A Strong Start to the Week

Indian equity markets continued to trade higher in the afternoon session and crossed the 28,000 benchmark amid strong European markets. At the closing bell, the BSE Sensex closed higher by 292 points, the NSE Nifty finished higher by 94 points. The S&P BSE Midcap & the S&P BSE Small Cap finished up by 1% each. All the sectoral indices finished in the green today with PSU and oil & gas stocks leading the gains.

Asian markets finished mixed as of the most recent closing prices. The Hang Seng gained 0.13% and the Shanghai Composite rose 0.1%. The Nikkei 225 lost 0.04%. European markets are trading higher today with shares in Germany leading the region. The DAX is up 0.97%, while France's CAC 40 is up 0.68% and London's FTSE 100 is up 0.11%.

The rupee was trading at 67.24 against the US$ in the afternoon session. Oil prices were trading at US$ 43.94 at the time of writing.

Shares of Coal India (up 0.6%) and NTPC (up 0.7%) finished on an optimistic note after it was reported that the companies will jointly finance a Rs 60 billion revival package for Hindustan Fertilizers Gorakpur plant in Uttar Pradesh. NTPC and Coal India would each take 50% stake in Hindustan Urvarak Rasayan.

Revitalization of these plants would help reportedly generate 1.27 million tonne per annum of urea along with other associated chemicals from each plant, bridging the demand supply gap of urea. The other positive consequence of the venture would be employment generation opportunities within the state. Gas would be made available through the proposed Jagdishpur-Haldia pipeline to be constructed by GAIL.

In another development, according to an article in The Economic Times, Coal India will not revise its share buyback offer price of Rs 335 per share even if the stock crosses the offered price at the bourses. This would mean the government, its majority shareholder, will earn the entire Rs 36.5 billion earmarked for the offer.

Two weeks ago, the company's board approved a proposal to buy back 108.9 million shares, which is 1.72% of the state-run miner's shares, for Rs 335 each at a total of Rs 36.5 billion.

The buyback will be followed by an additional divestment that would bring down the government's stake in the company to below 75% and help the behemoth adhere to the Sebi norm of at least 25% public holding in listed companies.

Moving on to news from the pharma sector. According to a leading financial daily, Glenmark Pharmaceuticals Inc., USA (Glenmark) has been granted final approval by the United States Food & Drug Administration (USFDA) for Triamcinolone Acetonide Ointment USP, 0.5%.

The Triamcinolone Acetonide Ointment USP, 0.5% market achieved annual sales of approximately US$4.4 million, according to IMS Health sales data for the 12 month period ending May 2016. This ointment is used to treat various skin conditions including eczema, dermatitis, allergies and rash.

Glenmark's current portfolio consists of 116 products authorized for distribution in the US market and 61 ANDAs pending approval with the USFDA (Subscription Required). In addition to these internal filings, Glenmark continues to identify and explore external development partnerships to supplement and accelerate the growth of its existing pipeline and portfolio. Glenmark finished the day up by 0.1% on the BSE.

Meanwhile, the Supreme Court has directed Cipla to deposit Rs 1.75 billion with the government for alleged overcharging in respect to certain drugs. The case pertains to 2003 when Cipla received a demand notice from the National Pharmaceutical Pricing Authority for alleged overcharging of drugs covered under price cap. The stock of Cipla finished the day up by 1%.

Pharma stocks finished the day on a positive note with Lupin Ltd and Ajanta Pharma leading the gains.

PSU, Oil & Gas Stocks Rally
01:30 pm

Indian Indices moved higher during the post noon trading session with investors indulging in some strong buying activity. Sectoral indices are trading in green with stocks from the PSU and oil & gas leading the gains.

The BSE Sensex is trading higher by 200 points (up 0.7%) and the NSE Nifty is trading higher by 59 points (up 0.7%). The BSE Mid Cap index is trading higher by 0.8% while the BSE Small Cap index is trading higher by 1%. Gold prices, per 10 grams, are trading at Rs 30,746 levels. Silver price, per kilogram, is trading at Rs 46,070 levels. Crude oil is trading at Rs 2,984 per barrel. The rupee is trading at 67.29 to the US$.

As per an article in a leading financial daily, Indian Oil Corporation (IOC) is considering to buy Gujarat State Petroleum Corp's (GPSC) stake in Mundra LNG import terminal in Gujarat. Mundra terminal worth 45 billion is currently under-construction.

GSPC has offered 50% stake in the terminal to IOC. Presently, GSPC LNG holds 50% interest in the project. Adani Group holds 25% while the remaining 25% is to be offered to a strategic partner.

Reportedly, IOC wants GSPC to remain as a part of the project. The terminal is not linked with any pipeline for shipping gas to consumers. To place a pipeline to the adjoining grid, it requires state government support and with GSPC on board.

