Volatile Start to the Week

After having witnessed a fairly volatile day with the index crossing the dotted line a multiple times, the Indian stock markets ended the day marginally in the green amid mixed international cues. The BSE-Sensex closed higher by about 17 points, while the NSE-Nifty ended lower by about 8 points. Stocks from the FMCG and pharmaceuticals spaces fell sharply today, while those from the IT and realty spaces were favored. Further, the S&P BSE Midcap index and S&P BSE Smallcap Index closed higher by about 0.1% and 0.8% respectively.

Asian markets finished mixed. The Shanghai Composite gained 0.26%, while the Nikkei 225 and Hang Seng fell 0.69% and 0.33% respectively. European markets are mixed today. The DAX is up 0.70% while the CAC 40 gains 0.46%. The FTSE 100 is off 0.25%. The rupee was trading at 66.81 against the US$ in the afternoon session.

According to a leading financial daily, Bharat Forge will be investing about Rs 5 billion in setting up a defense systems facility in association with a joint venture partner. The company is set to apply for 40 acres of land next week in south Indian state of Telangana.

Hyderabad has brought over US$14.9 million investments in robust defence and aerospace manufacturing ecosystem in the last one year. There were around 10 precision engineering companies that are coming up near Adibatla and the total investment has been around US$29 million.

Bharat Forge Limited is the flagship company of the US$2.5-billion Kalyani Group and a global provider of safety and critical components/solutions to various industrial sectors including automotive, railways, power, construction & mining, aerospace, marine and oil & gas. Earlier this year, Bharat Forge announced it had ventured (51:49) with Israel's Rafael Advanced Defence Systems for manufacturing defense components in the nation.

Bharat Forge finished the trading day on a flat note today.

Telecom stocks finished the day on an encouraging note with Reliance Communications and Himachal Futuristic leading the gains. According to a leading economic daily, Bharti Airtel announced plans to invest Rs 600 bn over a period of next three years as part of 'Project Leap'. The company will make investments in upgradation and sophistication of the company's pan India network as part of the project.

Under the ten point programme, the company will double its base stations from 160,000 currently over the next ten years. Massive modernization of networks, upgradation of copper line, swapping out legacy networks, massive reduction in carbon footprint by 70% and enabling customers to understand the project are some of the ten initiatives under Project Leap.

Reportedly, the company would fund most of its investments through cash accruals. The investment will enable Airtel customers to avail broadband speeds of 50 Mbps from the current 16 Mbps, by 2016. In addition Airtel plans to offer speeds of up to 100 Mbps through its fiber to home network.

Bharti Airtel has declared results for the second quarter of FY16. The company has reported a 4.3% YoY increase in total revenues and a 10.1% YoY increase in net profits during the quarter. Data consumption continues to drive growth. The non-India operations are still in the red. The company added the highest number of subscribers in the industry i.e. 4.6 million. Here is our analysis of the results. (Subscription required)

Telecom Stocks out of favour
01:30 pm

The Indian Indices are currently trading on a flat note. Sectoral indices are trading mixed with stocks from the telecom and energy sectors leading the losses. Auto and consumer durables stocks are leading the gains.

The BSE-Sensex is trading up by 12 points (0.1%) and the NSE-Nifty is trading down by 3 points (0.04%). The BSE Mid Cap index is trading up by 0.3% while the BSE Small Cap is trading up by 0.7%. Gold prices, per 10 grams, are trading at Rs 24,985 levels. Silver price, per kilogram, is trading at Rs 33,600 levels. Crude oil is trading at Rs 2,798 per barrel. The rupee is trading at 66.75 to the US$.

Banking stocks are trading firm with IDBI Bank and Union Bank witnessing maximum buying interest. As per an article in Economic Times, the government is in talks with the International Finance Corp. for the disposal of a stake in state-run IDBI Bank. The government currently holds a 76.5% stake in the bank and is looking to lower this to 49%. As reported, the World Bank arm that invests in private sector is said to pick up a 15% holding.

