If the Sensex goes below 16,100, panic selling may start. If not, expect a laboured rise
The market pared early gains to end slightly higher than its Friday’s close. The Sensex ended 24 points higher at 16,469 (0.1%) while the Nifty shut at 4,944, higher by 13 points (0.2%). The bourses started the day in the green, taking cues from Asian markets. The market traded firm in the morning session but pared gains in the early afternoon session, wiping off most off the gains posted earlier in the session and touching an intraday low of 16,413 towards the close of trade.
Asian stocks were up on Monday tracking the rise on Wall Street on Friday. Key benchmark indices in China, South Korea, Indonesia, Hong Kong, Singapore and Taiwan were up 0.3% to 3.48%. On the other hand, markets in Indonesia and Japan fell by 0.27% to 0.36%.
US stocks snapped a three-day losing streak on Friday supported by bank stocks on investors’ confidence that the financial regulation bill won't be as onerous as some had feared. Bank shares rose a day after the US Senate approved a sweeping overhaul of regulations of Wall Street firms, capping months of wrangling over the biggest changes since the 1930s. The Dow was up 125 points (1.2%), to 10,193.4. The S&P 500 was up 16 points (1.5%), to 1,087.7. The Nasdaq rose 25 points (1.14%), to 2,229.
Back home, the monsoon is expected to reach the country's southern coast on 30th May and Cyclone Laila cyclone in the Bay of Bengal would not drive away the June-September rainfall, the weather office said. The India Meteorological Department (IMD) in late April said rainfall is likely to be 98% of the long-term average.
Prime minister Manmohan Singh said that controlling inflation will be one of the top priorities of the government.
China said that USA’s hint on easing controls on high-tech exports to China is an appreciated move. China’s vice premier said that the economic ties between China and US have enjoyed dynamic growth.
Foreign Institutional Investors were net sellers on Friday of Rs1,540 crore while Domestic Institutional Investors were net buyers of Rs 816 crore.
The government has reportedly asked telecom firms, which won third-generation (3G) spectrum in the recently concluded auction, to pay by 31st May. The government has collected almost Rs70,000 crore from the sale of 3G spectrum, nearly twice the projected revenue. The government could additionally generate about Rs15,000 crore from sale of pan-India licenses for broadband wireless access (BWA) services.
The board of directors of ICICI Bank (down 0.3%) and Bank of Rajasthan (BoR) (up 10%) have approved amalgamation of BoR with ICICI Bank. A swap ratio for the merger has been already set at 25 shares of ICICI Bank for 118 shares of Bank of Rajasthan. Bharat Forge (up 0.8%) has received a contract for engineering procurement and construction (EPC) from an independent power project (IPP). The company will execute the EPC contract under its 100% subsidiary. JK Lakshmi Cement (closed flat with a negative bias) is reportedly in talks to acquire an Egyptian cement firm for about Rs800 crore. Godrej Consumer Products (GCPL) (down 2.6%) will buy the entire equity stake in South America-based unlisted hair-care products maker, Issue Group. GCPL, which will get an entry into the South American market through this acquisition, did not disclose the size of the deal. Godrej said that the acquisition fits in the strategic objective of the firm that wants to increase its presence in hair colour, insecticides and soap businesses in Asia, Africa and Latin America.
Hindustan Construction Company (up 0.1%) has completed the repair and restoration of the damaged Malad water supply tunnel, in suburban Mumbai, well ahead of its scheduled date of completion of the project. With this, drinking water supply to the western suburbs of Mumbai can be restored to normalcy in the coming days.
The stock shot up 25% on heavy volumes since early March 2010—almost three months before its deal with Abbott was announced. Will SEBI look into what appears to be a possible case of insider trading?
On 21st May, Piramal Healthcare announced that it was selling a part of its business to Abbott Laboratories, ending months of speculation about what was going on in the counter. While that made the headlines, there was something else going on in parallel as well—a suspicious case of price rise on the back of large volumes. On 26 February 2010, Piramal Healthcare was trading at Rs397.85 and by 20th May—the day before the deal was announced—it had shot up to Rs570.10 on the National Stock Exchange. This meant a jump of 43%. In contrast, the Pharma index had gone up by just 3% during the same period.
The rise in price was backed by huge volumes. The average volume in January was 1.50 lakh. This went down to 52,115 in February. However, in March, as the discussions about the deal with Abbott progressed, the price shot up on huge volumes. In March, volumes skyrocketed to 71,146 shares per day, a jump of 47% over the January and February average. In April, volumes surged even further to an average of 2.12 lakh shares per day. On 20th May after the market closed, Piramal announced that it is selling its domestic formulations business to Abbott for $3.72 billion (approximately Rs17,112 crore). In the 16 days of trading in May, average daily volumes were an unprecedented 18.32 lakh shares.
