Firm close for Indian indices

After yesterday's weakness, Indian equity markets recovered today to trade in the positive throughout today's session. The day's proceedings began on a firm note and although the morning session saw the indices trade largely within a range, the momentum picked up in the final trading hours. This ensured a firm close for the indices. While the BSE-Sensex today closed higher by 233 points, the NSE-Nifty closed higher by 66 points. The BSE Mid Cap and the BSE Small Cap index also did well to notch gains of 0.5% and 0.2% respectively. Gains were largely seen in FMCG and IT stocks.

As regards global markets, Asian indices closed mixed today while European indices have opened in the green. The rupee was trading at Rs 60.13 to the dollar at the time of writing.

Auto stocks closed mixed today. While Ashok Leyland and Bajaj Auto were the major losers, Tata Motors and Mahindra & Mahindra (M&M) found favour. As per a leading business daily, Bajaj Auto has outlined plans of revamping its entire three-wheeler portfolio in FY14. This is across the petrol and diesel variants and will involve launching of new models. The company already is the market leader in this space and aims to sustain this through this strategy. Of the total three-wheeler sales of the company, about 55% comes from exports to more than 23 countries. The rest is sold in the domestic market. It must be noted that in the first three months of FY14, while volumes of motorcycles fell by 12.5% YoY, three-wheeler volumes did very well to grow by 23.6% YoY. In the overall product mix, three-wheelers account for only 11% of volumes, while motorcycles account for the rest.

As per a leading business daily, the Coal Ministry has allocated 14 new mines to public sector power companies. This is expected to cater to near 31,800 MW of capacity involving an investment of Rs 1,600 bn. The blocks are being offered on the basis of applications and not bids. But they would be governed under Competitive Bidding of Coal Mine Rules, 2012. National Thermal Power Corporation (NTPC) has emerged as the largest beneficiary as 4 blocks have been awarded to the company. These have estimated reserves of around 1,995 m tonnes. It must be noted that at the end of FY13, NTPC's generation capacity stood at 41,184 MW. The company added capacity of 4,170 MW during the year, while adding 4,830 MW in commercial operations. Company's generating volumes during quarter ended March 2013 were flat. The stock of NTPC closed lower today.

Realty & IT among major gainers
01:30 pm

Backed by persistent buying in index heavyweights, Indian share markets continued to soar higher in the post-noon trading session. Barring metal, all the sectoral indices are trading in the green with realty, IT and FMCG stocks being the biggest gainers.

BSE-Sensex is up 205 points and NSE-Nifty is trading 69 points up. BSE Mid Cap is trading up 0.8% whereas BSE Small Cap index is trading up by 0.2%. The rupee is trading at 60.0 to the US dollar.

Majority of the food stocks are trading in the green with Golden Tobacco and ITC being the biggest gainers. As per a leading financial daily, GlaxoSmithKline Consumer Healthcare (GSKCH) is launching Eno brand in the liquid and tablet versions to cement its leadership position in the digestive anatacid market. Eno is presently available in the powder form and has a 41% market share. Eno is growing at 30% per annum and constitutes 7-8% of GSKCH's overall turnover. As per the company, the liquid and tablet formats constitute 55% of the total digestive market in India and thereby presents a huge market potential. GSKCH stock is currently trading 1.2% up.

Most of the telecom stocks are trading in the green with ADC India and AGC Networks leading among gainers. As per a leading financial daily, Bharti Airtel has raised its stake by 2% in all the four Indian broadband wireless access (BWA) entities of Qualcomm AP. As a result all the four entities have become subsidiaries of Bharti Airtel. In May 2012, the company had acquired 49% share in Qualcomm AP's entities in India. The acquisition granted Bharti Airtel licence to offer 4G data services in four circles of Delhi, Mumbai, Haryana and Kerala. Additionally, the company has licence to offer high-speed broadband service in four telecom circles of Kolkata, Maharashtra, Punjab and Karnataka. Bharti Airtel stock is currently trading up by 1.8%.

