Markets finish higher for 5th successive day

Amidst much volatility in today's trading session, Indian equity markets closed in the green on firm global cues. Except IT and technology, all the other sectors closed the day in green today. Stocks from the automobiles, metals and realty pack were in favor today. The BSE-Sensex closed higher by 103 points and the NSE-Nifty was up by 25 points. Also, the BSE Mid Cap and the BSE Small Cap closed the day on a positive note and were up by 0.1% and 0.4% respectively.

Asian markets finished broadly higher today with shares in Hong Kong leading the region. The Hang Seng is up 3.13% while Japan's Nikkei 225 is up 0.75% and China's Shanghai Composite is up 0.48%. European markets too opened higher with shares in Germany leading the region. The rupee firmed up by 17 paise to quote at 65.24 against the US dollar in the afternoon session.

Banking stocks ended the trading day on a mixed note with Bank of India and PNB leading the gains. According to a leading financial daily, State Bank of India (SBI) and the German development bank KfW have signed a US$ 300 million loan agreement to support rural and micro-enterprise lending in the country. With a focus on agricultural and microenterprise loans, the facility is designed to further strengthen and extend SBI's priority sector lending activities. The bank will be on-lending these funds to underserved sectors, thereby contributing to the generation of growth, employment and income.

SBI chairperson Arundhati Bhattacharya recently made a pitch for re-introducing so-called teaser home loans to help boost demand for credit, four years after withdrawing such loans amid concern that they could hurt the asset quality of banks. Vivek Kaul, Co-Editor of The Daily Reckoning is of the opinion that teaser home loan rates are indeed a very bad idea and how teaser loans were a major reason behind the financial crisis that had started in the United States in September 2008. We also updated our view on SBI in the latest issue of StockSelect. (Subscription required)

According to a leading financial daily, Tata Power's Strategic Engineering Division (Tata Power SED), and Secusmart, the global expert in secure mobile communications, have entered into a comprehensive partnership for the Indian market. The two companies have signed a term sheet (MoU) providing a framework for the collaboration, the aim of which is to evaluate the design, development and marketing of a highly secure mobile communications system tailored to the needs of Government customers in India. The proposed collaboration is aimed at leveraging Tata Power SED's expertise in security, software and hardware design and manufacturing and Secusmart's expertise in software and security to provide a highly capable and secure communication solution meeting stringent Government requirements.

Notwithstanding this development, the outlook for Tata Power continues to be one of uncertainty. In a recent note to members, Rahul Shah, Managing Editor of Microcap Millionaires, listed out the various challenges being faced by Tata Power (Subscription Required) and suggested that visibility of growth was also not so good.

Auto stocks lead the gains
01:30 pm

Indian Indices are trading on a positive note during the post noon trading session. Sectoral indices are trading on a mixed note with stocks from the auto and metal sectors leading the gains. IT stocks are witnessing selling pressure.

The BSE-Sensex is trading up 68 points (up 0.3%) and the NSE-Nifty is trading up 10 points (up 0.2%). The BSE Mid Cap index is trading flat and the BSE Small Cap index is trading up 0.5%. Gold prices, per 10 grams, are trading at Rs 26,622 levels. Silver price, per kilogram is trading at Rs 37,106 levels. The rupee is trading at 65.08 to the US$.

As per a leading financial daily, the cabinet may not hold discussions on the issue of loan restructuring of power distribution companies today. Earlier it was stated that the Union Cabinet is likely to consider this week a proposal to recast Rs 4.3 trillion worth of loans of nine state power distribution companies. This was planned in order to bring down their liabilities. Amid these hopes of government announcing measures to recast loans of power distribution firms, listed power companies such as Power Finance Corp (PFC) and Rural Electrification Corp (REC) had rallied sharply in last few sessions. It may be noted that subsidized tariffs along with a delay in payments by the government have long been causing the state electricity discoms to face a cash crunch. They are said to be incurring annual losses of about Rs 600 billion. On the back of this news, shares of power finance companies are trading lower currently.

