Reform expectations spur indices

Indices in the equity market in India were in no mood to give up their gains and as a consequence, closed strongly on yet another occasion today. The BSE-Sensex edged higher by around 190 points (up 1.1%) while the NSE-Nifty managed gains of the order of 55 points. BSE Mid Cap and BSE Small Cap indices did not match their larger counterparts in terms of magnitude of gains but still closed creditably higher. Nearly 5 stocks gained for every one that closed the day in the negative on the Sensex.

While most indices in Asia closed higher today, Europe was seen trading mixed. The rupee was trading at Rs 55.2 to the dollar at the time of writing.

The Sensex may not have gone up more than 200 points for the second consecutive day of the week but it was still a very strong finish. While it was the global cues that led to the buoyancy in yesterday's trade, today's gains were mostly about reform expectations from the newly installed finance minister, Mr P Chidambaram. The fact that foreign institutional investors continued to line up to buy Indian equities also helped matters. Investors would do well to not get carried away by this new found interest in Indian equities. They should stay focused on identifying fundamentally good stocks and buying into them only if the valuations justify the same.

On a day when the index closed strong, Tata Chemicals, world's second largest soda ash manufacturer, ended in the red. This was mainly on account of a poor show put up by the company for the quarter ended June 2012. On a standalone basis, its net profits fell 39% YoY on the back of a 3% fall in total revenues. Bottomline on a consolidated basis fared even worse, falling 46% YoY on the back of a close to 5% growth in topline. The company witnessed forex losses to the tune of Rs 615 m as against a loss of Rs 51 m in the year ago quarter and this partly explains the poor bottomline performance. Its operating performance also suffered as margins fell by around 2%.

Engineers India Ltd, one of Asia's leading design, engineering and turnkey contracting company has bagged a project management consultancy contract for a 2,000 km natural gas pipeline project. The company will offer engineering consultancy services comprising of preparation of pre-bid documents and will also function as 'owner's engineer' apart from providing project management consultancy and construction supervision services. The company continues to bag orders thereby expanding its order book. It has recently received some big ticket orders from Bharat Petroleum Corporation Ltd (BPCL) as well as from Petronet LNG. The stock closed higher by 2% today.

Auto, IT stocks in favour today
01:30 pm

Persistent buying activity led the Indian share markets to rise steadily during the post noon trading session. Buying interest is being witnessed in stocks across the board with auto, IT and realty stocks leading the pack of gainers.

The Sensex today is trading higher by about 170 points (up 1%) while the NSE-Nifty is trading higher by about 55 points (up 1%). Midcap and smallcap stocks are also trading firm with the BSE Mid Cap and BSE Small Cap indices trading higher by about 0.5% each. The rupee is trading at 55.27 to the US dollar.

Indian Pharma stocks have been trading mixed with Torrent Pharmaceuticals, Aurobindo Pharma, Panacea Biotech and Glenmark Pharma leading the pack of gainers. However, Strides Acrolab and Cadila Healthcare are trading in the red. As per a leading financial daily, Ranbaxy Laboratories Ltd may have to take some hit on its revenues as the company might have already given up the idea of launching the generic version of blockbuster sleep disorder drug Provigil. The generics of Provigil are currently enjoying its lucrative six-month marketing exclusivity. And Ranbaxy too could have share this period with other pharma company it launches the drug before October 5. However, the company seems to be not doing so.

Industry experts are of the view that Ranbaxy has already forfeited marketing exclusivity for the generic version of Provigil. The company had done the same for three drugs without disclosing the identity of the drugs as a part of its regulatory settlement with US authorities. Experts think that forfeiting on the right on just Provigil could impact the topline of the company by around US$ 200 m. However, as per the company management all this would not have any significant impact the company's financial. The company has plans for launching generic versions of some diabetes and Hypertension related drugs. The stock of the company was trading flat.

Auto stocks are currently trading firm led by Escorts, Tata Motors and Bajaj Auto. It is reported that Maruti Suzuki is planning to build low cost houses for its blue collar employees in an attempt to improve their living conditions. As per the company's chairman, Maruti is looking for land to build housing units. It is believed that the company is planning to build a minimum of 1,500 flats in Haryana and also has similar intentions for Gujarat as well. Maruti is in the process of setting up a new unit in the latter. The management expects this step to improve the relations between the company and the workers. Given that the company has been facing a lot of issues relating to the work force where in it has seen recurring plant shut downs at Manesar.

IT stocks drive the gains
11:30 am

Indian equity markets built on initial gains during the last two hours of trade on back of buying across sectors. Among sectoral indices, FMCG and oil &gas stocks were the only ones on the losing end.

The BSE-Sensex is up by 103 points and NSE-Nifty is up by 32 points. BSE Mid Cap and BSE Small Cap indices are trading higher by 0.6% each. The rupee is trading at 55.41 to the US dollar.

Steel stocks are trading firm led by Tayo Rolls and Jindal Steel. As per a leading daily, the Jharkhand government has issued a show cause notice to Tata Steel with regards the memorandum of understanding for the purpose of setting up a Greenfield project. The said project which has to be set up in Seraikela-Kharswan district has been delayed. Another memorandum was for the expansion of the brownfield project situated at Jamshedpur. As per the Jharkhand government, Tata Steel has been putting all its efforts towards modernization of the Jamshedpur plant. Tata Steel has already spent Rs 220-250 bn for Jamshedpur plant and expansion work was near completion. Acquisition of land is a problem to set up new facilities, hence the government had allotted a mine to Tata Steel for the greenfield project. Still, the project is delayed.