Indian share markets remain in green
11:30 am

Indian share markets have generally traded in green during the previous two hours of trade. The most noticeable upward movements have been witnessed in the consumer durables and FMCG sectors while metals and PSU sectors have witnessed some selling pressures.

The BSE Sensex is up by 150 points and the NSE-Nifty is up by 45 points. BSE Mid Cap is up by 0.3% and BSE Small Cap is up by 0.2%. The rupee is trading at 60.06 to the US dollar.

Most of the PSU banks' shares have slipped in red with Corporation Bank and Bank of Baroda leading the pack of few gainers while Canara Bank and Allahabad bank are facing the maximum selling pressures. According to a leading financial news medium, State Bank of India (SBI), the country's largest lender has ruled out the possibility of a cut in its base rate. The Finance Ministry has urged the public sector banks to consider reducing lending rates to stimulate credit growth in the system. However, SBI would prefer to maintain status-quo since the base rate of the bank already stands lowest in the industry at 9.7%. Lenders have remained hard-pressed to pass on the rate cut benefits to end consumers. That's because the increased provisioning norms and the spike in cost of money have taken a toll on the banks' margins. Nonetheless, public sector lenders other than SBI have reassured the Ministry to review their lending rates and may be re-align them with SBI's rates. The average base rate of all other banks fall in the range of 10.2%-10.25%. SBI stands ahead of the curve, offering the lowest rate at 9.95% on its home loan portfolio as well.

SBI maintains a comfortable liquidity position and carries excess liquidity in its books to the tune of Rs 500 bn. However, the bank may have to go for a capital raise in the second half of the current fiscal to boost its asset growth. The bank's capital adequacy ratio stands at 12.9% with Tier-I at 9.5% as at the end of March quarter of FY13. SBI's share is down by 0.7%.

Engineering shares are trading on a mixed note with Suzlon Energy and L&T leading the gains while Punj Llyod and Crompton Greaves are facing the maximum selling pressures. According to a leading financial news daily, Larsen and Toubro (L&T), the engineering giant, has turned out to be a successful bidder to build Batinah road project in the northwest of Oman. The estimated project cost is around $352 mn (approximately Rs 21 bn) and has a construction period of two years. The company board has also recommended the issue of bonus shares in the ratio of 1:2 (i.e. one equity share for every two shares held) and has fixed July 13, 2013 as the record date.

The company reported a 10% YoY growth in profitability with a total revenue growth of 14% YoY for FY13. For the full year, the order inflow stood at Rs 880 bn, a growth of 25% YoY. The total order book at the end of the year stood at Rs 1,536 bn. 49% of the backlog belongs to the infrastructure sector while 28% belongs to the power sector. The company enjoys a well-diversified product portfolio and aims to focus on improving return on capital, monetizing non-core assets by exiting unviable businesses and focusing on international markets.

Indian share markets open firm
09:30 am

Barring Japan (down 0.1%), the major Asian stock markets have opened the day on a firm note with Hong Kong (up 1.8%) and Indonesia (up 1.4%) leading the gains. The Indian share markets indices have opened the day on a firm note. All sectoral indices have opened in the green with the stocks in the software and power sector leading the gains.

The Sensex today is up by around 123 points (0.6%), while the NSE-Nifty is up by around 36 points (0.6%). Mid and small cap stocks have opened in the green as well with the BSE Mid Cap and BSE Small Cap indices up by around 0.5% and 0.3% respectively. The rupee is trading at Rs 59.99 to the US dollar.

