Markets' thumbs down to RBI's QT

In what seems to be the exact opposite stance to that of US Fed chief Bernanke, the RBI governor has chosen to tighten liquidity in Indian banking system. The quantitative tightening (QT) as opposed to Fed's prolonged quantitative easing (QE) is basically an attempt to check the rupee's fall against the US dollar. However, this spooked Indian equity markets today as investors gave a thumbs down to the RBI's anti-inflationary stance. Stocks from the banking, realty and commodity sectors were the worst hit. While the BSE Sensex closed lower by 183 points (down 1%), the NSE-Nifty closed lower by 76 points. The BSE Mid Cap index and closed lower by 1.5% while the BSE Small Cap index lost about 1%.

As regards global markets, while Asian stock markets closed a mixed bag today the European indices have opened lower. The rupee was trading at Rs 59.23 to the dollar at the time of writing.

As per a business daily, coal mining major Coal India (CIL), would be signing 7-8 Fuel Supply Agreements (FSAs) with largest PSU power producer NTPC. CIL's total target for FY14 off-take stands at 492 million tonnes (mt), out of which 377 mt of coal would be supplied to power sector.The company, recently reported production of 32.57 million tonnes in June 2013, as against target of 35.23 million tonnes. Meanwhile, CIL's total off-take for the month of June stood at 37.09 million tonnes as against a target of 39.85 million tonnes.

Battery maker Exide Industries reported its June quarter (1QFY14) results today. The company's net sales rose by 5% while the net profits rose by 4.6% YoY in 1QFY14. The company witnessed traction in the after-market segment of the automotive battery business. The replacement market typically enjoys higher margins than direct sales to OEMs due to greater price flexibility. However, Exide was severely hampered by capacity constraints in the past couple of years. As demand from OEMs surged in FY11, Exide chose to cater to that segment with the result that focus on the replacement side diminished. This proved to be the company's undoing as it lost a whopping 10% market share in the replacement space. In FY12 and FY13, however, the company has regained more than half of its lost market share in the replacement market and is confident of recapturing the remaining in FY14.

Realty & banking stocks, major losers
01:30 pm

Due to persistent weakness in index heavy-weights Indian share markets continued to trade deep in the red in the post-noon trading session. Majority of the sectoral indices are trading in the red with realty, banking and capital goods stocks being the biggest losers. However, FMCG, oil and gas and IT stocks are among the few stocks trading in the green.

BSE-Sensex is down 244 points and NSE-Nifty is trading 86 points down. BSE Mid Cap is trading down 1.2% and BSE Small Cap index is trading down by 0.8%. The rupee is trading at 59.4 to the US dollar.

Energy stocks are trading mixed with Oil & Natural Gas Corporation (ONGC) and Bharat Petroleum Corporation Ltd (BPCL) being the biggest gainers while Jindal Drill and Mangalore Refineries & Petrochemicals Ltd (MRPL) are the biggest losers. As per a leading financial daily, Reliance Industries Ltd (RIL) is no longer interested in the gas distribution business. Reliance Gas had won bids for city gas distribution for three cities namely Rajahmundry in Andhra Pradesh, Shahdol in Madhya Pradesh and Yanam in Pondicherry in 2009 during the second round of bidding. However, as per Petroleum and Natural Gas Regulatory Board (PNGRB), RIL has said that it is no longer interested in laying pipelines in these cities. Reportedly distribution in these three cities may be put up on auction again. In February, PNGRB had issued licences for piped natural gas in six cities. RIL stock is currently trading down by 0.3%.

Domestic pharma stocks are trading mixed with Indoco Remdies and Biocon being the leading gainers and Dishman Pharma and Aurobindo Pharma being the biggest losers. Glenmark recently confirmed its Para IV challenge for drug Vimpat brand (generically known as Lacosamide tablets) in US. The company has filed an ANDA (Abbreviated New Drug Application) with Para IV for both tablets and oral solution. The drug is indicated as adjunctive therapy for the treatment for epilepsy. UCB is the innovator of the drug. Reportedly, on back of the Para IV filing, the innovator has sued Glenmark in the district court of Delaware to prevent Glenmark from early launch of drug before the patent expiry in March 2022. Annual sales of Vimpat brand in the US stand at around US$ 353 m. If Glenmark is successful in its patent challenge then it will have a fair chance of availing the 180-days exclusivity. Glenmark is trading up by 0.5%.

Indian share markets remain weak
11:30 am

Indian share markets have remained weak in the last two hours of trade. FMCG and oil and gas are leading the pack of winners while banks and realty are facing the maximum selling pressures.

The BSE-Sensex is down by 282 points and NSE-Nifty is down by 93 points. BSE Mid Cap and BSE Small Cap indices are down by 1.3% and 0.8% respectively. The rupee is trading at 59.43 to the US dollar.

IT shares are trading on a mixed note with Moser-Baer India and Mphasis Ltd leading the gains while Wipro and Tech Mahindra are leading the losses. According to a leading financial news medium, Tech Mahindra, the country's fifth largest IT service company, reportedly may acquire the IT services business of Chennai based Polaris Financial Technology. The Company is in an advanced stage of discussions with Polaris after L&T Infotech, another serious suitor, withdrew from the race to acquire the company on valuation issues. Tech Mahindra, which started the due-diligence a little while back, seems to be fine with the valuation of over US$400 million that Polaris is seeking for its IT services business. Polaris' services business has reported around US$330 m in revenues in 2012-13.