Engineering stocks are trading mixed with Alstom T&D and EMCO leading the losses. As per an article in Business Standard, Siemens has signed a MoU with Infrastructure Leasing and Financial Services (IL&FS) and Gujarat International Finance Tec-City Company (GIFTCL) to develop smart mobility solutions for the 'tec-city'. As part of this, Siemens will collaborate with IL&FS to study, develop and design state-of-the-art city level mobility solutions within the GIFTCL city. The management of Siemens has in recent times expressed its optimism about the opportunities that lie ahead for the company in areas of mobility solutions and smart cities. Scrip of the company is presently trading up by 1.1% on the BSE.

Indian markets recoup
11:30 am

After opening on a flat note, the Indian Markets have added to their early gains and are currently trading well above the dotted line. Sectoral indices are trading on a mixed note with stocks from the auto and metal sectors leading the gains.

The BSE-Sensex is trading up 84 points (up 0.3%) and the NSE-Nifty is trading up 18 points (up 0.2%). The S&P BSE Midcap index is trading up 0.1% while the S&P BSE Smallcap index is trading up 0.7%. The rupee is trading at 65.18 to the US dollar.

Stocks in the aluminum space are trading on a positive note with Hindalco and Nalco leading the gains. According to an article in Economic Times, domestic aluminum producers are urging the government to impose a safeguard duty on aluminum imports in a scenario of falling international prices and increasing product costs. Aluminum Association India (AAI) representatives are of the same view and are trying to push the matter forward. The cost of production for AAI members has risen 29% since April 2011. With imports accounting for 55% of aluminum consumption in the country at present levels, AAI has suggested that aluminum deserves to be treated as a core industry. Hindalco, Vedanta and Nalco are among the producers demanding this safeguard duty, as was imposed in case of some steel products. One must note that the government had recently imposed a 20% provisional safeguard duty on hot-rolled flat steel products for 200 days. We are of the view that long term investors should not panic over such near term concerns. The idea is to buy potential fundamentally strong aluminum companies with solid balance sheets from a long term perspective. While doing so, one must also ensure that to buy these stocks at reasonable valuations, keeping in mind the possible downside due to near term macro concerns.

Private sector banking stocks are trading mixed with South Indian Bank and Lakshmi Vilas Bank leading the gains. As per a leading financial daily, National Commodity & Derivatives Exchange Ltd (NCDEX) has announced its tie-up with Kotak Mahindra Bank to promote financial inclusion through electronic pledge facility. The tie-up aims to provide financing to the depositors of goods in warehouses which will be approved by the exchange. As per the agreement, farmers and traders can use their commodities stored in approved warehouses as collateral for availing financial assistance from Kotak Mahindra Bank. In addition to Kotak Mahindra Bank, HDFC Bank, Axis Bank and IndusInd Bank are also associated with the exchange to provide this facility. Apart from these banks, 10 non-banking financial companies too have tied up with NCDEX in order to extend pledge finance. This initiative over a period of time could become an important tool to improve the credit access to agricultural producers. Productive reforms like this can push Indian agriculture to the next level.

Indian markets open flat
09:30 am

The major Asian stock markets have opened the day in green. Stock markets in Hong Kong, Indonesia and Singapore are trading up by 1.1%, 0.7% and 0.5% respectively. The major stock indices in Europe ended their previous session on a positive note. However the benchmark index in the US ended the previous session lower by 0.7%. The rupee is trading at 65.34 per US dollar.

Indian stock markets have opened the day on a flattish note. BSE Sensex is trading higher by 12 points (up 0.04%) and NSE-Nifty is trading lower by 7 points (down 0.08%). However, BSE Mid Cap and BSE Small Cap are trading higher by 0.2% and 0.4% respectively. The sectoral indices have opened the day on a mixed note with stocks from oil & gas and pharmaceutical sectors witnessing buying interest. However stocks from the metal & mining and consumer durables sector are witnessing selling pressure.

Sun Pharmaceutical Industries plans to raise funds for the purpose of expansion and acquisition. The company has sought the approval of the shareholder's to raise funds up to Rs 120 bn. The funds will be raised through convertible debentures or by Qualified Institutional Placement (QIP). The company stated that the funds raised will allow it to strengthen its financial resources and net worth.

As per an article in Business Standard, company has made two acquisitions in the recent months. The first being GSK's opiates business in Australia and the second being Insite Vision (specialty ophthalmic product maker) in the US. The company's borrowings stood at around Rs 75.9 bn as at March 2015.

