Indian Indices End Firm

After witnessing choppy trades in the post-noon trading session, the Indian equity markets registered healthy gains and closed the day on a firm note. This is as the polling began on UK EU referendum in Britain. Stocks from sectors such as banking, auto and finance were leading the gains.

The BSE Sensex closed higher by about 237 points (up 0.9%). The NSE Nifty ended higher by about 67 points (up 0.8%). The BSE Mid Cap ended higher by 0.3%, while the BSE Small Cap stood flat.

On the global front, the Asian indices were trading on a mixed note. The Hong Kong's Hang Seng was trading higher by 0.35%, while Japan's Nikkei 225 was trading higher by 1.07%. The European indices witnessed most of the buying interest ahead of the UK referendum. The FTSE 100 was up 1.54%, France's CAC 40 was up 2.33% and Germany's DAX was up 2.29%. The rupee was trading at Rs 67.24 to the dollar at the time of writing.

Stocks in the textiles space closed the day on a mixed note with Vardhaman Holdings leading gains and Alok Industries leading the losses. As per a leading financial daily, the government has given approval for a special Rs 60 billion package for promotion of exports in textile and apparel sector. The approval is given in order to boost the competitiveness of the Indian garments sector globally.

The package is said to create one crore new jobs in the textile and apparel industry in three years. It is also said to attract investments of US$11 billion and generate US$30 billion in exports. Finance Minister Arun Jaitley on the matter stated that the package will help in realizing the true potential of employment generation in the textile and apparel sector.

The package includes a slew of measures such as additional incentives for duty drawback scheme for garments. It offers flexibility in labour laws to increase productivity as well as tax and production incentives for job creation in garment manufacturing. It also provides more flexible labour laws and financial incentives for the sector.

Under the package, the government has cleared the proposal to increase overtime hours for workers which are not to exceed 8 hours per week. These are in line with International Labour Organization norms and are included in order to bring in flexibility in labour laws.

Moreover, the government has announced that it will bear the entire burden of employers' contribution to the Employees' Provident Fund (EPF) scheme for new employees of the garments industry earning less than Rs 15,000 a month for the first three years. Also, the EPF has been made optional for employees earning less than Rs 15,000 per month.

These moves if executed properly, it will open up many avenues in the textile industry.

In another news update, Ciaz, the premium sedan car of Maruti Suzuki, has touched a milestone of 100,000 units in the domestic market. Reportedly, Ciaz has given tough competition to Honda City and has overtaken it in two of the first five months this calendar year.

The earlier products such as Kizashi and Grand Vitara were not that successful. Both these products had failed to deliver the desired volumes. However, the response from Ciaz has been quite overwhelming.

Further, the company has launched a mild hybrid variant of the Ciaz last September, which also benefitted from lower excise and government announced cash sops for buyers of hybrid vehicles.

Going forward, the response from new models like Vitara Breeza and Baleno will be the key things to watch out for. The stock ended the day trading higher by 0.4%.

Speaking about cars, Vivek Kaul has written an interesting article correlating car sales to black money. Click here to read this interesting piece.

Pharma & Banking Lead the Gains
01:30 pm

After opening the day on a flattish note, the Indian indices are trading on a positive note in the post-noon trading session. Sectoral indices are trading on a mixed note with stocks from the banking and healthcare sectors trading in green while power and realty are trading in red.

The BSE Sensex is trading up by 62 points (up 0.2%) and the NSE Nifty is trading up by 15 points (up 0.2%). The BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is down by 0.1%. Gold prices, per 10 grams, are trading at Rs 30,105 levels. Silver price, per kilogram, is trading at Rs 41,392 levels. Crude oil is trading at Rs 3,345 per barrel. The rupee is trading at 67.35 to the US$.

Stocks in the FMCG sector are trading on a mixed note with Godrej and Dabur trading in red. As per a leading financial daily, ITC is wary of a new government notification on tobacco products. As per the new norms, pictorial health warnings would cover 85% of cigarette packs. This is as compared to 40% currently. This is likely to have an impact on the cigarette consumption and in-turn impact the sales of the company as the cigarette business contributes around 48% to ITC's net turnover.

Moreover, implementation of any change in the health warnings on the cigarette packages is an elaborate process for the manufacturers. It involves substantial cost and effort.

