US$ 30.9 billion in FY 15.

The government's move to liberalise foreign investment will improve investor sentiment in the short-term. Also, in the long-term, it will benefit firms operating in these sectors. Manufacturing and job generation will also get a boost by the latest round of liberalisation in FDI norms that include doing away with dual clearances.

Overall, there is no dispute that the FDI relaxations, are a step in the right direction irrespective of whether they were timed to signal the Centre's commitment to reforms in the face of Governor Rajan's announcement.

However, opening up more avenues for FDI cannot be the answer to all problems. In order to deliver more, the government now needs to look at the domestic investments that are still stuck and try to bring them back on track as well.