After opening the day on a positive note, stock markets in India witnessed selling pressure and are presently trading marginally higher. Sectoral indices are trading on a mixed note with stocks in the telecom sector and IT sector witnessing maximum buying interest.
The BSE Sensex is trading up 80 points (up 0.2%) and the NSE Nifty is trading up 25 points (up 0.3%). The BSE Mid Cap index is trading down by 0.3%, while the BSE Small Cap index is trading down by 0.6%. The rupee is trading at 64.92 to the US dollar.
Gitanjali Gems share price has continued its downtrend and is witnessing selling pressure today. Most of the losses are seen as the CBI has registered a fresh FIR against Nirav Modi in the Punjab National Bank (PNB) fraud case.
The CBI has also noted that the violation of norms for issuance of Letters of Undertaking (LoUs) to benefit Nirav Modi and his uncle Mehul Choksi had been going on since 2010.
Note that the stock of Gitanjali Gems has nosedived on several occasions since 2013, eroding market capitalisation by over 80%. Its promoter’s role in aiding Nirav Modi carry out one of the biggest frauds in the banking history has damaged the stock’s position and credibility. Reportedly, Gitanjali Gems and its two subsidiaries fraudulently acquired letters of undertaking and letters of credit worth Rs 48.9 billion issued through Punjab National Bank.
Gitanjali Gems, the Fall Guy
It has emerged that Gitanjali Gems’ receivables position has been outstanding far longer than that allowed by the RBI. Auditors have pointed out the overdue loans/debentures and overdrawn working capital limits by the company in the latest annual report. In fact, the company has said that it does not even have funds to honour debenture redemption liability of as low as Rs 14.8 m.
We had stuck our necks out, warning investors that Gitanjali Gems’ shiny exterior is a sham. Being in a working capital business of importing gold and exporting jewellery, regulatory restrictions on gold imports in FY13 pushed the company in deeper debt. But the company’s weak management, integrity, and ethics were completely unacceptable to us. Therefore, despite Gitanjali Gems attracting institutional interest during the gold rally, we had clearly asked investors to steer clear of this value-trap.
Connecting the dots in the aftermath of the fraud undoubtedly confirms that the dubious management is responsible for the company’s downfall, something we had seen coming long back. Clearly, management integrity is one aspect that shareholders cannot afford to compromise in their frenzy to ride the bull run.
In other news, as per an article in the Economic Times, the head of the International Monetary Fund (IMF) head Christine Lagarde on Wednesday warned that a trade war US President Donald Trump apparently intends to provoke with tariffs on steel and aluminium would snuff out global growth.
She noted that if international trade is called into question by these types of measures, it will be a transmission channel for a drop in growth, a drop in trade and it will be fearsome. She further added that in a trade war that will be fed by reciprocal increases of customs tariffs, no one wins.
The comments follow Donald Trump’s plan to impose across-the-board tariffs on steel and aluminum imports to which the European Union (EU) proposed to apply a retaliatory tariff of 25% on a range of goods imported from the US.
Trump proposes to slap a 25% tariff on imports of steel and a 10% tariff on imports of aluminum. The formal announcement is expected to be made this week.
As for domestic markets, the above announcement by Trump also sent Indian metal stocks in the red, with SAIL share price, NMDC share price, JSW Steel share price, and Tata Steel share price witnessing most of the selling pressure.
Note that India’s steel industry was just coming out of a rough patch. Demand was picking up. Steel prices were on the rise. Buyers were lining up to pick up stressed assets. With the expected pick up in the investment cycle, the sector was on the upswing. And steel exports were on a roll.
However, Donald Trump has now spoiled the party with his plans to impose the above tariffs. India produces a lot of both commodities but internationally, we are not a big player. The US imports only 2.4% of steel and 2% aluminium from India.
But it’s not that simple.
With the new US tariffs, major exporters like South Korea will look to sell in other countries. This would lead to a glut and as a result, lower prices across the industry.
This would mean lower revenue and profitability for Indian metal companies as well and threaten the nascent recovery in the industry. As Ankit wrote in a recent edition of the Equitymaster Insider…
If metal producers are deterred from selling their goods in the US, they will come looking for other markets to sell their produce. This is likely to create an ‘excess-supply’ situation in those markets.
What happens when there’s too much supply? Basic economics says that when supply increases more than the growth in demand, prices decline. So, Indian metal producers are likely to be faced with the possibility of lower metal prices. This will impact their revenues and profitability.
How exactly this trade war will unfold is something to watch out for. We’ll keep you updated on all the developments from this space.
Read the complete Indian stock market update. For the terms of use, go here.
Originally published at www.equitymaster.com.
No comments:
Post a Comment