We were at the Taj Mahal Hotel in Mumbai, attending the Equitymaster conference over the last two days. Overlooking the dark waters of the Arabian Sea and the Gateway of India, as we ate, talked and heard, we also sat back and thought about how the end of the easy money era would play out.

As we heard Marc Faber and Ajit Dayal lay out their ideas, we got more ideas. And we came to an old conclusion, all over again: forecasting, especially about the future, is a difficult business. But then someone's got to take a shot at it. Everyone in the investing world cannot be cautiously optimistic. We have clearly have had enough of that term.

So how is this end of the era of easy money, likely to play out? The Federal Reserve of the United States, the American central bank, has started shrinking its massive balance sheet from October 2017 onwards. Between October 3, 2017 and January 29, 2018, the Federal Reserve has shrunk its balance sheet by around $40 billion, we can see that from the Fed documents. But there is still a long way to go, given that the size of the Federal Reserve’s balance sheet is still more than $4.4 trillion.

In the aftermath of the financial crisis that started in September 2008, once the Lehman Brothers, the fourth largest investment bank on Wall Street went bust, and many other financial institutions in the Western world almost went down with it, the Federal Reserve decided to print a lot of money. But just printing money wasn’t enough, this money, had to be pumped into the financial system as well.

This printed money (or rather created digitally) was pumped into the financial system by buying American treasury bonds and mortgage backed securities. American treasury bonds are bonds issued by the American government in order to finance its fiscal deficit, or the difference between what it earns and what it spends.

Mortgage backed securities are essentially securitised financial securities which are derived from mortgages (i.e. home loans). As of September 1, 2008, the Federal Reserve had assets worth $905 billion. As it got around to buying treasury bonds and mortgaged backed securities, it expanded its balance sheet very quickly. The size of Federal Reserve’s balance sheet peaked at $4.51 trillion, towards the end of December 2016.

The idea was that all this money floating around in the financial system would drive interest rates low and keep them there. This happened. Over and above this, the hope was that the companies would use low interest rates as an opportunity to borrow, invest and expand. This would create jobs and employment, would lead to spending and create faster economic growth.

The companies didn’t quite behave the way they were expected to. Yes, they did borrow. But they borrowed to buyback their shares and reduce the number of outstanding shares, and hence, pushed up their earnings per share.

These buybacks essentially benefitted the rich Americans who owned shares. The benefits were two-fold. First, they had an opportunity to sell their shares back to the companies buying them. And second, as the stock market rallied because of improved earnings and all the money floating around, those who owned shares benefitted.

But this wasn’t really what the Federal Reserve had hoped. The consumers were also supposed to borrow and spend at low interest rates. But that didn’t quite play out the way the Federal Reserve had hoped.

What happened instead was that large financial institutions borrowed money at very low interest rates and invested them in stock and bond markets all over the world, including India. These trades are referred to as the dollar carry trade. This led to stock markets rallying all over the world, irrespective of the fact whether the earnings of the companies were improving or not.

The Federal Reserve has decided to gradually start withdrawing all the money that it has put into the global financial system. Between October and December 2017, it planned to sell treasury bonds and mortgage backed securities worth $10 billion. Between January and March 2018, this will go up to $20 billion a month. Between April and June 2018, this will go up to $30 billion a month. Between July and September 2018, the Federal Reserve plans to sell bonds worth $40 billion a month. After that the amount will rise to $50 billion a month.i

How does the actual evidence look like? As mentioned earlier in the piece, the Federal Reserve had managed to shrink its balance sheet by $40 billion between October 3, 2017 and January 29, 2018. From the looks of it, the Federal Reserve seems to be doing what it said it would do. Nevertheless, these are early days.

In 2018, the Federal Reserve is expected to shrink its balance sheet by $420 billion and 2019 onwards, the balance sheet is expected to shrink by $600 billion a year. With the Federal Reserve taking money out of the financial system, there will be lesser money going around, this is likely to push up interest rates. In fact, the yield (i.e. return) on the 10-year treasury bond has crossed 2.85%.

This yield acts as a benchmark for other kinds of lending, simply because lending to the American government is deemed to be the safest form of lending. With interest rates expected to go up, the carry trades are expected to become unviable. This will lead money being withdrawn from stock and bond markets all over the world.