The government, with plans to kick off strategic sales of public sector entities, has asked the finance ministry to conclude the IDBI deal by December. A panel has been set up to carry out strategic sales for the same.

The bank stake sale is primarily focused at making the bank more professional on the lines of private counterparts as was earlier seen in case of Axis Bank. The move will not face difficulties as unlike other state-run banks, IDBI Bank is governed by a separate legislation. The IDBI Act allows the government to lower its stake to 49%. In other state-run banks, the government has pledged to keep a majority 52% stake.

Lastly, going by the government's strategic sale plans, India wants to raise a record of Rs 695 billion this fiscal year from divestment. Of this, it has so far raised Rs 126 billion.

As per an economic daily, Nestle India has said that it has resumed production of Maggi noodles at all five facilities in India after production was started at its Tahliwal plant in Himachal Pradesh.

Earlier, last week, the food major has started production of Maggi noodles from its fourth plant at Pantnagar in Uttrakhand. The production was resumed on November 9 after a five-month ban. In June, FSSAI had banned Maggi noodles after finding lead content beyond permissible limits. Post that, the company took a hit of Rs 4.5 billion including the disposal of over 30,000 tonnes of Maggi packets.

As a result, the company reported 60% decline in its standalone net profit for the third quarter ended September 2015. Its net sales plummeted 32% during the period. However, the company since then is working to make up the lost ground. In our recent report, we have given our views on what one should expect from the company going further. If you are interested in the stock, you can read the report here.

Presently the stock of Nestle India is trading down by 1.4%.

Markets Trade Near the Dotted Line
11:30 am

After opening the day on a flat note, the Indian stock markets registered some early gains but failed to hold up at those levels and are presently trading just below the dotted line. Sectoral indices are trading on a mixed note with stocks from the auto and consumer durables sectors leading the gains. FMCG and energy stocks are trading in the red.

The BSE-Sensex is trading down by 20 points (down 0.1%) and the NSE-Nifty is trading down by 11 points (down 0.1%). The S&P BSE Midcap index and the S&P BSE Smallcap index are trading positively, up by 0.2% and 0.7% respectively. The rupee is trading at 66.79 to the US$.

Pharma stocks are trading mixed with Wockhardt Ltd leading the gains and Torrent Pharma leading the losses. Cipla Ltd has inked an investment agreement with FIL Capital Investment (Mauritius) II Limited concerning the Cipla's consumer healthcare business. To remember, the same business was divested by the company to Cipla Health, a wholly owned subsidiary, by way of a slump sale for a consideration of Rs 105 million.

The investment is subject to approvals from the Foreign Investment Promotion Board (FIPB) and the Competition Commission of India (CCI). The company further added that the investment would also be subject to the transfer of Cipla's consumer healthcare business to Cipla Health Ltd.

Cipla's board in July had approved an investment by Fidelity Growth Partners India and US-based Fidelity Biosciences. This was through FIL Capital Investments (Mauritius) II or its affiliates in its recently launched consumer healthcare business.

Indian consumer health care is a US$ 4 billion market. It is growing at a CAGR of 15%. It is expected to be a US$10 billion market by 2020. Cipla, through the consumer healthcare business, has entered the over-the-counter (OTC) healthcare market in India. Presently, its stock is trading up by 0.9%.

Stocks in the power space are trading positively with Rattan India Power and Reliance Power witnessing maximum buying interest. As per an article in Economic Times, the government is aiming at increasing renewable purchase obligation (RPO) targets for distribution companies (discoms) from 3% to 10%. The same is to meet the one lakh MW solar capacity target by 2022.

Under the RPO, discoms have to purchase a certain amount of their power from renewable sources. As per the current tariff policy, there are separate percentages of RPO mentioned for solar and non-solar sources.

Moreover, the recently announced UDAY package that aims at revival of power distribution companies also includes a rule that they will now have to comply with the RPO. The same has to be complied within a period, which will be decided in consultation with the power ministry.