Those in the know of the deal might have laughed all the way to the bank. The volumes in other pharma counters hardly budged from their averages. The correlation between the rising price of Piramal Healthcare shares, the rising volumes and the final announcement of the deal seems apparent to anyone who wants to see it. The question, do the regulators have any interest in seeing it?
The first line of regulators are the stock exchanges. They are not known to stir themselves into insider trading investigation. We have written to the Securities and Exchange Board of India whether the price rise, accompanied by large volumes over months and culminating in a deal, warrants an investigation but we have not heard from the regulator till the time of uploading this piece.
The Piramal Group has interests in healthcare, drug discovery & research, diagnostics, glass, real estate and financial services. The company recorded a consolidated operating income of Rs3,670 crore in the year ended 31 March 2010 while it posted an operating profit of Rs740 crore. In FY10, its Healthcare Solutions (Domestic Formulations) division reported sales of Rs2,000 crore. Piramal Healthcare, controlled by Ajay Piramal, was put together through a series of acquisitions.
The new deal was possibly ordered by the political establishment and means little in real business terms, especially since it is inconceivable that Mukesh Ambani would get into finance and telecom
The press release issued on Sunday afternoon was matter-of-fact: “Reliance Industries Ltd. (RIL), led by Shri Mukesh D. Ambani, and Reliance ADA Group companies, Reliance Communications Ltd., Reliance Infrastructure Ltd., Reliance Natural Resources Ltd., and Reliance Capital Ltd., led by Shri Anil D. Ambani, have today approved and signed an Agreement canceling all existing non-compete arrangements entered into between the two groups in January 2006 pursuant to the scheme of reorganization of the Reliance Group and entered into a new simpler, Non Compete Agreement with respect to only Gas Based Power Generation.”
The reaction was of utter surprise across media, the corporate sector and market players. Does this mean that the two brothers are now bhai-bhai? Or does this mean that Anil has finally thrown in the towel in the high-stakes fight he was fighting? Analysts were quick to point how Mukesh Ambani is now free to get into telecom, a dream business for him until the fight broke out and he had to give it away to Anil. He can also get into power and then financial services. The market, of course, believes all this. Reliance was up 2.72% by the end of the day. Anil Ambani’s companies too made smart moves. Reliance Natural Resources was up 22.70% and Reliance Communications was up 10.99%.
This writer, whose first brush with a Reliance balance sheet was in 1984, 26 years ago, has a different view. Knowing Anil Ambani and Mukesh Ambani, their business motivations, personal bent and their current financial status, this truce is temporary and means very little in real business. According to a long-time Reliance watcher I spoke to, the truce was directed by political bigwigs who literally ordered them to arrive at some sort of settlement that can send a signal to the public that all is well now. “All this is drama. They have been asked to display friendship which is what they are doing.”
In which case, what does it mean, in business terms? For one, Anil Ambani can now look to sell a part of his telecom business which is what he tried to do when he struck a deal with MTN in 2008. That deal came unstuck because Mukesh Ambani scared MTN out of the deal by saying that he was holding the first right of refusal and therefore a deal with Reliance Communications would lead to a long-drawn legal fight. MTN subsequently tried to tie-up with Bharti.
Second, as part of the deal, Anil Ambani will now get some compensation for higher gas prices. This can come in the form of RNRL being taken over by Mukesh Ambani since RNRL is a shell company now.
What about the speculation regarding Mukesh Ambani’s moves? Those who know even a little bit about him (and there are so few of them) would find it hard to believe that he will enter a business as fragmented, risky and volatile as finance which offers so little potential for scalability. He has no interest in owning a mutual fund and fighting it out with 38 others. Mukesh Ambani running a stock-broking company? Nothing can be more ridiculous. The Reserve Bank of India will not give a license to an industry house and therefore he cannot set up a bank. Experts who have predicted that Mukesh Ambani will now enter finance have no clue as to how Mukesh Ambani’s mind works.
Those who know that the telecom business was dear to Mukesh Ambani (he was truly rueful when he had to give it up to Anil as part of the settlement) will assume that Mukesh Ambani will jump into telecom now that the non-compete clause is gone. Indeed, all analysts have broadcast this, today morning. Once again, it seems most unlikely to me that Mukesh Ambani would still be interested in a business whose business model is broken after five years of incredible growth. There are too many players aping each other. There is little competitive advantage today. Maybe Reliance will enter this business someday but only when several of its competitors have gone belly up.
The only possibility is Mukesh Ambani entering power which involves all the skills that Ambani is famous for: execution skills of mega-projects, massive fund-raising, managing the environment and so on.
So, if the friendship was all a drama and businesswise little has changed, will the constant behind-the-scenes sniping by the brothers at each other come to an end? Don’t bet on that either.