In fact, regular readers would know that we have already discussed a large part of what has been written up until now. But now comes the completely crazy part. The United States government is expected to borrow $955 billion, during the course of this year, to meet its expenses. It is further expected to borrow a trillion dollars, in each of the next two years. Basically, the American government needs to borrow close to $3 trillion between 2018 and 2020.

During the same period, the Federal Reserve is working towards withdrawing more than $1.6 trillion ($420 billion in 2018 + $600 billion in 2019 + $600 billion in 2020) from the financial system. In this scenario, when the Federal Reserve is withdrawing money from the financial system and the government needs to borrow a huge amount of money, it is but logical that the interest rates in the United States are going to go up.

This will impact the carry trades. Hence, stock markets and bond markets will have a tough time all over the world. Of course, all this comes with the assumption that the Federal Reserve will continue doing what it is. The question is will it continue to withdraw the printed money it has pumped into the financial system?

Now this is where things get really interesting. The American society as a large is a highly indebted one. The total household debt of the Americans as of September 30, 2017, stood at $12.96 trillion. The debt has been going up for 13 consecutive quarters now. This debt includes, home loans, auto loans, student loans, credit cards outstanding, etc.

Hence, rising interest rates will hurt the average American as the EMIs will go up. It will also hurt the American government which is in the process of borrowing more, in the years to come. Governments, because they borrow as much as they do, as a thumb rule, like low interest rates. In this scenario, if the Federal Reserve continues withdrawing the printed money, it is more than likely to run into a confrontation with the American president Donald Trump. Trump has only recently chosen Jerome Powell as the Chairman of the Federal Reserve, after Janet Yellen. One school of thought seems to suggest that Powell, given that he has been appointed by Trump, is likely to bat for Trump and go easy on withdrawing money from the financial system, and allowing interest rates to go up. But it is not just up to him. The American monetary policy is decided by the Federal Monetary Policy Committee (FOMC), which has Powell and 12 other members.

In fact, even if that Powell does not bat for Trump, the FOMC might still vote to go slow on allowing interest rates to rise. Ultimately, the Federal Reserve has to ensure that the American economy continues to remain on a stable footing. If rising interest rates end up hurting the American economy, the FOMC will have to react accordingly. No Federal Reserve decisions are written in stone and can always be changed.

The question is how quickly is this likely to happen? Now that is a very difficult question to answer. But my best guess (and I use the word very very carefully here) is that during the second half of the year, the Federal Reserve might have to reverse its policy of taking out all the money that it has put into the global financial institution.

Up until then, a lot of damage will be done to the stock and bond markets around the world. The funny thing is that though the Federal Reserve is now pulling out money to let interest rates rise, the European Central Bank continues to buy bonds issued by its member governments and the 10-year government bond yields of European countries, is significantly lower than that of United States.

What does this mean in an Indian context? Unless, the American Federal Reserve reverses its current policy, the Indian stocks are going to have a tough time. That is a given. What happens next, if and when Federal Reserve changes track? Will another easy money start? On that your guess is as good as ours.

Let’s watch and wait!

Warm Regards,

Vivek Kaul

Editor, Vivek Kaul’s Diary

i https://www.federalreserve.gov/newsevents/pressreleases/monetary20170614a.htm

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India’s Big Government — The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Indian Indices Continue Momentum; Healthcare Stocks Witness Buying

After opening the day on a positive note, stock markets in India have continued their momentum and are presently trading in the green. Sectoral indices are trading on a positive note with stocks in the realty sector, healthcare sector and capital goods sector witnessing maximum buying interest.

The BSE Sensex is trading up 224 points (up 0.7%) and the NSE Nifty is trading up 61 points (up 0.6%). The BSE Mid Cap index is trading up by 1.4%, while the BSE Small Cap index is trading up by 1.8%. The rupee is trading at 64.28 to the US$.

In news from stocks in the pharma sector. Cadila Healthcare share price is among the top gainers on the bourses today.

The surge came after the company reported that the US Food and Drug Administration (USFDA) successfully completed the audit and inspection of it facility in Moraiya, Ahmedabad, without any adverse observations.