ITC said the move will lead to an increase in smuggling. The company stated that the new warning will encourage the flow of illegal trade of brands owned by international companies into the country. This, as per the company, is because such brands are manufactured in many jurisdictions which do not mandate the printing of graphic health warnings on cigarette packages as is applicable in India.

However, it's important to note that 70% of the cigarettes in India are sold in the loose form. Thus, the decision to increase the pictorial warning may not have a significant effect on the sales of the company.

Vivek Kaul, in one of the articles from the Vivek Kaul's Diary, has offered some of his views on the harsh regulations imposed by the government on the cigarette business.

Lately, due to the uncertainties in the cigarette business, ITC is intending to focus more on its non-cigarette businesses. Going forward, the traction from its non-cigarette business coupled with the sales growth from its cigarette business will be the key thing to watch out for the company. Currently the scrip of ITC is trading up by 0.8%.

Moving on to the news from telecom sector, as per an article in Business Standard, Bharti Airtel recently announced that it will sell its operations in Africa's Burkina Faso and Sierra Leone to France-based telecom operator Orange.

As of present, Orange has completed the acquisition of 100% of the operations of Airtel in Burkina Faso via its subsidiaries.

Reportedly, the entire acquisition is estimated to be worth US$800-US$900 million. These acquisitions are implemented in partnership with Orange's subsidiaries in the Cote d'Ivoire and Senegal.

One must note that Airtel is the 2nd largest mobile operator in Burkina Faso, with a 4.6 million customer base. In its results for the fourth quarter ended March 2016, the company reported a 8.4% YoY (year-on-year) increase in total revenues, while net profits witnessed an increase of 2.8% YoY. To know our views on the stock of the company, you can read the detailed result analysis (subscription required).

However, Bharti Airtel's operation in Africa has recorded minimal success. At the end of March, according to the latest earnings data available, Bharti Africa reported a net loss of US$585 million. Revenues from its African operations stood at US$4.2 billion during the concerned period. Bharti Airtel was trading up by 0.1% at the time of writing.

Indian Markets Trade Marginally Lower
11:30 am

After opening the day on a flat note, the Indian indices witnessed choppy trades and are trading below the dotted line. Sectoral indices are trading on a mixed note with stocks from the pharma, realty and power sector witnessing maximum selling pressure. Healthcare stocks are leading gains.

The BSE Sensex is trading down 15 points (down 0.05%) and the NSE Nifty is trading down 11 points (down 0.1%). The BSE Mid Cap index is trading down by 0.1%, while the BSE Small Cap index is trading down by 0.3%. The rupee is trading at 67.33 to the US$.

Stocks in the power space are trading on a negative note with National Thermal Power Corporation (NTPC) and Reliance Power witnessing maximum selling pressure. As per a leading financial daily, the government has extended the deadline for states to join the UDAY scheme for power distributing companies by a year to March 2017. The decision is accepted with optimism as it will help more states to adopt the package for reforms which in turn can transform the power sector.As per the change approved, states can takeover 75% debt by March 2017 and need not stagger it.

One shall note that the UDAY scheme was brought up by the government to bring a turnaround in the State Electricity Boards (SEBs) that have been caught up in a vicious cycle of high debt and operational losses. The scheme allows power distribution companies (discoms) in select states to convert their debt into state bonds. Further, the part of debt not taken over the DISCOMs shall be converted by banks into bonds with a cap on the interest rates.

So far 20 states have communicated their consent to join the scheme. Of this, 12 states have signed the agreements. Reportedly, some states could not join the programme due to elections or lack of regulatory approvals.

Banks' total credit outstanding to discoms stands at Rs 4,370 billion exposure. Also, the outstanding dues of state utilities payable to central generating power stations have increased 16% in the last one year. The effect of UDAY scheme will take time to reflect on the financial of power utilities. Having said that, one shall watch out further steps that government takes to make the scheme successful.

Moving on to the global markets... All eyes are fixed on the outcome of much touted UK EU referendum. The referendum is going to take place today and will spell out the decision on whether the UK will remain in the 28-nation European Union (EU) or opt to leave.

Britain's exit from the EU (Brexit) is in the news globally as it could have major implications for the international financial market and exchange rates.

A recent entry in Vivek Kaul's Diary gives a bird's eye view of Brexit and explains how the European Union has fed into the Brexit sentiment.

