Reliance Industries announces a tie-up with DE Shaw group to build financial services business in India
On a quiet Sunday morning, while the country was more excited about cricket, Reliance Industries Limited (RIL) announced plans for joint venture with the D. E. Shaw group “to build a leading financial services business in India”. D. E. Shaw group is a global investment and technology development firm with over $20 billion in aggregate investment capital as of March 1, 2011, but there is a big question about how and when this joint venture will take off.
Reliance Industries is under investigation by the Securities and Exchange Board of India (SEBI) in connection with a 2007 matter when RIL sold 4.1% of the equity of Reliance Petroleum in an open market transaction, earning huge profits. Reliance Petroleum has since been merged and does not exist. Media reports have suggest that SEBI Chairman C B Bhave, who rejected RIL’s request to file consent proceedings had been looking to make an example out of RIL by imposing a penalty in the region Rs500 crore for insider trading, and probably other restrictions as well. However, there is now a new chairman at SEBI and there is some speculation that things may be different under U K Sinha’s leadership.
Our queries to the top brass of SEBI and the media agency of Reliance Industries (NeUcom) about the implications of the insider trading investigation on the joint venture’s plans did not elicit a response at the time of publication this piece.
According to a press release issued on behalf of Reliance Industries, the “joint venture will incorporate the D. E. Shaw group’s investment and technology expertise with Reliance’s operational knowledge and extensive presence across India to offer a comprehensive array of financial services to the Indian marketplace”. It quotes Reliance Chairman Mukesh Ambani saying, “Reliance is delighted to partner with the D.E. Shaw group in the financial services domain. The D. E. Shaw group is a natural partner for Reliance. Together, we look forward to participating in the growing Indian financial services sector”.
Lou Salkind, a member of the D. E. Shaw group’s Executive Committee is quoted saying, “We are excited about this new partnership with Reliance. We have had a long-term commitment to Asia generally and to India specifically, having begun our operations in the country fifteen years ago”. He is also quoted as saying, “We believe this joint venture allows us to apply to the Indian markets our historical success in investment management and market-making, and that strengthening our presence in India and deepening our relationship with Reliance benefits our business globally.”
Anil Chawla, a Managing Director and head of the D. E. Shaw group’s private equity activities in India is quoted in the release saying, “This joint venture will draw upon the core competencies of both firms to develop a platform that can serve the growing needs of Indian companies and individuals.”
Reliance Industries Limited (RIL) is India’s largest private sector with a turnover of Rs 2,00,400 crore and a net profit of Rs 16,236 crore (US$ 3.6 billion) as of March 31, 2010.
The D. E. Shaw group has been in India since 1996, initially focusing on global information technology. It now has over 700 employees in its Hyderabad, Gurgaon (Delhi), and Mumbai offices.
But buy only on declines
The market closed the week with smart gains, mainly on institutional support and firm cues from the global arena. It had a negative bias at the close of the first day of the week, but climbed up and stayed positive on the other four days. The gains kept increasing, with the maximum registered on the last two days. The four-day rally and strong close changes the picture from a range-bound market to an uptrending market with the promise of further gains. The Nifty will now target 5,800 and the Sensex 19,400.
The market clocked gains of over 5% in the week (the best weekly gains since July 2009) with the Sensex closing on Friday at 18,816 and the Nifty at 5,654, their best closing levels since 27th January this year. The Sensex added a whopping 937 points and the Nifty jumped 281 points over the week.
The top Sensex gainers were DLF (up 13%), Jaiprakash Associates (up 10%), ICICI Bank, BHEL (up 9% each) and Infosys Technologies (up 7%). There were no losers this week.
All sectoral gauges ended positive with the BSE Realty index (up 9%) and BSE Bankex (up 6%) the top gainers.
The current four-day rally (22nd March to 25th March) has added 977 points on the Sensex and 289 points on the Nifty. The rally has surpassed the three-day budget rally (28th February to 3rd March) when the Sensex gained 789 points and the Nifty 233 points.
Going forwards there are tremendous headwinds like spiralling crude prices and inflationary pressures and the market will not run away at this stage. Besides, the next big trigger for the domestic market is the upcoming earnings season. Any entry into the market and specific stocks must be on the dips.
In economic news, food inflation was back in double digits at 10.05% for the week ended 12th March after a fortnight-long gap. Food inflation, which has been showing a declining trend for the last three weeks, stood at 9.42% in the week ended 5th March. In the corresponding week of the previous year, it was more than double, at 20.62%, as per government data.
The rate of price rise in food items, which accounts for over 14% of overall inflation, may prompt the Reserve Bank of India (RBI) to hike key policy rates. The central bank has already hiked its key policy rates eight times since March 2010. The last hike was taken at its mid-quarterly review on 17th March. Headline inflation, which has been above 8% since March 2010, was at 8.31% in February 2011.
The Centre has extended the ban on exports of pulses for another year, till March 2012, even as the country is likely to import 3.4 million tonnes of the vital foodgrain item to match the enhanced demand.
Production of pulses during 2011-12, as per the Second Advance Estimates of the agriculture ministry is put at 16.51 million tonnes. On the other hand, the Planning Commission has estimated the demand for pulses during the next fiscal at 19.11 million tonnes.
In one of the shortest Budget sessions in recent times, the government managed to clear the Finance Bill for 2011 with some modifications. Finance minister Pranab Mukherjee rolled back the 5% service tax on healthcare and also modified tax proposals relating to ready-made garments, dividend tax, personal computers, printers, mobile phones and auto parts. The government also tabled a Bill to raise the voting rights of shareholders of nationalised banks to 10% from the existing 1%.