Cadila’s Moraiya facility was audited by USFDA as a surprise inspection which was triggered due to the product recalls last year. Moraiya is key facility for Cadila as significant number ANDAs are filled from this facility. This facility had been under import alert prior to its clearance by the USFDA last year.

At the time of writing, Cadila Healthcare share price was trading up by 3%.

The Indian pharmaceutical industry has come under a lot of regulatory pressure in the past few years.

The sector has faced great volatility over the years.

We had written about the current predicament of Indian pharma companies in one of the premium editions of the 5 Minute WrapUp:

• Over the past few years, risk in the US markets has increased. The US Food and Drug Administration has become stricter on products entering US borders. Surprise inspections have increased and companies are being issued warning letters. This has impacted the business and earnings of Indian pharma players, causing major volatility for the sector.

Is the Worst Over for all the Pharma Stocks?

The list of pharma sector woes is long. So, is there light at the end of the tunnel? Girish Shetty, Research Analyst thinks there is.

As per him, it doesn’t make sense to paint all pharma stocks with the same brush. The leaders of the industry will certainly survive this phase. There are interesting, niche pharma stocks that are worth your attention.

Facing pricing pressures in the domestic and export markets, currency fluctuations, as well as manufacturing issues related to their plant, there is a transformation happening in the overall sector as to how business is done and will be done in the future.

Moving on to news from stocks in the engineering sector. L&T share price is in focus today after the company’s unit bagged new orders.

L&T Hydrocarbon Engineering Ltd (LTHE), a wholly owned subsidiary of Larsen & Toubro Ltd, has signed a major field development engineering, procurement and construction (EPC) contract with Al Dhafra Petroleum Operations Company Limited, Abu Dhabi, UAE.

Al Dhafra Petroleum is a joint venture between ADNOC and Korea National Oil Corporation (KNOC) and GS Energy, which is represented by Korean Abu Dhabi Oil Consortium (KADOC).

The contract is worth over Rs 22 billion. And its scope includes Engineering, Procurement, Construction & Commissioning of flow lines, gathering facilities & pipelines to transfer crude oil & gas from Haliba fields to processing facility at Asab and installation of 132 kV and 33 kV overhead electrical transmission lines to supply power.

L&T’s Hydrocarbon segment secured fresh domestic orders of Rs74.6 billion during Q3FY18.

At the time of writing, L&T share price was up by 1.6%.

This article was originally published in English at www.equitymaster.com

Read the complete Indian stock market update. For the terms of use, go here.

Sensex Opens 240 Points Up; ONGC Rallies

Asian stocks are higher today as Chinese and Hong Kong shares show gains. The Shanghai Composite is up 0.38% while the Hang Seng is up 0.68%. Meanwhile, the Dow Jones industrial average rebounded more than 300 points Friday, paring deep losses for investors in what still amounted to the worst week in two years.

Back home, India share markets opened on a strong note. The BSE Sensex is trading higher by 241 points while the NSE Nifty is trading higher by 68 points. The BSE Mid Cap index and BSE Small Cap index opened the day up by 1.1% & 1% respectively.

All sectoral indices have opened the day in green with metal stocks and realty stocks witnessing maximum buying interest. The rupee is trading at 64.37 to the US$.

Oil & gas stocks opened the day on a mixed note with Gulf Oil Lubricants & ONGC leading the gainers. As per an article in a leading financial daily, a consortium of Indian companies led by Oil and Natural Gas Corp. Ltd (ONGC)’s overseas arm, ONGC Videsh Ltd, has bought a 10% stake in the UAE’s offshore oil and gas field Zakum.

Reportedly, the Indian side will pay a sign-up bonus of US$600 million as part of the deal inked in Abu Dhabi between company executives and UAE officials.

The deal gives the Indian consortium, which includes Indian Oil Corp. Ltd and Bharat Petroleum Corp. Ltd’s overseas arm Bharat PetroResources Ltd, access to about two million tonnes of annual share from the field which produces about 400,000 barrels of oil a day.

Backed by diplomatic efforts, Indian energy companies have been aggressively pursuing a share in the world’s most prolific oil and gas fields. In 2016, Indian Oil, Oil India Ltd and Bharat PetroResources had bought stakes in two assets in Siberia owned by Russia’s state-backed PJSC Rosneft Oil Co. for US$3.3 billion.

