SAT seeks details of insider trading case from SEBI and RIL

While SEBI opposed RIL’s plea saying that it is up to the regulator to decide on acceptance or rejection of a consent application, SAT said it is seeking written submissions from both the parties as it is hearing such a case for the first time

The Securities Appellate Tribunal (SAT) on Monday while adjourning the hearing till 14th June on Reliance Industries’ (RIL) appeal against market regulator Securities and Exchange Board of India (SEBI) asked both the parties to make written submissions.


Mukesh Ambani-led RIL had approached SAT after its application to settle the matter through a “consent mechanism” was rejected by SEBI.


RIL has challenged SEBI’s decision to reject its plea and also the changes made by the regulator during 2012 in regulations governing settlement of cases through the consent mechanism, especially those already under consideration.


Under SEBI’s consent mechanism, companies can seek to settle cases with the market regulator after payment of certain charges and disgorgement of any ill-gotten gains.


RIL filed a petition before SAT against SEBI’s rejection of its application for “consent settlement” of a probe into alleged violation of insider trading norms in sale of shares of the company’s erstwhile subsidiary Reliance Petroleum.


In May 2012, SEBI had tightened the norms for settlement through consent framework. As a result, many cases, including those related to insider trading, are not being settled through this mechanism.


On 3 January 2012, SEBI published a list of 149 consent pleas, including 16 from entities related to the RIL group, which it had found unsuitable for settlement through consent process.


These include applications of RIL itself and that of RIL chairman Mukesh Ambani’s close aide Manoj Modi.


High court says MTNL is commercial consumer of BEST

The Bombay High Court also asked MTNL to pay electricity charges as per the tariff rate applicable for commercial consumers from June 2009 onwards

The Bombay High Court on Monday upheld the decision of BrihanMumbai Electric Supply and Transport (BEST) to categorise telephone exchanges of Mahanagar Telephone Nigam (MTNL) as “commercial consumer” for the purpose of charging tariff.


State-run MTNL had challenged the decision of BEST to change its category from “industrial consumer” to “commercial consumer”.


BEST contended that the Appellate Tribunal for Electricity had recently held that telephone exchanges were liable to be charged on the basis of commercial category (non-residential supply category) and that the arguments that telephone exchanges are “industrial users” was not accepted by the tribunal.


This communication was sent to MTNL but this had not been challenged in the petition, BEST said.


Hearing the petition recently, a bench headed by Chief Justice Mohit Shah refused to grant relief saying they were prima facie satisfied with the arguments of BEST that MTNL was not an “industrial power user” but a commercial consumer.


The court also took into account the submission of BEST that MTNL have been paying electricity charges based on rates applicable to commercial consumers right from 1987 to 2006 and again from June 2009 onwards.


The bench granted a stay against recovery of amount by the power company on the basis of impugned bills for the period January 2007 to May 2009 and for any prior period.


From June 2009 onwards, the court, however, ordered MTNL to pay based on tariff rate applicable for commercial consumers.


Cyclical sectors like metals, capital goods, auto, and cement expected to perform poorly in the equity market

Indian equity market at P/E of under 14x FY14E EPS is attractive, says Motilal Oswal Securities in its India strategy report. Markets remained flat for the last five years, with record outflow by domestic investors

The Indian economy is expected to register GDP (gross domestic product) growth of 5% in FY13, the lowest in a decade. Inflation has remained consistently above the comfort level and currency problems have compounded in the last 18 months, with all-time high current account deficit levels. Indian equities have reflected all these concerns as markets remained flat for the last five years, with record outflow by domestic investors. The last couple of quarters provided some ray of hope with the finance minister pushing for several reforms, controlling FY13 fiscal deficit to 5.2% of GDP, and targeting to lower it further to 4.8% for FY14. These observations were made by Motilal Oswal Securities (MOSL), a leading brokerage, in its preview of corporate earnings for the March quarter of the current fiscal.


The brokerage, which tracks 144 companies (excluding RMs i.e. three major oil refining

& marketing companies—IOC, BPCL, HPCL), states that corporates are expected to report zero growth in aggregate profit after tax (PAT) for the fourth quarter of 2012-13(4QFY13). This is the lowest growth in the last 28 quarters, excluding the four quarters of PAT de-growth during the global financial crisis (FY09/FY10). Aggregate PAT growth for full year FY13 works out to only 6%, the lowest since FY07, again excluding the global crisis year of FY09. Both in 4QFY13 and FY13, secular sectors like consumer, technology, and healthcare are expected to perform much better than cyclical plays like metals, capital goods, auto, and cement. MOSL expects Sensex 4QFY13 PAT to be down 2% year-on-year.


According to the brokerage, the Indian market has been very volatile for the last couple of quarters. Post a strong 2012 (26% returns), the BSE Sensex is down marginally in 1QCY13 by 3%. However, the broader markets are down even further with the BSE Mid-cap index dropping by 14%. Domestic investors were net sellers throughout the last 12 months, whereas FIIs were big buyers. The Sensex return in FY13 at 8% has very closely tracked the EPS growth of 5%, keeping the valuation multiples unchanged.


MOSL expects growth in FY14 to recover over FY13 levels as its bottom-up estimates indicate an EPS growth of 16%. This is partly driven by a recovery in earnings of few beaten down companies. It further states, “The current uncertainty does make us cautious and these estimates are prone to some downgrade in 1HFY14. Even with the possibility of some downgrades in FY14 earnings, we believe that Indian market at P/E of under 14x FY14E EPS is attractive.”