India's foreign exchange reserves for the week ended 17th March surged by $1.67 billion to $303.51 billion, helped by a healthy increase in foreign currency assets (FCAs). The reserves had declined by $755 million to $301.84 billion in the previous week.
FCAs, which include the effect of appreciation or depreciation of non-US currencies such as the euro, pound and yen held in reserves, went up by $1.47 billion to $273.72 billion for the week under review, according to RBI data. India's gold reserves were unchanged at $22.14 billion at the end of the reporting week, the central bank said.
On the international front, the ongoing turmoil in West Asia has now spread to Syria. Government troops opened fire on protesters in cities across Syria and pro- and anti-government crowds clashed in Damascus, as one of the Mideast's most repressive regimes sought to put down demonstrations that exploded nationwide, demanding reform.
Also, Bahrain's security forces fired tear gas at anti-government protesters in the Gulf kingdom on Friday after a prominent Shiite cleric vowed that their demands for the Sunni monarchy to loosen its grip on power will not be silenced by "brutal force".
Portuguese prime minister Jose Socrates resigned earlier this week after the country's Parliament rejected the minority government's austerity measures. The move is likely to be a setback to the European Union's initiatives to take the region out of the debt crisis.
A strong rally on higher volumes breaks the sideways movement of two months, but there are strong headwinds
Contrary to our expectation, the market was not soft today. Rather, we had a massive rally. The four-day rally and extremely firm close changes the picture from a range-bound market to an uptrending market with a promise of further gains. Nifty will now target 5,800 and Sensex will target 19,400. However, there are tremendous headwinds and the market will not run away at this stage. Any entry into the market and specific stocks must be on dips and not on rises.
The market opened the day on a positive note, tracking the firm Asian markets and on institutional support. The Sensex opened 130 points higher at 18,481 and the Nifty was at 5,589, up 67 points from the previous close. IT, realty, banking and metal stocks supported early gains. The indices pared some gains to touch their intra-day lows a little before 10am. At the day's low, the Sensex was back at 18,481 and the Nifty retraced to 5,561.
The market was range-bound till around 12.20pm, after which brisk buying pushed the indices further northwards. However, the broader indices were a bit slow in catching up with the Sensex and were left behind. The market touched the day's high in the last half hour, with the Sensex at 18,858 and the Nifty at 5,667.
The market closed a tad below those levels-the Sensex closed with gains of 465 points at 18,816 and the Nifty closed at 5,654, up 132 points. The closing was the best since 27 January 2011. The advance-decline ratio on the National Stock Exchange was good at 924:476.
The three-day budget rally (28th February to 3rd March) added 789 points on the Sensex and 233 points on the Nifty, whereas the current four-day rally (22nd March to 25th March) has put on 977 points and 289 points, respectively.
While the market closed with splendid gains, investors are advised to take a cautious approach as a firm direction is yet to come.
The BSE Mid-cap index closed 1% higher and the BSE Small-cap index was up 1.02%.
The BSE IT index (up 4.02%) was the top sectoral gainer. Other major gainers were BSE TECk (up 3.49%), BSE Bankex, BSE Realty (up 2.72% each) and BSE Capital Goods (up 2.23%). There were no losers in the sectoral space.
All 30 stocks in the Sensex ended higher today. DLF (up 6.17%), Infosys (up 5.23%), NTPC (up 3.82%), Wipro (up 3.68%) and Tata Power (up 3.67%) were the best performers in the index.
The telecom ministry said today that it will decide in a month's time on the cancellation of licences given by former telecom minister A Raja to firms that were allegedly ineligible. Mr Raja faces charges of issuing 122 licences in 2008 without auctioning the scarce resource spectrum, which caused a presumptive loss of over Rs1.76 lakh crore. The matter is being examined by various investigating agencies as well as a parliamentary panel.
The Asian markets, with the exception of the Jakarta Composite, witnessed a good performance today with most of them clocking gains of over 1%. The markets focused on economic growth and ignored the worries plaguing the world. Optimism ahead of the earnings season also supported investor sentiments.
The Shanghai Composite closed 1.07% higher, the Hang Seng surged 1.06%, the KLSE Composite added 0.11%, the Nikkei 225 surged 1.07%, the Straits Times climbed 0.91%, the Seoul Composite gained 0.85% and the Taiwan Weighted rose 0.40%. On the other hand, the Jakarta Composite fell by 0.13%.
Back home, institutional investors-both foreign and domestic-were net buyers in the equities segment on Thursday. Inflows by foreign institutional investors were Rs307.82 crore while domestic institutional investors pumped in Rs378.12 crore.
Pharma major Shasun Pharmaceuticals (down 0.85%) has estimated a loss of Rs50 crore from the closure of its Cuddalore plant due to a chemical leak two weeks ago. With the Inspector of Factories giving its clearance, the plant, which makes anti-ulcerant drugs such as Ranitidine, Nizatidine and Gabapentin, expects to start operations shortly.
Telecom services provider Bharti Airtel (up 1.86%) stated that it has no immediate plans for an initial public offering of its telecom tower unit, Bharti Infratel. The telecom major is also not looking at listing its joint venture, Indus Towers.
Bharti Infratel has more than 30,000 towers across 18 states, and 11 telecom circles. It also has a 42% stake in Indus Towers which was created as a joint venture between Bharti Infratel, Vodafone and Idea, which is the world's top telecoms tower company with more than 100,000 towers.
Uflex (up 2.31%) is in the process of starting a PET film plant in Kentucky in the US. The plant is expected to be fully operational by December 2012 and will contribute $20-22 million per annum to the company's EBITDA. Uflex will invest $80-$85 million in the plant, which will be financed by a mix of debt as well as internal accruals, the company said.