The company has also sought shareholders' approval to grant loans, provide guarantees or make acquisition of up to Rs 500 bn. The fund raising plans reflects the management's intention to go for more acquisitions going forward. Indeed, Radhika Pandit, the Managing Editor for Indian stock markets have opened the day on a flattish note. ValuePro, had earlier discussed why M&A activity has been heating up in the Indian Pharma space (Subscription required), in one of the premium editions of The 5 Minute WrapUp. According to her, the focus on niche products has certainly increased, but the quantum of drugs losing patents has begun to diminish. And so this has been one reason why consolidation has gained prominence as companies strive further to achieve economies of scale and bolster margins. The stock of Sun Pharma is trading up by 0.04%.

As per an article in Economic Times, Oil and Natural Gas Corporation (ONGC) will set up 280 wells across 400 square kilometer area. The wells will be set up for the purpose of drilling coal-bed methane in Jharkhand. Coal-bed methane is a form of natural gas extracted from coal beds. The state government has assured allotment of land to the company. Each well would require 1.7 acres of land. The coal-bed methane would be generated in 15-20 years. At a time when capital expenditure plans for most of the global oil companies have been deferred due to low oil and gas prices, ONGC plans to boost spending as it expects exploration costs to drop. While the stock price has suffered due to the slump in oil and gas prices, we believe the investment in the current scenario is likely to pay off once oil and gas prices recover. The stock of ONGC is trading up by 2.7%.

Will the government ever recover black money?

Recently, the Indian government initiated steps to bring back black money. A scheme was introduced wherein a person could voluntarily disclose unaccounted holdings of foreign assets. The disclosure had to be made by 30th September. However the scheme received a dismal response. The amount of money disclosed was just Rs 37.7 bn. The amount disclosed this time is way less than the '1997 Disclosure Scheme' in which the sum of Rs 330 bn was disclosed. In any case, both these amounts are miniscule to what Finance Minister Arun Jaitley was targeting (in foreign assets) to what P. Chidambaram's scheme was targeting in the domestic market.

So should Mr. Jaitley be targeting domestic black money too?

Mr. Jaitley's responded by stating that the people who didn't declare their unaccounted foreign assets will face consequences.

A huge chunk of the black money is invested in the Participatory Notes (P-Notes). According to the data provided in First Post, US$ 43 bn was invested in P-notes as of last June. Second preferred asset class is real estate, which too attracts huge sums of black money.

If the government is able to crack down on both these sources, the black money saga can be curbed substantially.

With this however, the government seems to have put itself in a catch-22 situation.

It wants to raise money through the disinvestment route. And in case of a ban on P-notes, Indian stocks would decline substantially. This could possibly dilute the equity value of its holdings.

A quick flash back...

It was in 2007 that P notes had been cracked down upon. What followed was a correction of 10% in the markets within a matter of minutes that led to a halt in trading. A lot has changed since then. The share of P-notes in foreign holdings has come down from over 50% to about 10% now (both equity and derivative). Regulations have become tighter. However, the notes are still transferable which makes it difficult to track the final beneficiary; thus making the markets susceptible to their misuse.

From the government's perspective this would not seem to be a viable solution, however short terms its implications may be.

Coming to real estate, majority of the schemes are funded by a political party or politicians. This is the prime reason why the real estate rates have not tanked. The politicians will not let the prices fall in order to protect their own unseen net worth. Vivek Kaul the editor of 'The Daily Reckoning' is also of the opinion that unless real estate prices falls, home sales won't pick up. Further, he also states that the real estate prices have not declined mainly on account of ill-gotten wealth of politicians and their cronies has found its way into the sector through 'benami' means over the years. Further, any sudden crash will also rock the public sector banks. The banks have huge exposure to real estate. And if the realty sector crashes, their bad loans are likely to pile up.

The government will have to come up with a revised plan in order to target the foreign illegal assets and the domestic black money. However, it needs to take some serious steps in order to keep the black money in check. Some of the remedies as mentioned in the article published in First Post are to demand Permanent Account Numbers (PAN) for all transactions above Rs 10,000 and encourage the use of plastic and mobile money.