Although global oil prices have been rising recently, it is far below the US$100-plus levels seen three years ago, forcing many oil-rich nations to narrow their budget deficits by selling assets and diversifying into non-oil sectors of the economy.

US exporters stepping up their supplies is also helping to reduce the effectiveness of the supply cuts by the Organization of the Petroleum Exporting Countries (Opec), aimed at propping up prices.

Further, ONGC Videsh stated that stake acquisition in Zakum is the first time that Indian oil and gas companies have been given a stake in the development of Abu Dhabi’s hydrocarbon resources. The deal has a term of 40 years.

Meanwhile, the country’s energy subsidy burden has come down over the past few years. As per a report by the International Institute of Sustainable Development, the value of energy subsidies the central government doled out declined by 38%, from Rs 2.17 trillion to Rs 1.35 trillion between FY 14–16.

Steady Decline in Energy Subsidies (in Rs billion)

During this period, India lowered its overall subsidy bill with a steep 70% cut in Oil and Gas subsidies.

Although subsidies given to the renewable segment have risen four folds, it still constitutes a miniscule 6.9% of the overall energy subsidies. This means that the lion’s share of subsidies still favour fossil fuels rather than renewable sources.

However, electricity remains inaccessible to a sizeable population, and fossil fuel still dominates the energy mix in the country.

The pertinent question here is, how will India find the balance between fulfilling its energy needs while honouring its commitment towards global climate change?

ONGC share price opened the day up by 3.5%.

Moving on to the news from steel sector. Tata Steel share price surged 2.9% after it reported a five-fold jump in its fiscal third-quarter net profit on the back of strong volume growth in the domestic market and a hike in steel prices.

For the quarter ended 31 December 2017, Tata Steel reported a net profit of Rs 12.9 billion (US$201) million), compared with Rs 2.4 billion in the comparable quarter of the previous fiscal.

Consolidated revenue from operations grew 15% to Rs 334.5 billion, compared to Rs 276.8 billion in year-ago.

Further, its Indian business showed a 10.6% growth year-on-year at Rs 156 billion and European sales grew 20.7% to Rs 146.9 billion, while revenue from Indian operations grew 22%.

Tata Steel stated that its Indian business reported earnings before interest and tax (EBIT) growth of 37% at R 46.5 crore and Europe business reported an EBIT degrowth of 10.6% at Rs 6.3 billion compared to same quarter last year.

Quarterly steel deliveries were up nearly 8% at 6.56 million tonnes, with domestic market accounting for about 50% of the total.

The company’s gross debt decreased by Rs 16.6 billion to Rs 886 billion since the quarter ended September 2018.

The liquidity position of the group remains robust with approximately Rs 225.4 billion, comprising Rs 126.8 billion in cash and Rs 98.6 billion in undrawn credit lines.

This article was originally published in English at www.equitymaster.com

Read the complete Indian stock market update. For the terms of use, go here.

Carnage in Global Stock Market Continues

Global stock markets were spooked again by the sell-off in the US markets. In the week gone by, the US stock markets continued to slide on growing uncertainty that the US Federal Reserve will raise interest rates faster than expected. Further strengthening bond yields in the US signal at higher rates that can push up borrowing costs, hurt corporate profits and curb economic activity. Another point of concern is a government budget proposal announced by US lawmakers, which raises spending caps thereby fanning inflation.

Dow’s decline by 1,175 points on Monday was the steepest in percentage terms since August 2011, when markets dropped in the aftermath of “Black Monday” — the day Standard & Poor’s downgraded its credit rating of the US. Yet again on Thursday, the Dow slumped by over 1,000 points sparking a sharp pull-back on stocks across the world markets.

Apart from the US Federal Reserve, even the Bank of England has hinted towards an uptrend in interest rates. The Bank left interest rates at 0.5% at its meeting, but said a strengthening economy meant interest rates were likely to rise sooner than the markets were expecting.

Back home, global cues weighed down and the index posted a second straight weekly fall after scaling new highs in January. BSE-Sensex ended the week on a negative note and fell 3% to 34,006 this week. Meanwhile, the BSE MidCap was up 0.4% and BSE SmallCap increased 1.8% in the past week.