Mining stocks are trading in the green led by MMTC and Gujarat NRE Coke. According to a leading financial daily, Coal India (CIL) board will meet today to finalise the fuel supply agreements (FSA) with power companies. Earlier in a meeting, the coal mining company's board had reached a consensus on supplying a minimum of 80% of the contracted quantity of the fuel to power firms. It was decided to import coal if need be to ensure these supplies. As a result, CIL will import around 20 million tonnes of coal this year. We may recollect here that last month the prime minister's office had directed the coal giant to sign the pacts with power firms for supply of 65-80% of the contracted quantity. This was to provide support to the troubled power companies. CIL had also been asked to try and ensure supply 75-80% of the assured quantity of coal in the second year under a relaxed penalty clause. In the third, fourth and fifth year, it could be 80% with strict penalty, it was suggested. However, so far only 29 power plants have signed FSAs with CIL.

Indian share markets open in green
09:30 am

The Asian stock markets have opened the day on a mixed note with stock markets in Hong Kong (up 0.3%) and Japan (up 0.6%) leading the gains in the region. However, stock markets in China have opened on a weak note (down 0.1%). The Indian share market indices have opened the day on a positive note. The sectoral indices have opened mixed with stocks in the software and pharma leading the pack of gainers while power and Oil and gas sector have opened weak.

The Sensex today is up by around 39 points (0.2%) and the NSE-Nifty is up by around 1.0 point (0.0%). Mid and small cap stocks are trading in the green with the BSE Mid Cap and BSE Small Cap indices up by around 0.3% and 0.4% respectively. The rupee is trading at Rs 55.34 to the US dollar.

Steel stocks have opened the day on a strong note with Tayo Rolls and JSW Steel leading the pack of gainers. As per a leading financial daily, Steel Authority of India Ltd. (SAIL) led consortium of leading Indian steel and mining firms plan to invest US$75 m. This is towards the first phase for the development of Hajigak Iron Ore mines in Afghanistan. The company has a maximum 20% stake in the venture. Apart from SAIL, National Mineral Development Corporation (NMDC) and Rashtriya Ispat Nigam Ltd. (RINL) hold 18% each in the venture. The consortium had won the mining rights for three iron ore mines in November last year through an international bidding. The three blocks are said to contain 1.28 bn tones of rich reserves. As per the company management, the first phase will be prospecting of the iron ore mines and would take about two and half years time to complete. The Indian consortium is now looking to sign the final agreements to move ahead with the project development. Besides developing iron ore mines, the project development plan includes setting up of a 6 million tonnes per annum steel plant, an 800 MW power plant and building necessary infrastructure at a total cost of US$10.8 bn.

Pharma stocks have opened the day mainly in green led by Indoco Remedies and IPCA Labs.As per a leading financial daily, Cipla Ltd. is will start the supplying Dymista formulation to Swedish pharmaceutical company Meda AB for the US market. The company has a manufacturing contract with Meda, which has discovered and developed the drug. Meda is planning to launch it in the US in a few months. As a result of this, the company is likely to witness a revenue gain in the second half of this financial year. The drug which is a combination inhaler for the treatment of allergic rhinitis is targeted at 60 million patients in the US. According to Meda's 2011 annual report, the US and European Union markets for Dymista are expected to be around US$6 bn. As per the market sources, apart from sales formula, Cipla is also entitled for an upfront milestone payment of US$15 million from Meda. It was in 2009 that the company had signed a long-term collaboration agreement with Meda to develop and market Dymista for various global markets.

The way forward for gold ETFs

Since their launch, about five years back, Gold Exchange Traded Funds (ETFs) have been a preferred form of investing for many investors. This is reflected from the fact that the assets under management (AUM) for gold ETFs have crossed Rs 100 bn mark over the last five years. However, it seems that there are some hindrances in the current structure for the instrument to prosper further. Thus, some reforms are required to gain further market acceptance.

Let us have a look at the problem area's first. It may be noted that gold ETFs are required by regulation to hold physical gold only with no lending clause attached to it. And this results in opportunity cost foregone from loaning out the asset. True, that by the virtue of it, ETFs are structured to give investors exposure to gold without any undue risk. But when the ETFs hold gold in their vault they lose out on possible income arising from lending out the same. It also increases the storage cost. So, without any additional income investors actually lose out on some proportion of their gold return.

So, what could be the solution for this? It is simple. Allow ETFs to lend gold to credit worthy borrowers in a safe manner. There is a huge market for this in India. The potential borrowers of gold could be jewellers who have to stock huge amount of inventory. They can pledge rupee fixed deposits (FD) as collateral.

However, the said mechanism is exposed to the risk of default by the borrower. This can happen if the FDs are not of a sufficient amount to cover up as collateral. Hence, the lending norms have to be extremely stringent. One solution could be that the ETFs lend only to bullion banks who in turn can lend to these jewellers. Another option is to lend gold through stock exchanges. While the exact mechanics of the same may take some time to evolve it reduces the concentration risk of lending gold to a few banks.

Thus, it can be seen that the lending risk can be curbed to a certain extent though various measures. Also, if lending is allowed the ETFs could earn extra income which could eventually be given to the investors as dividends. If not, the storage cost would hurt investors' returns and the market acceptability of the instrument may eventually fade.