Stocks
Sensex, Nifty yet to find direction: Tuesday Closing Report

The market has settled into a low-range trading

 

The market, which was in the negative for most part of the trading session, picked up momentum in post-noon trade and settled near the day’s high on select buying. Yesterday we had mentioned that the indices are presently directionless and a big move will help it find direction. We continue to maintain the stance. Although the Nifty covered more than yesterday’s loss, the index made a fresh low of the current downfall which began on 24th August. The benchmark moved in a narrow range today. The National Stock Exchange (NSE) saw a volume of 51.66 crore shares and the advance decline ratio was 945:696. 
 
The market resumed trade on a soft note as tracking the weak Asian markets in morning trade. The Nifty and the Sensex opened five points down at 5,249 and 17,379, respectively. Lack of any fresh domestic triggers kept the market sideways in the negative till the noon session.
 
Selling in select sectors saw the market fall to its intraday low at around 12.50pm. At this point the Nifty went down to 5,233 and the Sensex dipped to 17,308. However, the benchmarks recovered from the lows as buying in blue chips boosted sentiments.
 
The indices were firm in late trade as buying activity expanded, despite subdued trading in the European markets following Moody’s downgrade of the Eurozone rating outlook to ‘negative’.
 
The benchmarks hit the day’s high at the fag end of the session with the Nifty rising to 5,278 and the Sensex climbing to 17,453. The market closed near the high-point of the day. The Nifty gained 20 points to 5,274 and the Sensex added 56 points to settle at 17,441.
 
Among the broader indices, the BSE Mid-cap index closed 0.53% higher and the BSE Small-cap index gained 0.39%.
 
The top sectoral gainers were BSE Realty (up 1.59%); BSE Oil & Gas (up 1.19%); BSE Power (up 0.92%); BSE Power (up 0.92%); BSE Consumer Durables (up 0.89%) and BSE Metal (up 0.83%). The two losers were BSE IT (down 0.05%) and BSE Healthcare (down 0.04%).
 
Of the 30 shares in the Sensex list, 18 settled in the positive. The top gainers were GAIL India (up 2.60%); Jindal Steel (up 2.44%); Reliance Industries (up 1.87%); Tata Motors (up 1.71%) and Tata Steel (up 1.41%). The losers were led by HDFC (down 1.54%); Cipla (down 1.47%); Tata Power (down 1.28%); Bajaj Auto (down 0.98%) and Sun Pharma (down 0.61%).
 
The top two A Group gainers on the BSE were—Indiabulls Real Estate (up 7.61%) and Torrent Power (up 6.89%).
The top two A Group losers on the BSE were—AstraZeneca Pharma India (down 3.35%) and Castrol India (down 3.20%).
 
The top two B Group gainers on the BSE were—Nath Seeds (up 19.92%) and Shree Rama Multi Tech (up 19.87%).
The top two B Group losers on the BSE were—Riba Textiles (down 14.29%) and Sharon Bio-Medicine (down 13.82%).
 
Out of the 50 stocks listed on the Nifty, 32 settled in the positive. The top gainers on the Nifty were GAIL India (up 2.69%); Jindal Steel (up 2.47%); Jaiprakash Associates (up 2.41%); Reliance Industries (up 2.33%) and Tata Motors (up 1.95%). The key losers were IDFC (down 1.86%); HDFC (down 1.83%); Cipla (down 1.44%); Tata Power (down 0.97%) and Sun Pharma (down 0.79%).
 
Markets across Asia closed mostly lower on concerns about economic growth—both within the region and across the globe—as weak indicators recently showed. Downgrade of the Eurozone rating outlook by Moody’s also weighed on investors.
 
The Shanghai Composite declined 0.75%; the Hang Seng dropped 0.66%; the Jakarta Composite fell 0.31%; the Nikkei 225 lost 0.10%; the Straits Times slipped 0.19% and the Seoul Composite settled 0.29% down. On the other hand, the KLSE Composite and the Taiwan Weighted added 0.01% each.
 
At the time of writing, the key European indices were down between 0.29% and 0.76% and the US stock futures were mixed.
 
Back home, institutional investors continued to pull out funds from the equities segment on Monday, as well. Foreign institutional investors were net sellers of funds totalling Rs54.79 crore and domestic institutional investors were net sellers involving Rs160.70 crore.
 
State-owned NTPC is awaiting nod from the Arunachal Pradesh government for its proposed Rs1 lakh crore hydro power project, a top company official said today. As per its policy, the state government is believed to have asked NTPC to make an upfront payment of about Rs400 crore for setting up the project. The stock gained 0.80% to close at Rs170.15 on the NSE.
 