Key World Markets During the Week

On the sectoral indices front, stocks from capital goods, banking and IT witnessed maximum selling pressure in the week gone by.

BSE Indices During the Week

Now let us discuss some key economic and industry developments during the week gone by.

In its monetary policy, the RBI kept the repo rate unchanged at 6%. With this, the policy rate stands at a seven-year low. The MPC committee had last cut the repo rate by 25 basis points in August last year. As for inflation, the RBI raised its March-end Consumer Price Index (CPI) inflation forecast to 5.1% and projected an inflation range of 5.1–5.6% in the first half of the next fiscal year.

Notebandi and goods and service tax, two major reforms carried out by the government are gradually beginning to yield results. After November 2016, 10.1 million tax filers were added compared to an average of 6.2 million in the preceding six years. Further analysis suggests that new filers reported an average income, in many cases, close to the income tax threshold of Rs. 2.5 lakh, limiting the early revenue impact. As income growth pushes many of the new tax filers in time over the threshold, the revenue dividends should increase robustly.

Since the launch of Goods and Services Tax (GST), there were 9.8 million unique GST registrants, an increase of 50% compared to the previous tax regime. There has also been a large increase in voluntary registrations, especially by small enterprises that buy from large enterprises wanting to avail themselves of input tax credits.

Gold imports remained weak on low demand. Provisional data from precious metals consultancy GFMS and bank dealers showed India’s gold imports in January dropped to their lowest in 17 months as prices rebounded and buyers postponed purchases on expectations of import tax cuts. The fall in imports by India, the world’s second-biggest consumer of gold after China, could weigh on global prices, which have risen over 7% in the past few weeks.

The telecom sector, reeling under huge debt and disruptive competition with the entry of Reliance Jio, is witnessing consolidation. Last year, Vodafone and Idea announced a merger that will create the country’s biggest telecom services company. Bharti has taken over Tata Teleservices’ consumer mobile services and Norway-based Telenor’s Indian arm, Uninor.

UK’s Vodafone is in the final stages of talks to sell its entire 42% stake in Indus Towers for about US$5 billion, raising Bharti Infratel’s holding in the company to 84% through a share-swap deal. Reportedly, Vodafone’s stake is pegged at around US$5 billion. However, the final number will be an outcome of the impact of tower cancellations that will arise once the different telcos consolidate the overlapping tenancies.

Bharti Infratel, a subsidiary of Bharti Airtel owns 42% in the Indus Towers joint venture. While Idea Cellular has a 16% share in it. The no-cash transaction, involving a share swap, will see Vodafone getting a smaller pie of the combined Bharti Infratel. Along with these mergers comes the sector’s anticipated reduction in infrastructure and people overlaps. Indus Towers had 122,920 telecom towers at the end of June 2017, with 297,867 slots on rent.

Movers and shakers during the week

Source: Equitymaster

Some of the key corporate developments in the week gone by.

Cipla reported a 4.8% growth year-on-year in profit at Rs 4 billion in Q3FY18. The growth was largely supported by better-than-expected operational performance and tax reversal but restricted due to lower other income.

Tata Motors’ third quarter consolidated earnings were impacted by weak Jaguar Land Rover show; but standalone or domestic business reported healthy performance backed by strong commercial vehicle segment performance and cost reduction efforts. Net profit rose to Rs 12.14 billion for the three months ended December from Rs 1.11 billion in the same period a year earlier, the biggest jump in seven quarters.

Sales in JLR unit rose just 3.45% from a year ago to 154,447 units. While sales in the US and Europe declined, sales growth in China slowed to 14.6%. JLR’s sales were weighed by few launches and model refreshes during the year. The company expects to maintain an Ebitda margin of 8–10% in the medium term.

Tata Motors’ passenger and commercial vehicle business performance was strong for the quarter as standalone profit stood at Rs 1.83 billion in Q3 against loss of Rs 10.45 billion in same period last year.

In another development, Tata Motors Ltd and Warburg Pincus Llc have mutually agreed to call off the US private equity firm’s proposed investment of around US$360 million in Tata Technologies Ltd. Due to delays in securing regulatory approvals as well as due to the recent performance of the company not meeting internal thresholds because of market challenges, the parties mutually decided not to proceed.

