Sensex, Nifty cautious ahead of the RBI monetary review: Tuesday closing report

A close well above 6,200 is needed to for Nifty to be back on an uptrend

Yesterday, we mentioned that Nifty has to stay above Monday’s low and close -above 6,210 for an upmove to start. This did not happen today and Nifty made its lowest low of December. The market today opened with full optimism after the US economic data indicated solid improvements in business activity across the country. After five days of negative opening the benchmark opened in the positive and had a range bound session until the end of the morning session. With the beginning of the noon session, the indices started heading down.


The Sensex opened at 20,732 while the Nifty opened at 6,178. At the beginning of the session itself the indices hit their days high at 20,784 and 6,191. At the end of the session the Sensex hit a low of 20,595 and closed at 20,612 (down 47 points or 0.23%) while the Nifty hit a low of 6,133 and closed at 6,139 (down 16 points or 0.25%). The NSE recorded a volume of 52.85 crore shares, marginally higher than yesterday.


Among the other indices on the NSE, the top five gainers were Pharma (1.76%); FMCG (0.67%); Consumption (0.63%); MNC (0.61%) and Media (0.53%) while the top five losers were Finance (1.57%); Bank Nifty (1.44%); PSU Bank (1.01%); Energy (0.76%) and Service (0.71%).


Of the 50 stocks on the Nifty, 23 ended in the green. The top five gainers were Ranbaxy (4.81%); Bharti Airtel (4.58%); Cipla (3.06%); Sun Pharma (2.18%) and NMDC (1.94%), while the top five losers were HDFC Bank (3.67%); Coal India (2.96%); NTPC (2.21%); HDFC (1.97%) and Bajaj Auto (1.73%).


Of the 1,223 companies on the NSE, 511 closed in the positive, 645 closed in the negative while 67 closed flat.


Market now looks ahead for Reserve Bank of India mid-quarter monetary policy review tomorrow and the Fed’s two-day meeting starting today, where the discussion over the $85 billion of monthly bond purchases would take place.


US indices closed in the positive on Monday. The Empire State manufacturing index rebounded in December after a slump in November. Markit's US Purchasing Managers' Manufacturing index rose further into expansion at 54.4. Industrial production jumped 1.1% in November, its biggest one-month gain in a year, and surpassed its pre-recession peak, versus a 0.1% fall the month before.


Asian indices closed mainly in the green. Jakarta Composite was the top gainer which rose 1.37% while the Shanghai Composite was the top loser which fell 0.45%. European indices were trading in the negative while US Futures were trading flat.


Optimism in the air for telcos following EGoM announcements

According to CARE Research, M&As in telecom would take some time to pick up, as players would wait for Lok Sabha election results and clarifications on other issues like one-time charge for excess spectrum and spectrum trading guidelines

Consolidation-hungry telecom sector waited long for clear merger and acquisition (M&A) guidelines as hyper-competition kept bleeding everyone as tariffs nose-dived over the years. Recently, the empowered group of ministers (EGoM) has cleared M&A guidelines which have enthused most of the stake-holders in the industry with increased market-share limits.

However, according to CARE Ratings, the M&A activity would take some time to pick up as players would wait for Lok Sabha election results and clarifications on other issues like one-time charge for excess spectrum and detailed guidelines of spectrum trading.


Telecom wireless space in India is getting divided on the following lines (i) Top three incumbents with deep pockets – Bharti Airtel, Vodafone, Idea, (ii) Other incumbents with struggling balance sheets – Reliance Communication (RCom), Tata Teleservices, Aircel, Loop, (iii) Government owned – Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) (iv) the new comers - Telewings and Sistema with backing from their foreign parents and, (v) new players with Indian parent like Videocon.


According to CARE Research, consolidation would be driven to acquire subscriber base or spectrum. Incumbents are the major contenders for the ‘consolidator’ tag. There might be possibilities of a three-way merger among Tier-II players like Tata Teleservices, Sistema, Aircel and Himachal Futuristic Communications Ltd (HFCL).