But GSPC is planning to sell the 5 million tonnes a year LNG import terminal project together with storage and re-gasification facilities. The Mundra terminal is expandable up to 10 million tonnes per annum in near future, the reports stated.

Moving on to the news from banking sector. According to an article in The Economic Times, The Reserve Bank of India (RBI) has imposed a penalty of Rs 50 million on Bank of Baroda (BoB).

The penalty follows the RBI carrying out investigation and noting deficiencies which were reflective of weaknesses and failures in internal control mechanisms. As per the BSE filling, discrepancies with respect to certain AML (anti-money laundering) provisions such as monitoring of transactions, timely reporting to FIU (Financial Intelligence Unit), and assigning of UCIC (unique customer identification code) to customers were identified.

Reportedly, Bank of Baroda has assured that it has implemented corrective action plan to reinforce internal controls and ensure that such instances do not repeat.

The observation came as part of inspection done by the central bank after last year's BoB case in which Rs 61 billion import remittances were effected by its Ashok Vihar branch. All the remittances were made to Hong Kong, the reports stated.

The bank said it has fully cooperated with the RBI during the process, leading to the conclusion of its findings.

Subscribers can also access to BoB's latest result analysis our website (subscription required).

Indian Indices Trade Marginally Positive
11:30 am

After opening the day on a flat note, the Indian stock markets registered gains and went on to trade in the green. Sectoral indices are trading on a positive note with stocks from the oil & gas, realty and finance sectors leading the gains.

The BSE Sensex is trading up 122 points (up 0.4%) and the NSE Nifty is trading up 38 points (up 0.4%). The BSE Mid Cap index is trading up by 0.7%, while the BSE Small Cap index is trading up 1%. The rupee is trading at 67.19 to the US$.

Stocks in the energy space are trading on a positive note with Mangalore Refinery and Petrochemicals (MRPL) and Chennai Petroleum leading the gains. As per an article in the Economic Times, the government is all set to start consultations for an ambitious plan to merge 13 state oil firms. This is planned in order to create a giant corporation whose revenue overlook global energy major Chevron that competes with US conglomerate General Electricity in the fortune 500 ranking.

Also, the Cabinet Secretariat has referred the above idea of merging state oil corporations to the oil ministry. Following this, the oil ministry has begun the process of evaluating the prospects of creating the conglomerate, which will have a bigger market value than Russian state oil giant Rosneft and India's Reliance Industries. The ministry plans to consult all stakeholders in the state firms that will be joined in the conglomerate.

Notably, a similar proposal as above was considered more than a decade ago. However, the government in July 2005 said that the official committee that studied the matter felt that a merger or formation of the holding company may not be advisable for the present.

What developments are seen for this plan remain to be the test of time. If the merger actually takes place, it would open up many avenues for India as well as the merged oil firms. As the article notes, a consolidated entity could rival the likes of Russia's Rosneft (US$55 billion in market cap) and UK's BP Plc (US$112 billion) in market value and financial power. It can offer proposals such as a significant stake in Rosneft. It would also aid in catering the rising demand for fuel in the country.

Moving on to the news from the global markets... All eyes are set on the Bank of Japan (BOJ) monetary policy meet this week that will define the central bank's stimulus measures.

In the policy meet scheduled this week, Japan's government will be finalizing one of the biggest spending packages since Shinzo Abe took office more than three-and-a-half years ago vowing to revitalize the economy.

As per the news, policymakers have urged BOJ Governor Haruhiko Kuroda to coordinate efforts by expanding the central bank's monetary easing.

Notably, Haruhiko Kuroda has ruled out the possibility of further stimulus. The governor, in a speech last week, declined the use of helicopter money to lift the Japanese economy. The BOJ has already implemented a negative interest rate policy (NIRP). Further, it is printing 80 trillion yen (US$750 billion) a year to stimulate inflation after decades of deflation and stagnant growth. Despite all these measures the inflationary expectations appear to be weakening. An entry in Vivek Kaul's Diary explains how Japan became a giant laboratory experiment for novel monetary policies.

Indian Indices Open Flat
09:30 am

Major Asian stock markets have opened the day on a mixed note with the stock market in China trading higher by 0.3%. While, stock market in Taiwan is trading lower by 0.8%. Benchmark indices in Europe and US ended their previous session in green. The rupee is trading at 67.13 per US$.

Indian stock markets have opened the day on a flattish note. The BSE Sensex is trading marginally lower by 19 points (down 0.1%) and the NSE Nifty is trading lower by 7 points (down 0.1%). While, BSE Mid Cap and BSE Small Cap have moved upwards and are trading higher by 0.5% and 0.6% respectively.