M&M has sought board approval to invest around Rs 8 billion to develop two new electric vehicle (EV) products and set up a research and development Centre for such vehicles. M&M, which has so far invested Rs 6 billion in its electric venture, plans to raise EV capacity to 1000 units a month by end-2018 from about 200 units now, and 5,000 by 2020. If everything goes as planned, M&M could be selling 60,000 EVs annually by 2020, and if that makes up a quarter of the market, that would mean a total EV market size of 250,000.

Even Ashok Leyland is reportedly planning to invest around Rs 1 billion in the electric vehicle (EV) technology over the next two-three years. The company is also planning to showcase the prototype of its first EV product at the upcoming Auto Expo 2018, scheduled to start this week in New Delhi. The company’s total planned capital expenditure for the 2018–19 financial year, including the expense of expanding its cabin facility, debottlenecking and investment in technologies, would be Rs 5–7 billion.

Currently, electric vehicle sales are low in India, rising 37.5% to 22,000 units in the year ended 31 March 2016 from 16,000 in 2014–15. Only 2,000 of these were cars and other four-wheelers, according to automobile lobby group Society of Indian Automobile Manufacturers (Siam).

The government wants to see 6 million electric and hybrid vehicles on Indian roads by 2020 under the National Electric Mobility Mission Plan 2020. The government is targeting to have all cars propelled by electric engine by 2030. The target is more daunting than in many advanced countries.
Bharti Airtel’s quarterly profit plunged 39% to Rs 3.06 billion in the December 2017 quarter. The dismal performance is due to mounting pressures on the revenue front as the pricing war triggered by the entry of Reliance Jio Infocomm showed no signs of abating. The telecom regulator has more than halved interconnection fees that has been a further drag on the company’s topline. Airtel’s net debt as of 31 December was Rs 917.13 billion, up from Rs 914.80 billion as of 30 September.

Singapore Telecommunications Ltd (Singtel) will indirectly raise its stake in Bharti Airtel Ltd by investing Rs 26.49 billion in Bharti Telecom Ltd, the promoter company of Airtel, through a preferential allotment of shares.

With this investment, Singtel’s total stake (along with its affiliates) in Bharti Telecom will increase to 48.9%. Singtel currently holds 47.17% stake in Bharti Telecom. Bharti Enterprises continues to hold over 50% stake in Bharti Telecom. The investment comes within 23 months of Singtel’s participation in Bharti Telecom’s Right Issue of Rs 25 billion, which was completed in February 2016.

Coming to the issue of bad loan resolution, Bhushan Steel with a Rs 440 billion default, is the biggest bankruptcy to go under the hammer thus far after the Reserve Bank of India and the government pushed banks to clean up the bad loan mess through the Insolvency and Bankruptcy Code (IBC). As many as 451 cases with an exposure of Rs 1.28 trillion are pending in the bankruptcy courts. Essar Steel and Electrosteel Steels are the other big metal companies undergoing the bankruptcy process.

Bidding for Bhushan has witnessed some twists in the past month with many global giants showing initial interest then withdrawing from the race. JSW Steel, Tata Steel and a group of employees along with a private equity firm have submitted bids for the bankrupt Bhushan Steel. JSW Steel had submitted its bid along with Piramal Enterprises’ distressed asset fund after Japanese company JFE Steel Corp bowed out at the last moment.

Bhushan Steel has an annual steel capacity of 5 million tonnes. The resolution professional has set the liquidation value at Rs 150 billion, below which no bid will be accepted. Most bids are expected to be in the Rs 250–300 billion range.

GAIL (India) Limited has placed an order of Rs 4.4 billion for laying of approximately 350 kms of pipeline from Vijaipur (in the state of Madhya Pradesh) to Auraiya (in the state of Uttar Pradesh). This is a part of approximately 665 km length from Vijaipur to Phulpur to the existing HVJ-DVPL upgradation pipeline system. Reportedly, this pipeline shall provide the gas feed to the ongoing 2,655 Km long Jagdispur-Haldia-Bokaro-Dhamra pipeline (JHBDPL) project of GAIL.

The JHBDPL will pass through the state of Uttar Pradesh, Bihar, Jharkhand, West Bengal and Odisha, and the project is progressing in full swing which will usher industrial development in eastern India by supplying environmentally clean natural gas to fertilizer and power plants, refineries, steel plants, city gas distribution and other industries.