Energy stocks have opened the day mainly in the green with Gujarat Gas and Petronet LNG Ltd leading the gains. As per a leading financial daily, Oil and Natural Gas Corporation (ONGC) has confirmed that its US$ 5 bn acquisition of a stake in Kazakhstan's biggest oilfield has been blocked. It is important to note here that ONGC's subsidiary ONGC Videsh Ltd (OVL) was hoping to buy ConcoPhilips' 8.4% stake in the Kashagan oilfield. This could have been its largest acquisition ever. However, Kazakhstan has exercised its pre-emption rights to block the deal. As per Kazakh law, the government has the right to buy any oil asset for sale in the country at the price agreed on by buyer and seller. Now, Kazakhstan's national oil company KazMunaiGaz will buy ConcoPhilips' stake for about US$ 5 bn. This stake will then be sold to China National Petroleum Corporation (CNPC) for a reported US$ 5.3-5.4 bn.

Indian Pharma stocks have opened the day on a firm note with Orchid Chemicals and Torrent Pharmaceuticals Limited leading the gains. As per a leading financial daily, Sun Pharmaceutical Industries Ltd has withdrawn from the race to buy Swedish firm Meda Pharmaceuticals for up to US$6 bn. Sun Pharma that has a cash balance of US$1.3 bn as on March this year (including its subsidiary Taro Pharmaceutical Industries' cash), was in talks with banks to raise funds for the acquisition in June 2013. As per the bankers, the decision to withdraw has been taken in the wake of sharp depreciation in the rupee and a patent settlement worth US$ 550 m in the US. Besides, the bankers stated that the negative reaction of the market to Apollo Tyres' US acquisition has also made the company wary.

Beware of Indian corporate bonds!

In India, various financial markets viz; equity, derivatives, commodity, currency etc are relatively well developed compared to corporate bonds markets. But this market seems to be catching investor interest of late, especially when equity markets have become very volatile.

Bonds are considered to be safe haven for investments, compared to equities. This is because, unlike in equities, returns from bonds are assumed to be fixed. Bonds also help in risk diversification and thus the investors who have low risk appetite opt for bonds instead of equities and mutual funds. But often investors fail to differentiate the risk profile of types of bonds viz corporate bonds and Government bonds (G-Secs). Unlike government bonds, corporate bonds are very much subject to the risk profile of the entity issuing the paper. This means subscribers to the bond issue of corporate sporting bad fundamentals are subject to nearly as much risk as its shareholders.

Nevertheless, return hungry investors these days are focused on the yield and tenure of corporate bonds. Hence the lure of higher returns is leading them to compromise of the safety of the principal.

An article on firstpost, has discussed about a classic example of Manappuram Finance's NCDs (Non-convertible debentures). As per this article, the price of its NCD has declined on back of concerns over its credit rating in the bond market. This has hit the bond holders of the company who have invested at higher levels and thus eroding their capital holding. Most of the rating agencies have given the company A- rating indicating that the company's financials could deteriorate further. These risks, also bring down the liquidity of the bonds.

The reason why Manappuram business got a hit was its nature of business. The company had witnessed robust growth of 112% CAGR in past four years. However, when gold prices kept hitting lower levels, the company's business got impacted and has resulted to various write offs.

It is evident from the above example; that an adverse impact on the business of the corporate could have an impact on its credit rating and thereby impact the prices and liquidity of its bonds. In an extreme case, there is fair probability of debt default too.

Meanwhile, Mahindra and Mahindra (M&M) has issued plain vanilla bond with maturity of 50-years. The credit rating agencies have given superior ratings to this bond. Thus in order to retain its rating throughout the unusually long tenure, the company will have to ensure that it consistently grows sales and profits and launches new products.

Thus, the investors should not get carried away by the attractive returns and longer tenure of these bonds. Investors should note that corporate bonds carry an additional risk of default unlike G-Secs. Though, the risk may vary for different companies. At times the corporate issuers tend to offer higher yield in order to compensate for the higher risk, but not commensurate enough.

Thus investors should assess the risks of bonds very carefully before investing in them. Comparing the risks of various bonds, nature of business of the corporate, historical rating, risk free interest rates, liquidity, etc are some of the aspects where investors should look at before making an investment.