Baring stocks from metal and banking sector, major sectoral indices have opened the day on a positive note. Stocks from oil & gas and realty sector are witnessing buying interest.

As per an article in Business Standard, companies are increasingly borrowing through the corporate bond market. The data compiled by Bloomberg states that the companies have borrowed Rs 311.9 billion through the bond market in this financial year. Whereas, this figure stood at Rs 215.8 billion in the same period a year ago.

AAA-rated companies are able to raise money now at 7.75-7.85% on the back of falling interest rates. Further, the investor base for the corporate bonds has also increased. Earlier, provident funds weren't allowed to invest money in corporate bonds of AA-rated companies. However, new provisions allow them to invest in such corporate bonds.

Having said that, bond dealers are of the opinion that the companies are borrowing slowly and not as much as they should when the rates are at a multi-year low. Further, a majority of the loans is being borrowed to repay the old debt.

Hence, the money borrowed is not being used for expansion or building new capacities. This is partially on account of the prevailing excess capacity situation. The latest report of the Reserve Bank of India states that the firms were able to use only 72.5% of installed capacity.

Subdued demand from the global markets coupled with sluggish domestic demand has led to excess capacity situation. Until the situation of excess capacity is resolved, the companies would not be inclined to borrow even if the interest rates are at their very lows.

In another news update, India is celebrating its 25th anniversary of economic liberalization since 1991. Sure, many things have changed since then for good. Liberalization marked the end of License Raj. The economy was opened to the private sector as well as foreign players.

However, there are still many matters on which we are worse off than in 1991. One being, the share of manufacturing in the gross domestic product (GDP). In 1989-90, the share of manufacturing in the GDP was 16.4%. Whereas in 2015-16, even after myriad new manufacturing policies the ratio stood at 16.2%. That's worse off than in 1989-90.

The weak share of the manufacturing sector in GDP is partly on account of weak labour laws. It is often argued that Indian entrepreneurs do not expand beyond a certain point because it is very difficult to fire workers once they have been taken on. The Chapter VB of the Industrial Disputes Act, 1947, makes it very difficult for companies with 100 employees or more, to fire an employee without the permission from the government. Such laws prevent entrepreneurs from expanding.

Though we have come a long way from the manner in which we operated before 1990-91, there are many structural issues which still need to be addressed to sustain the tag of the world's fastest growing economy.

The Impact of Foreign loans on Companies

Indian companies are finding foreign currency loans cheaper than raising loans in local currency directly. This is because the London interbank offered rate, or Libor, an international reference rate for financial transactions, is attractively low.

Companies generally take loans in foreign currency if they are executing any project outside India or acquiring some assets and companies. Sometimes, companies take this route for refinancing existing loans (with high-interest rate) with a loan in foreign currencies (low-interest rate).

When taking a loan in foreign currency, companies generally take a forward cover. A Forward cover is a sort of insurance against currency fluctuations. If the borrower does not take such cover and the rupee depreciates against the dollar, costs will go up substantially as it would need to buy dollars from the market for repaying the loan. However, if a company earns its revenue in the dollar, then the company need not take a hedge.

Take a shipping company for example. To acquire a ship, ship-owner will take a loan in foreign currency. Ship-owner will earn revenue in dollar terms. So any fluctuation in foreign currency gets offset in this process. This is called as a natural hedge.

When we are talking about the loan in foreign currency, it is important to consider rupee depreciation. The weakening rupee has made life even more difficult for Indian companies whose books are already loaded with debt. Companies with foreign currency loans are seeing an increase in interest payouts on account of a weaker rupee. The fall in rupee adds another layer of challenge to the highly leveraged companies who are either net importers and/or have foreign currency debt liability.

As per the latest article in Business standard, Indian companies, especially public sector companies such as Oil India, Indian oil and Bharat petroleum are set to raise about US$ 5 billion. Most of the debt will be utilised for funding acquisition abroad. These companies are set to acquire 23.9% stake in Russia's Vancor field for US$ 2 billion.

Private companies are hardly raising any money in foreign currency. The ECB (external commercial borrowings) volume has significantly reduced. As per the latest data available on the RBI website, ECB in the month of May 2016 declined by about 45% on YoY basis. Low demand, leading to under-utilized capacity, is weakening risk appetite for credit even from the cheaper international market. It is important to note that low rates are only available for companies with good credit rating.

As per CMIE Study, projects under implementation by the private sector were at least 10% lower than projects under implementation by the government. The private companies announced projects worth Rs 11,300 billion during 2014-16. Out of this, only a third has gone for implementation. Whereas of the Rs 7400 billion new investments announced by the Modi government during the last two years, 60% have already gone under implementation.

Higher demand will lead to higher capacity utilisation and once this happens, the private sector companies will think about increasing capacities. Only then, there could a demand for foreign currency loans from this private sector.