One shall note that, GAIL has awarded contracts of Rs 54 billion in the current fiscal year which includes Rs 35 billion for procurement of pipeline and Rs 19 billion for laying of pipes. Further, GAIL has awarded till date contracts worth Rs 75 billion for ongoing pipeline projects of around 4,000 kms in south and eastern India.

Emami has concluded a deal to acquire a substantial minority stake in Brillare Science Pvt. Ltd, valuing the company at Rs 750 million-1 billion. Brillare produces hair and skin care products, and sells them to professional salons. Emami currently does not sell through grooming salons but according to Brillare’s director, the company may bring these products within its own distribution network to supply to premium outlets going ahead.

In early December, Emami announced it had agreed to acquire a 30% stake in another new consumer goods maker, Helios Lifestyle Pvt. Ltd, which sells upscale men’s grooming products under The Man Company brand.

Bangalore-based builder Prestige Estates Projects has entered into a strategic partnership with HDFC Capital Advisors to support its business in the mid-Income and affordable housing segment. This dedicated real estate platform will have a capital to the tune of Rs 25 billion, which will be combination of equity and debt.

The primary focus of this platform will be on expanding the builder’s residential business by identifying strategic land parcels with the potential of developing large-scale residential projects in the mid- income segment.One shall note that, HDFC Capital has been offering long-term equity capital to select real estate developers, mainly to develop affordable housing, preferred by builders and investors alike.

Last October, Mahindra Lifespace Developers Ltd, the real estate arm of Mahindra Group, partnered with HDFC Capital to jointly invest Rs500 crore over the next three years to develop affordable housing projects across geographies.

And here’s an update from our friends at Daily Profit Hunter…

The Nifty 50 Index witnessed extreme volatility during the week. On Monday, it opened the session 157 points gap down before recovering a bit to end the session 94 points down. The bears continue to dominate as the index opened 372 point gap down on the next day. It witnesses some short covering during the midweek. But the index again gap down 160 points on Friday and ended the weekly session 2.84% down.

As mentioned a week before, the correction in the Indian indices was inevitable as the RSI indicator was trading in its extreme overbought territory. Last week, the index slipped 300 points and this week it fell another 300 points.

As mentioned in our previous note, if the index keeps dropping, what happens at the 10,500 level, which is an important support, would an interesting thing to watch out for. The index slipped to a low of 10,276 but did not sustain down for long and recovered on the same day.

Currently, the index is again trading near the 10,500 support level. The index also found support from the rising trendline (blue line). The RSI indicator has also cooled off and is now trading near its support level.

If the index holds the 10,500 level, we could see the bulls getting back in action. On the flip side, if it does not hold the support level, the correction might continue for some more time.

Stay tuned…we’ll fill you in next week. You can read the entire stock market commentary here.

Nifty 50 Index Tumbles 3% for the Week

This article was originally published in English at www.equitymaster.com

Read the complete Indian stock market update. For the terms of use, go here.

Sensex Trades in Red; Bank Stocks Top Losers

After opening the day in red share markets in India witnessed choppy trading activity and are presently trading well below the dotted line. Sectoral indices are trading on a mixed note, with stocks in the realty sector and stocks in the metal sector witnessing maximum buying interest. While stocks in the banking sector are leading the losses.

The BSE Sensex is trading down by 435 points (down 1.3%) and the NSE Nifty is trading down by 131 points (down 1.2%). Meanwhile, the BSE Mid Cap index is trading down by 0.2%, while the BSE Small Cap index is trading down by 0.1%. The rupee is trading at 64.29 to the US$.

In news from stocks in the pharma sector. Jubilant Lifesciences share price is among the most active stocks today after the company said its subsidiary has received final approval from the US Food and Drug Administration (USFDA) Amantadine Hydrochloride tablets, an anti-viral and anti-Parkinsons drug.

The approved drug, generic version of Symmetrel of Endo, is indicated for the prophylaxis and treatment of signs and symptoms of infection caused by various strains of influenza A virus. It is also indicated in the treatment of Parkinsonism and drug-induced extrapyramidal reactions.