Elecon Engineering Company, a manufacturer of material handling equipment and transmission products, has received letter of intent from Tecpro Systems for the supply of equipment worth Rs26 crore for a project in Andhra Pradesh. The order involves design, engineering, manufacture and supply of equipment for Apgenco-Rayalseema Project-914. Elecon closed at Rs42.95 on the NSE, up 1.92%.
 
Shriram City Union Finance on Tuesday said it is planning to raise up to Rs500 crore through a public issue of secured non-convertible debentures. The NCDs are proposed with a face value of Rs1,000 each and the public issue opens on 12th September. The funds raised through the issue would be used for the company’s various financing activities and to repay their existing loans. The stock rose 0.45% to close at Rs765.55 on the NSE.

User

Finance ministry wishes to ignore manipulation in the F&O segment

Questions put to the finance minister on the manipulation in the F&O segment have been vaguely answered. Who is the ministry of finance looking to protect?

 

Rajeev Chandrasekhar, an independent Member of Parliament (MP) in the Rajya Sabha, recently asked a list of questions pertaining to the Futures and Options (F&O) segment to the finance minister. Most of the questions asked were related to the manipulation in the F&O segment. The questions asked were whether several dubious operator-driven stocks have crashed in response to SEBI’s recent decision to change the eligibility norms for the F&O segment. He also asked for the details of any enquiry made regarding dubious and poor quality stocks being added to the F&O segment.

It seems that the finance minister missed the point and replied that the average decline of the 51 stocks in three weeks from 23 July to 13 August “was only around 0.5% which cannot be termed as a crash warranting an enquiry.” But it’s not all the stocks put together that need to be scrutinised. It is individual stocks that crashed by more than 10% that should have fallen under their radar.

In the first week itself (23 July to 27 July) the 51 stocks which were common to both the NSE and the BSE crashed by an average of 5.95% with around 45 stocks in the red. Out of these, as many as 12 stocks had declined by more than 10% within the week. The Nifty remained flat during this period. Even in the period referred to by the finance minister, there were stock like S Kumars Nationwide and BEML which were down by nearly 30% and 20% respectively. And as many as 25 stocks were negative. Yet these stocks were overlooked. If such is the state of affairs in the ministry of finance, one cannot expect much from the exchanges or even the market regulator.

Moneylife has highlighted the brazen manipulation in creating the F&O list several times in the past. Even as the Securities and Exchange Board of India (SEBI) has stepped in to change the eligibility criteria for F&O nobody seems to have gone into what is, on paper, the role and responsibility of the stock exchanges. Indeed, in a supreme irony, while SEBI’s move is designed at checking manipulation by doing away with illiquid stocks, the bourses have either encouraged manipulation or turned a benign eye towards them.

Read our earlier articles on this:

SEBI slams down on F&O manipulation-I: What was NSE’s role all this while?

SEBI slams down on F&O manipulation-II: NSE and BSE as the first line of regulation stand exposed

Stock Manipulation
 

User

How safe is India Infoline’s non convertible debenture issue?

With debt issues becoming more opaque with each passing day, is it wise enough to invest? The answer lies in the fact that it is good to do some ground work before deciding whether or not to invest

 

A few days ago, my banker sent me a flyer about a non convertible debenture (NCD) issue from India Infoline. It has a six-year repayment duration and a coupon of 12.75% per annum (p.a.). This being one of the highest coupons available for a financial services company, I was curious. And it also enjoys a double A minus (AA-) rating from CRISIL and ICRA.

A fine print in the first page tells me that it is a "subordinated debt". In essence, on liquidation, there are going to be others in the queue that will have to be paid off in full. My banker did not mention this in his mailer.

'"Subordinated Debt" means an instrument, which is fully paid up, is unsecured and is subordinated to the claims of other creditors and is free from restrictive clauses and is not redeemable at the instance of the holder or without the consent of the supervisory authority of the non-banking financial company'. (From the offer document).

"The NCDs will be in the nature of subordinated debt and hence the claims of the holders thereof will be subordinated to the claims of other secured and other unsecured creditors of our Company. Further, since no charge upon the assets of our Company would be created in connection with the NCDs, in the event of default in connection therewith, the holders of NCDs may not be able to recover their principal amount and/or the interest accrued therein in a timely manner, for the entire value of the NCDs held by them or at all. Accordingly, in such a case, the holders of NCDs may lose all or a part of their investment therein. Further, the payment of interest and the repayment of the principal amount in connection with the NCDs would be subject to the requirements of RBI, which may also require our Company to obtain a prior approval from the RBI in certain circumstances."