Indian markets open flat
09:30 am

The major Asian equity markets have opened the day in red with stock markets in China (down 1.7%) and Korea (down 1.8%) being the top losers. Major stock indices in Europe ended their previous session in red. However, benchmark indices in US closed marginally higher. The rupee is trading at 66.35 per US dollar.

Indian stock markets have opened the day on a flattish note. BSE-Sensex is trading higher by 15 points (up 0.06%) and NSE-Nifty is trading lower by 14 points (down 0.2%). Both S&P BSE Midcap and S&P BSE Smallcap have moved upwards and are trading higher by 0.3% and 0.4% respectively. Major sectoral indices have opened the day on a mixed note. Stocks from capital goods and automobile are witnessing maximum buying interest. However stocks from oil and gas and telecommunication are the top losers in the pack.

As reported in a leading financial daily, Maruti Suzuki intends to invest Rs 150 bn. The money will be utilized for procuring land for dealership network and expanding its stockyard, warehouse and transportation infrastructure.

The investment is in sync with the company's aim to increase its annual sales to about 2 million units by 2020. Further, once Gujarat plant gets operational it will help in doubling its sales. Thereby additional dealership network will be required to sell these manufactured products. Reportedly, company has a dealership network of 1,700 outlets. The company intends to double its dealership network in the next 5-6 years.

The expensive land cost is making it difficult for the dealers to invest in land. Hence, company will purchase the land for the dealers to set up their showroom. The land parcels procured by the company will then be leased to dealers who will in turn pay rents to the company. Going forward too, company intends to set up future dealerships on the land owned by the company.

Maruti Suzuki is trading up by 1.5%.

As per an article in Livemint, there appears to be no signs of revival in the tractor sales. Reportedly, sales volumes in the tractor segment contracted for the 13th consecutive month. Sales data for October showed a contraction of sales by 19.5%.

The main reason for a drop in the tractor sales is weak monsoon. Further, minimum support prices for the crops have not increased significantly, leading to low disposable income in the hands of the farmers. These factors have impacted revenues of the companies such as Mahindra and Mahindra. The company has reported a drop in sales from farm equipment by 26% YoY, for the Sept quarter. Further Escorts too reported a drop in their sales by 20% on a YoY basis.

Going forward, recovery in tractor and farm equipment looks bleak in the second half of 2015-16.

Can Vulture Funds Save Banks?

The menace of debt defaulters is a serious one. Firms which take on debt are obliged to repay. Most of them do so. But some of them default willingly. This causes a lot of stress for banks. Without a way to get rid of these stressed assets, they are reluctant to lend to deserving firms. This slows down economic growth.

The government and the RBI have taken several measures to deal with this issue. They have cracked the whip on wilful defaulters. Banks have been told to clean up their balance sheets. Banks have hived off many questionable assets to asset reconstruction firms. But the cleanup process will take some more time.

Recently the RBI has cleared the way for Foreign Portfolio Investors (FPIs) to invest in bonds that are in default. We believe this is an important reform. It will allow banks to sell off their stressed assets quickly. The buyers of such debt are usually foreign 'Vulture Funds'. The funds are constantly on the lookout for stressed assets globally.

These funds typically buy the bonds of a company in default and bring enormous pressure on the management to perform. Once a turnaround is complete, they exit by selling the bonds to more conservative investors. They usually make a good profit in the process.

It is important to note that foreigners are not prevented from buying such bonds, known as junk bonds. But during the recent Amtek Auto fiasco, they were unsure if they could buy the defaulting company's debt. The RBI's clarification will go a long way to clear up any confusion in this regard.

As per an article in the Business Standard, the global market for junk bonds is huge. In the US alone, the market size is around US$ 300 bn. Such a market does not exist in India but things should change post the decision of the RBI.

We believe this step will be a big help to banks which are struggling under their NPA burdens. The sooner they convert their stressed assets into bonds that can be sold; the better will be the prospect of the economic recovery.