CARE Research said it believes that the increased market share limit (50% from earlier 35%) would avail enough room for larger players like Bharti Airtel and Vodafone to go for acquisitions in most of the circles. "Consolidation would provide much needed exit to some of the weaker players along with reducing the hyper-competitive environment in the sector. At the same time, with increased market-share larger players would get some pricing power but would not result in substantial change in the dynamics of the sector as voice and, to some extent, the data business being commoditised in nature. It would allow better spectral efficiencies for the sector as there is a large variance in the subscribers per MHz metrics. It will also lead to better utilisation of passive infrastructure like telecom towers and networks," the ratings agency added.


Decisions pertaining to spectrum in 1800 MHz band

After a subdued response to auctions held in November 2012 and March 2013, government is again planning to auction spectrum in the 1800 MHz band associated with cancelled licenses. The spectrum being licensed would include spectrum which had remained unsold during last two auctions and some additional spectrum freed from other agencies such as defence. The incumbent operators (Bharti Airtel, Vodafone, Loop, Idea etc) whose licenses are going to expire over next few years have to participate in the auction to acquire the spectrum. As higher reserve price was presumed to be predominant reason for muted participation, government asked TRAI to come out with new pricing. Telecom Commission has increased the reserve price partially and the same was approved by EGoM.


CARE Research said it believes that the reduction in reserve price is a welcome move for the industry which is already reeling under the debt-burden raised for 3G-BWA auctions and subsequent roll outs. It said, "Government’s decision to put more spectrum on table would help in price discovery as it would remove the artificial scarcity of spectrum. Additional spectrum would help players reduce on network expansion costs as there is a trade-off between spectrum and additional towers. As the data usage increases, players would need additional spectrum. Also, the players whose licenses are expiring over next few years can plan in advance and participate in the auction."


Decisions pertaining to spectrum in 900 MHz band

Telecom licenses issued in 1994 to incumbent players Bharti Airtel, Vodafone (then Hutch) and Loop in Delhi, Mumbai and Kolkata circles would expire in 2014. These operators collectively hold 46 MHz of spectrum in the more efficient 900 MHz band in these three metro circles and were constantly pushing for an extension of another 10 years. Due to the limited availability (around 20 MHz in each circle) of the spectrum in this band, most of it is lying with incumbent operators (first 2-3 operators), which puts them in an advantageous position as against new players. In order to create a level playing field, the government has decided to auction the spectrum as and when the licenses expire.


CARE Research said it believes that removal of reservation for incumbents who already hold the spectrum is slightly negative whereas a cap of 5 MHz for 900 MHz spectrum would act as a dampener for the incumbent players. "Even if the existing holders of the spectrum go for maximum spectrum they can bid for, there would 6MHz, 6MHz and 4MHz spectrum remaining in Delhi, Mumbai and Kolkata circles respectively. This implies expected participation from other operators like Idea and RCom and even slightly stretched possibility of Reliance Jio participating in the auction," the report added.


Decision pertaining to Spectrum Usage Charge (SUC)

In case of Spectrum Usage Charge (SUC), the EGoM has decided to continue with the current cascading SUC charges until the Department of Telecom (DoT) decides on the flat rate. The current SUC ranges from 3 to 8%of the adjusted gross revenue (AGR), depending on the quantum of spectrum held by a licensee. However, TRAI had recommended a flat SUC of 3%for all (including 3G and BWA players) acquiring spectrum through auctions and 3-5 % for spectrum without auctions, so that the disincentive to buy additional spectrum in the existing SUC regime gets eliminated. Currently average SUC collected by the government is around 3.6% of AGR.


