Asian indices are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is up 0.06% while the Hang Seng is up 0.12%. The Shanghai Composite is trading up by 0.09%. US stocks fell on Tuesday as excitement over the likelihood of a tax code revamp was offset by concern over its effect on years of monetary policy stimulus and the future of interest rates.
Back home, India share markets have opened the day on a flattish note. The BSE Sensex is trading higher by 31 points while the NSE Nifty is trading lower by 12 points. The BSE Mid Cap index opened up by 0.1% while BSE Small Cap index opened the day up by 0.3%.
Sectoral indices have opened the day on a mixed note with automobile stocks and energy stocks witnessing maximum buying interest. While, stocks from banking sector & FMCG sector opened the day in red. The rupee is trading at 64.12 to the US$.
Finance stocks opened the day on a mixed note with Geojit BNP Paribas and Mahindra Finance leading the gains. As per an article in a leading financial daily, Housing Development Finance Corp. Ltd (HDFC) is planning to raise up to Rs 130 billion via a qualified institutional placement (QIP) as it seeks to maintain its shareholding in its subsidiary HDFC Bank Ltd and bolster its capital base to meet the growing demand for home loans.
Reportedly, the fundraising will be either through fresh equity issue or convertible debentures or both. The last time it raised funds through an equity issue was in 2007.
This capital raising exercise is aimed at helping the housing finance major to, among others, participate in the preferential issue of HDFC Bank; meet capital needs for new initiatives, including foraying into health insurance, acquisition and resolution of stressed assets in the real estate sector. Further, fund organic and inorganic growth opportunities in the affordable housing space and growth of subsidiaries.
With HDFC Bank proposing to raise further capital to fund its growth, HDFC said it will participate in the bank's preferential offer up to an amount not exceeding Rs 85 billion. This move is aimed at maintaining the Corporation's current shareholding in HDFC Bank (post dilution as a result of outstanding stock options).
Additionally, the new funds could also be used to infuse capital into its subsidiaries including its education loan arm HDFC Credila, HDFC Ergo, HDFC Capital partners which has an affordable housing fund.
This year, QIP fund-raising activity has been dominated by large issuances in the banking and financial services sector. Till November, 33 companies have raised Rs 457.6 billion.
Speaking of QIP route of equity raising, QIPs tend to be a faster way to raise capital as the dealing happens with a few investors - only institutions in this case. And this is why companies prefer this route - because of its convenience and fewer resource requirements compared to other methods of raising equity.
HDFC share price opened the day up by 0.2%.
Moving on to the news from cement sector. As per an article in a leading financial daily, Despite Supreme Court relaxation on the use of petcoke by cement companies, the prices of cement are likely to go up by Rs 3-4 a bag by mid-January. This comes on the back of government's decision to hike the import duty on petcoke from the current 2.5% to 10%.
This follows the abolition of a ban on petcoke and furnace oil to the cement and power industries in Delhi, Haryana, Rajasthan and Uttar Pradesh by the Supreme Court.
The increase in import duty is expected to create a rise in coal imports as companies change their energy mix. Shree Cement, JK Cement, J K Lakshmi Cement, UltraTech Cement and Mangalam Cement are all expected to be particularly affected by the tariff change.
One shall note that, India is the world's biggest consumer of petcoke, with much of it imported from refineries in the US.
Reportedly, the hike will result in the average cost of production for cement firms going up by Rs 50-60 a tonne and it is likely that firms will pass over the rise in higher costs to the consumers.
As per rating agency ICRA, the demand for cement is likely to remain modest at just 1% for the year as the expected rebound in the third quarter of the current fiscal year didn't take place.
Factors like Real Estate Regulatory Authority (RERA) Bill impacted sales in west India while east India and Tamil Nadu were impacted by the sand shortage. Rural demand also failed to pick up and weak housing activity halted the demand for cement.
However, the cement manufacturers may resort to coal imports due to low domestic availability. Cement manufacturers prefer using pet coke, as it contains high calorific value (7,500-8,500Kcal/kg), to non-coking coal (2,200-7,000Kcal/kg), the reports noted.
Speaking of the cement companies in India, if one were to go by the numbers as reported by Business Standard, the valuations of the Indian cement companies are obscenely expensive.
Cement Companies Increasing Leverage
Globally, cement makers are valued at 26x their latest annual earnings and 1.6x times their latest book value. The corresponding ratio for Chinese players is 23x and 0.95x respectively. On the other hand, Indian cement makers are valued at 48 times their net profit in the last financial year.
Here's what Tanushree Banerjee, Co-head of Research has to say about the sector:
- "There is no denying the performance of the cement companies have shown improvement off late. However, the current valuations certainly warrant a caution. For readers who are looking forward to commit their money in cement stocks should factor in realistic growth expectations.
One would do better to look into long term growth for every cement company. And then judge whether the valuations are reasonable enough. If not, then it is best to stay away from the sector."
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This article was originally published in English at www.equitymaster.com
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