Indian Indices Open Flat
09:30 am

Major Asian stock markets have opened the day on a mixed note with stock markets in China are trading lower by 0.9%. However, stock markets in Singapore and Japan are trading higher by 0.8% and 0.6% respectively. Benchmark indices in Europe ended their previous session in green with stock markets in Germany ending the day higher by 0.6%. The rupee is trading at 67.55 per US$.

Indian stock markets have opened the day on a flattish note. The BSE Sensex is trading marginally higher by 38 points (up 0.1%) and the NSE Nifty is trading marginally lower by 3 points (down 0.03%). However, BSE Mid Cap and BSE Small Cap are trading higher by 0.3% and 0.2% respectively.

Major sectoral indices have opened the day on a mixed note with stocks from power sector are witnessing selling pressure. However, stock from pharmaceutical and fast moving consumer goods (FMCG) space are witnessing buying interest.

As per an article in Livemint, the union government cleared India's largest ever telecom spectrum auction. Reportedly, the government could possibly raise Rs 5.66 trillion from this auction.

Further, the government is putting on sale spectrum bands of 700MHz, 800MHz, 900MHz 1,800MHz, 2,100MHz, 2,300 MHz and 2,500 MHz. Amongst these, the 700MHz band is the most effective and expensive band.

A 25% upfront will have to be made for all bands under 1000MHz. While, a 50% upfront would be required for 1,800 MHz, 2,100MHz, 2,300MHz and 2,500MHz bands. The balance will have to be paid on two year moratorium and ten year's installment.

The receipts from the auction will help the government to keep the ambitious target of fiscal deficit in check. The spectrum will also help to address the problem of call drops.

Having said that, in the event of aggressive bidding, the stressed balance sheet of telecom operators (TELCOS) will come under further pressure. Saddled with a huge pile of debt, this additional burden will put profitability under pressure.

In another news update, the initial public offering of Mahanagar Gas Ltd continued to witness a strong response on its second day. Overall, the issue was oversubscribed by 3.92 times the issue size on the second day of the three-day offering.

Mahanagar Gas is the sole authorised distributor of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai. CNG is used in motor vehicles and PNG for households, commercial and industrial use. The company is planning to expand its business in Navi Mumbai as well as Raigad in Maharashtra. Through its IPO, the natural gas distributor plans to raise Rs 10.4 billion.

Today is the last day for subscribing to the issue. Should you invest in this IPO? We have prepared a detailed report regarding the same. Click here (subscription required) to get the answer.

Will This Reform Bring Energy Security?

The government continues to reform the energy sector. Coal is a primary fuel used for electricity generation. Although the state owned Coal India has a monopoly in mining and related activities, it is not able to meet the growing energy needs of the country. As a result, the country still has to import thermal coal. The ministry has taken initial steps towards commercial mining and sale of coal in India, wherein it would allot the mines to states that would be free to sell the mined coal to interested industries.

The Centre has identified 16 coal mines with an estimated annual capacity of around 40 million tonnes. A state would be able to own a mine in other states as well and use it for commercial purposes. As per the ministry of coal, the government plans to evolve the mechanism of commercial mining by involving the states first and then private miners.

Till 2013, most of the coal blocks allocated to states had an equity structure which favored the mining development operator (MDO). This resulted in private companies ending up with the ownership of the block. The states were only eligible to get royalty from the private companies mining coal for captive use. This arrangement was struck down by the supreme court last year and it cancelled all the allocations to the states.

According to revised mechanism, the states would apply for coal mines citing their demands, reasons for demand and expected sale plan. Joint ventures by the states are allowed as long as the states maintain a majority stake in it. Further, once the coal mines are allocated, the states would not be able to transfer the mine to a private company. This would ensure that mineral rich states earn surplus revenue from selling coal rather than just receive royalty. For the mining operation, states are allowed to employ an MDO by following guidelines as per the new Coal Mines Act,2014.

Commercial mining of coal will have strict guidelines. The role of an MDO will only be that of a contractor. Strictly no joint ventures with an MDO or any change of ownership will be allowed to happen. The mines eligible for commercial mining have been divided for host states and non-host states, wherein a non-mine rich state can own mine in another state and use it for commercial purposes.

Eight blocks will be awarded to state utilities within the state, while the remaining eight will be allocated to state utilities other than those in the host state. The coal ministry has already invited applications from state utilities with allotments expected to be made in August after the coal ministry scrutinizes the applications and makes the allocations.

We think commercial mining of coal is the right step forward and will help bring in additional transparency and pave way for further reforms.