As on December 31, 2017, Jubilant Life Sciences had 86 ANDAs for oral solids filed in the US, of which 56 have been approved and 12 injectable filings, of which 10 had been approved, the filing added.

Jubilant Lifesciences share price was trading down by 2.5%.

The Indian pharmaceutical industry has come under a lot of regulatory pressure in the past few years.

The sector has faced great volatility over the years.

We had written about the current predicament of Indian pharma companies in one of the premium editions of the 5 Minute WrapUp:

• Over the past few years, risk in the US markets has increased. The US Food and Drug Administration has become stricter on products entering US borders. Surprise inspections have increased and companies are being issued warning letters. This has impacted the business and earnings of Indian pharma players, causing major volatility for the sector.

Is the Worst Over for all the Pharma Stocks?

The list of pharma sector woes is long. So, is there light at the end of the tunnel? Girish Shetty, Research Analyst thinks there is.

As per him, it doesn’t make sense to paint all pharma stocks with the same brush. The leaders of the industry will certainly survive this phase. There are interesting, niche pharma stocks that are worth your attention.

Facing pricing pressures in the domestic and export markets, currency fluctuations, as well as manufacturing issues related to their plant, there is a transformation happening in the overall sector as to how business is done and will be done in the future.

Moving on to news from stocks in the banking sector According to a recent report by ratings agency India Ratings and Research, public sector banks (PSBs) may need capital of over Rs 2 trillion for a credit growth of the 8–9% in FY19.

In October last year, the government had announced a Rs 2.11 trillion bank recapitalisation plan spread over two fiscals, 2017–18 and 2018–19. Out of this, the government last month said it would infuse Rs 881 billion capital in 20 public sector banks (PSBs) before March 31, 2018.

The report said that the recapitalisation amount from the government will go towards sustaining the banks. For a higher growth state-run banks may need more capital. It estimates state-run banks’ capital requirement of Rs 2.06 trillion at a modest credit expansion of 8–9% in FY19.

It said the profit and loss account for most state-run banks would also be under pressure due to accelerated provisioning requirement on the cases identified by the regulator to be referred to the National Company Law Tribunal under the Insolvency and Bankruptcy Code in FY18.

PSBs are burdened by bad loans that have doubled in the past five years. This has led to a slowdown in the loan growth segment. Due to this, PSBs lost their market share from 70.9% in FY16 to 64% in FY17.

PSBs are in a big mess. They already have a huge amount of bad loans piled up. There is a sense of urgency towards the recapitalisation move. This is because banks have to be recapitalised by 2019 to be compliant with the Basel-III frameworks.

As per SBI Ecoflash report, subscribing to the recapitalisation bonds does not really strain bank finances, because lending to the centre is the safest thing.

The report also highlights the advantages of such bonds because these do not alter the fiscal math; the government earns both dividends and market returns on bank shares. Moreover, the government need not raise immediate tax revenues. And by borrowing directly from the banking system instead of the markets, the centre can avoid crowding out private borrowings or distorting market yields.

However, using recapitalisation bonds can only act as a short-term measure to the crisis afflicting Indian public sector banks today. Such a measure will not address the structural issue in the banking system, i.e. the poor standard of lending and poor governance system.

Our big picture editor, Vivek Kaul, talks about moral hazard risk arising out of recapitalization. He writes:

• “If the government bails them around this time around, the banks know that they can count on the government bailing them out the next time around as well. And this means that they can follow fairly loose standards of lending, in order to lend money quickly.”

My colleague, Ankit Shah, editor of Equitymaster Insider presents an interesting analysis of recapitalisation plan.

Here’s a snippet of what he wrote:

• “The Indian stock markets are at an all-time high. The BSE Sensex has crossed the 33,000 mark.Stock prices of public sector banks are up anywhere between 10% and 40%.
  
• I did some quick math and found that the 21 listed public sector banks have gained approximately Rs 1.1 trillion of market capitalisation in just one day.
  
• In other words, 50% of the recapitalisation amount of Rs 2.11 trillion has been captured by the stock market in a single trading session”.

Ankit is deeply intrigued by the interplay of politics and economics, and how it impacts the stock markets. His aim is to connect the dots and offer deeper insights into the workings of the market.

I would recommend you read his entire article here. (subscription required)

This article was originally published in English at www.equitymaster.com

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