Even in terms of 4Q growth alone, this quarter’s growth is likely to be the lowest since

FY06, excluding the global crisis quarter of FY09, according to MOSL. In effect, during FY13, y-o-y PAT growth for the four quarters presents a steady decline—12%, 8%, 5% and now 0%. As a result, Aggregate PAT growth for full year FY13 works out to only 6%, the lowest since FY07, again excluding the global crisis year of FY09.


Of the 16 major sector classifications of companies tracked by MOSL four sectors are expected to report PAT growth of 15% or higher (NBFC, private banks, media and consumer), five sectors are likely to clock medium/low PAT growth of 0-15% (technology, retail, healthcare, oil & gas, utilities) while seven sectors are expected to report PAT de-growth (telecom, auto, capital goods, PSU banks, real estate, metals and cement). The only two sectors to have all companies clocking positive y-o-y growth are both secular in nature—consumer and NBFCs.


The 4QFY13 performance of the more secular private sector banks is expected to be much better than that of the more cyclical PSU banks, according to MOSL. In aggregate, private banks are likely to report 23% y-o-y growth in 4QFY13 PAT, whereas PSU banks’ PAT is expected to de-grow 16% y-o-y. Interestingly, only one private bank out of its list of eight is expected to report y-o-y PAT de-growth. On the other hand, only one PSU bank out of nine is expected to report y-o-y PAT growth.


Auto sector

MOSL states that demand has weakened across auto segments on the back of economic slowdown and consequently weak consumer and business sentiments:


Two-wheelers: For most players, weak retail demand has led to higher inventory to 4-5 weeks.

Passenger vehicles: The petrol segment remains weak for over a year now due to sharp rise in petrol prices. Now, even diesel segment demand has also moderated over the last 4-5 months (with y-o-y drop in volumes).

MHCVs: The segment continues to fall sharply reflecting tough macroeconomic conditions. This coupled with higher competitive intensity has resulted in high level of discounting.

 Tractors continue to struggle due to weak demand from southern and western regions.


Expected softening in interest rates, and reform-led revival in business and consumer sentiment are key medium-term drivers for auto volumes.


EBITDA margins for the auto sector is expected to improve by 70 basis points (bps) quarter-on-quarter (-110 y-o-y) on favourable currency (Japanese yen/Indian rupee) together with stable RM cost. Discount levels remain high across segments particularly for CVs and PVs. In two-wheelers, there is no widespread cash discount, but OEMs are aggressively pushing finance schemes to spur demand. The brokerage expects EBITDA margin to rise for Maruti Suzuki 140bp q-o-q (+210bp y-o-y), and for Hero MotoCorp 80bp q-o-q (-140bp y-o-y).


Capital Goods

Motilal Oswal expects the moderating trend in revenue growth to continue in 4QFY13E, up 4.8% y-o-y (versus 8% y-o-y in the nine month period of FY13), impacted by depleting order book and execution constraints due to overall economic slowdown. Ordering activity continues to show a sluggish trend, particularly in the industrial/power generation segment.


Ordering by Power Grid Corporation has also been showing a moderating trend, however ordering from SEBs is likely to show an improvement. Business-to-business has been showing a declining trend, after peaking out in 2QFY11, and stands at 2.3x, the lowest since past 20 quarters. In 4QFY13E, it expects the EBITDA margin at 14.6%, down 290bp y-o-y, impacted by poor fixed cost absorption. While commodity prices have corrected meaningfully, a large part of the decline in negated by currency movements. Companies with high local manufacturing content, higher product sales v/s project sales and high export content will be a beneficiary of the initial round of increase in public sector capex.


Cement demand growth is expected to be unusually sluggish in 4QFY13, given continued weakness in housing and infrastructure verticals. The brokerage estimates industry volumes to grow by around 3.7% y-o-y (+15% q-o-q) resulting in FY13 demand growth estimate of 5.3% y-o-y. Capacity utilization is expected to decline 3pp y-o-y to 81% (+9pp q-o-q). MOSL’s interaction with dealers across regions highlights limited visibility of near-term demand recovery. However, multiple states elections and general elections in 2013-14 are likely to favour demand recovery from 2HFY14 resulting in 7%-8% volume growth. The brokerage is bullish on UltraTech/Grasim and Shree Cement in large-caps, in mid-caps it prefers Madras Cement, JK Cement and Dalmia Bharat.



Steel prices recovered in 4QFY13 from their three-year lows in 3QFY13. Average 4QFY13 HRC prices improved in CIS, North America, Europe and China by 10%, 1%, 6% and 6%

q-o-q respectively. However, prices in China again started to weaken as restocking demands seem to be fading away amid high levels of inventories. Steel inventories (traders) in China are already at yearly high levels. Any further push in demand can now come from actual consumption for which outlook remains subdued. Bao Steel, one of the largest Chinese steel producers is forecasting demand growth of only 3% in 2013. Pertinently, the new Chinese leadership appears to be focusing away from property construction to rural development and social welfare as its strategy for the next 10 years. There is only a moderate increase in 2013 budget for infrastructure, with greater focus on building dams, rural grid and social welfare projects. This is likely to moderate steel consumption growth further.



Average 4QFY13 non-ferrous metal prices showed a q-o-q improvement. Aluminium,

copper, lead and zinc prices increased 1%, 1%, 5% and 5% q-o-q respectively. Alumina prices also increased 5% q-o-q. Spot premiums for aluminium continue to remain high and increased 4% q-o-q. MOSL has factored aluminium, zinc and lead prices of $2,100 per tonne, $2,000/t and $2,100/t in FY14E.


In the second part of this quarterly preview, to be carried tomorrow, we will take a look at the earning prospects from the remaining six sectors.


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