CARE said, "If approved, this will be beneficial to the most of the telecom players, especially incumbent players, who are paying more than 5% SUC on Administered spectrum. BWA players like Reliance Jio will however be at a disadvantage as it implies an increase of SUC from the earlier 1% to 3% of AGR. On the flip side, approval of the flat 3-5% SUC rate would result in a loss of nearly Rs13.56 billion for the government."


High Court orders sale of Zenith Infotech's cloud computing business

The Bombay High Court also found evidence of various irregularities including alleged siphoning off of funds at Zenith Infotech following the sale of the company's MSD business

The Bombay High court has directed the sale of mainstay cloud computing business of Zenith Infotech Ltd (ZIL) to repay dues to foreign currency convertible (FCCB) bondholders, including hedge fund.


After the sale of its managed services division (MSD) a couple of years ago, cloud computing was the main business operation of the Mumbai-based ZIL promoted and run by father-son duo of Rajkumar Saraf and Akash Kumar Saraf. 


According to a report from the Business Standard, the court decided to allow the sale of business as a “going concern” to protect the interest of employees and on expectation that it is likely to fetch better valuation when compared to an outright winding up. Two different valuers have valued the cloud business to be worth around Rs200 crore.


The single Bench order came in a winding up petition filed by the Bank of New York Mellon, the custodian of FCCB holders, to recover dues of over $100 million (about Rs600 crore). The High Court found evidence of various irregularities including alleged siphoning off of funds following the sale of its MSD business. 


Earlier, in March 2013, market regulator Securities and Exchange Board of India (SEBI) has barred Rajkumar Saraf, Akash Kumar Saraf, Devita Saraf, Vijayrani Saraf, VU Technologies Pvt Ltd and Zenith Technologies Pvt Ltd from the securities market till further directions, while asking them to furnish a bank guarantee of $33.93 million valid for one year.


SEBI had said its examination “prima facie'” shows that promoters and directors of Zenith Infotech have in a devious manner attempted to take away the assets of a listed company directly and indirectly for their own benefit or for benefit of entities owned and controlled by them, thereby causing loss to shareholders.


In 2006, Zenith Infotech, run by Akash Saraf as managing director and chief executive, issued FCCBs worth $33 million at a conversion price of Rs310 per share due in September 2011. Next year, the company again issued FCCBs worth $50 million at a conversion price of Rs522 per share and due to mature in August 2012. The first tranche of $33 million came up for repayment as Zenith's share price at that time was below the conversion price on the maturity date.


However, in a regulatory filing, the company admitted that it has defaulted on its $33 million FCCB and was in negotiations with the bondholders to extend time for repayment. Since there was a default in payment of the first tranche, it triggered a cross default provision under which the second tranche also was considered defaulted. This made the total defaults of around $83 million.


One representative of the creditors, who did not want to be identified, had told Moneylife, “Despite having the cash at the time of the maturity of first tranche, Zenith Infotech had not paid our dues. Later on 26 September 2011, it decided to sell one of its two divisions, called managed services division or MSD through a newly incorporated vehicle Zenith RMM LLC in Delaware to US-based private equity fund Summit Partners via an asset purchase agreement.”


Following orders from the court, it was discovered that Zenith received $54 million or about Rs250 crore in cash for selling 85% of its MSD business and would also retain 15% ownership in Zenith RMM with Summit Partners holding the rest. Zenith UAE, which received $27 million or about Rs133 crore from the deal is a very small entity.


In an affidavit filed before the Court, Zenith also revealed that it transferred about $15 million from the proceeds to Vu Technologies, a company run by Devita Saraf, the daughter of Raj Saraf and sister of Akash Saraf. However, till date Zenith failed to explain what happened to the Rs150 crore it showed on its balance sheet and why it did not cleared its dues or repaid money to FCCB holders, the representative had said.


The company is likely to challenge the order in the division bench of the High Court. Akash Saraf, the chief executive of Zenith Infotech told the newspaper that “We will be appealing (against) the order. We will be countering the verdict.”


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