Polaris is a full-spectrum Financial Technology major, using technology as an enabler to drive unprecedented operational productivity in Retail, Corporate and Investment Banking. Polaris services over 200 banks across the world, including 9 of the top 10 banks, with a comprehensive suite of products, services and consulting offerings.

Energy shares are trading on a mixed note with Bharat Petroleum Corporation Ltd. (BPCL) and Chennai Petroleum leading the gains while Mangalore Refinery and Petrochemicals (MRPL) and Jindal Drill are facing the maximum selling pressures. According to a leading financial news medium, Hindustan Petroleum Corp (HPCL) will ink a pact with Mumbai based infrastructure major, Shapoorji Pallonji by signing a joint venture agreement to establish a terminal for the import of liquefied natural gas (LNG) on the Gujarat coast. It will be investing about Rs 50 bn for the same. The Company will set up the LNG import terminal through a 50:50 joint venture with SP Ports, a unit of the Shapoorji Pallonji group. Currently, HPCL and SP Ports are carrying out a detailed feasibility study for establishing the technical and commercial viability of setting up an LNG import and re-gasification terminal of 5 m tonnes per annum capacity at the proposed Port. HPCL's share is trading up by 1.3%.

RBI saves rupee; spooks mkts
09:30 am

The major Asian stock markets have opened the day on a mixed note with Japan (up 0.6%) and Indonesia (up 0.4%) leading the gains. However, markets in China (down 0.7%) and South Korea (down 0.4%) are trading weak. The Indian equity market indices have opened the day on a weak note with stocks in the realty and banking space leading the losses. However, stocks in the software and FMCG sector were trading firm.

The Sensex today is down by around 271 points (1.4%), while the NSE-Nifty is down by around 91 points (1.5%). Mid and small cap stocks have also opened in the red with the BSE Mid Cap and BSE Small Cap indices down by around 1.4% and 0.7% respectively. The rupee is trading at Rs 59.35 to the US dollar.

Banking stocks have opened the day in the red with Oriental Bank and UCO Bank leading the losses. In order to rescue the rupee, the Reserve Bank of India (RBI) has effectively raised interest rates by raising the cost of borrowing for banks. The RBI has increased banks' cost of borrowing short term money through the Marginal Standing Facility (MSF) rate and Bank Rate each by 200 basis points (2 %) to 10.25 %. However, the policy rates have been kept unchanged. Thus, the window of borrowing for banks from it has been narrowed to just 1 % of deposits at Rs 750 bn. The move intends to restore stability to the foreign exchange market and make debt securities attractive for global investors. The measure will force banks to look for funds from markets and offer higher rates for depositors. Hence, interest rates on short-term borrowings, commercial papers, deposit rates and loans rates may go up 25-50 basis points (0.25% - 0.5%) in the next few weeks. The home and auto loans will also become expensive.

Auto stocks have opened the day mainly in the red with Ashok Leyland Ltd and Escorts Ltd leading the losses. As per a leading financial daily, Tata Motors has reported sales for the month of June 2013. The company's global sales for the month stood at 84,458 units, down 10.2% year on year (YoY). This includes the sales of Jaguar Land Rover (JLR). The global wholesales of all commercial vehicles were down by 13.2% YoY. The global wholesales of all passenger vehicles in June 2013 were down by 7.10%. The sales of Tata passenger vehicles also witnessed a decline of 31.2% YoY. However, the sales volumes of JLR were up by 8.3% YoY.

Will India be back in early 90s crisis mode?

Balance of payments (BoP) is a record of all transaction between a country and others during a specific period of time; usually, a year. In the early 90s, India's faced a BoP crisis. The government was close to default, having barely enough reserves to finance three weeks worth of imports. This led it to pledge its gold with the IMF in order to receive a loan.

Current account deficit (CAD) is a situation that arises when a country's total import bill of goods, services and transfers is in excess of such exports. It is one of the causes of BoP. With India's CAD almost touching the 5% mark (of GDP) during FY13, comparisons are being made to the crisis of the early 1990s.

If Mr. Saumitra Chaudhari - a member of the Planning Commission and Prime Minister's Economic Advisory Council - is to be believed, the situation is not as bad. He is of the view that once the current account deficit is under control, the BoP should be under control as well. The CAD has worsened because of sluggish exports - on account of external factors - and the rising imports. The latter mainly primarily include gold as well as oil and coal. The latter two have impacted the imports to a relatively lesser extent. According to Mr. Chaudhari, gold imports have increased from less than US$ 30 bn in FY10 to US $62 bn in FY12 and US$ 56 bn in FY13. As such, if the gold imports were to go back to what there were in FY10, the CAD situation and ergo, the BoP situation, should be well under control.

How easy it will be to bring these under control may be difficult to say. Nevertheless, gold imports dropped significantly in the month of June this year. If the government is able to keep it under control, one could expect deficit situations to improve. Also, as and when the issues related to the domestic coal mining are curbed, the country could rely less on imported coal.

While we agree with Mr. Chaudhari on curbing gold imports bringing down the CAD, we believe the government should do more on the other side i.e. to boost capital inflows. Even though capital inflows have been higher in FY13 than the past three-year average, the government's efforts should be aimed at bringing in more investments from abroad. And one of the ways to make this possible is to improve on India's tainted image and making the country an investment friendly destination. Given the Indians love for gold, their conservative mentality & their preference for tangible assets, the solutions the government is using at present to curb gold imports may be only good for the short term. The long term solution for CAD is to improve the fundamental strength of India. For that the government needs to do work harder.