(Risk factors, item no 12 in the offer document)


A quick reading makes me very uncomfortable. If the company faces trouble at the point of contractual repayment, I am at the tail end of the queue. Does the above statement mean that even if there is a contractual date, regulatory approval is needed for repayment? This is very confusing and I have no idea about where I would stand, in case I invest.

Now I am curious. Either the interest rate scenario is very bleak or this company can use the money brilliantly well and earn enough returns on it to service interest and repay principal.

My first impression was that this debt has been issued by India Infoline, and the company is into stock broking and distribution of mutual funds, insurance, lending, etc. I find that this issuer is not the same as the listed entity. It is only that brand image has been created to build the same identity. This issuer is a NBFC (non-banking finance company), owned almost entirely by the listed entity. And in turn the issuing company has two subsidiaries-one engaged in housing finance and the other, in mutual funds, insurance, etc.

The issuing company lends money in the form of gold loans, loans against shares, etc.  

I was sure that to pay this coupon rate of 12.75% and to cover the costs, and also give a return to the shareholders, the company has to lend aggressively and also recover what it lends. I am not very keen to know about the 'provisioning' that a company does, since it is subjective. I firmly believe that no one speaks the truth.

As the next step, I wanted to see what the shareholders were making, after paying all the lenders their dues and covering all the costs of running this money lending business.  Logically, for any business to survive, the business should give a return on shareholder funds that is higher than the cost of borrowing. If not, there would be gradual erosion of shareholders' money.

So, I took the first step. This is what I see:


 

The numbers set my alarm bells ringing. For five years, the shareholders have got returns that have ranged from two to seven percent per annum! Won’t the shareholders be better off investing the money elsewhere?
 

The NBFC industry is tightly regulated and capriciousness is a hallmark of the policy. So, the industry is vulnerable to the whims and fancies of the regulators. One of the businesses of this company is “gold loans” and the RBI recently changed the rules.  One subsidiary is in distribution of mutual funds and insurance, where there are huge shifts keep happening.
 

I also fail to understand the issue size. They say Rs250 crore, with a “green shoe” of Rs250 crore. Wonder what the company actually needs now? If they need only Rs250 crore, why raise Rs500 crore? Till they deploy the money, they will presumably earn far lower than what they will pay the debenture holder. Unless they have lined up huge borrowing clients and the entire Rs500 crore can be disbursed in double quick time. 
 

Given the dismal return on shareholder money, I am surprised at the credit rating. Surely, standards have fallen. How can a company that gives its shareholders a return less than a bank deposit, enjoy a high safety rating? Do they know something that we do not? The rating rationale of CRISIL talks about the strength of the group and its market position without giving any comments on the business outlook or specifics about the issuer. It looked like they have banked on the parent company’s strength to give this rating. What if the issuing company ceases to be a subsidiary? Is there any guarantee from the parent company for repayment?
 

Issues of NBFCs are getting more and more opaque. The investor does not know which entity is borrowing and is not given any time to analyse or reason out. A high decibel marketing campaign combined with a dozen or so bankers associated with it, will bamboozle investors in to coughing up money.
 

With so many doubts in my mind, I will not put money in the issue, though the coupon rate looks attractive. It takes me back to the wisdom of staying away from anything that looks too good to be true.
 

(The author can be contacted at [email protected].)

 

User

COMMENTS

Apoorva Raval

4 years ago

Well as far as it pays you regular interest and it trade above your purchase price I Don't see any problem in this issue...

REPLY

sachchidanand

In Reply to Apoorva Raval 4 years ago

PROBLEM IS WITH RETURN OF PRINCIPAL AMOUNT ON MATURITY. NORMALLY SUCH DEBENTURES ARE REDEEMED BY ISSUING FRESH DEBENTURES , JUST LIKE MLM . IF THE COMPANY IS UNABLE TO MAKE FRESH ISSUE OF DEBENTURES, FOR REASON OF DETERIORATION IN THE QUALITY OF ISSUER, THEN THE PROBLEM DO ARISE ON REDEMPTION

sachchidanand

4 years ago

i agree that it is better to be cautious than sorry

Apoorva Raval

5 years ago

I had applied for 2lac for monthly option and had got full allotment, what shall I do now..? Shall I sell or hold

c d kajrolkar

5 years ago

Some people also warned at the time of Reliance Power IPO. But the mood of the people was so bullish at that time that nobody paid any heed to them. But this time, we should not repeat the past mistakes.

SUNIL KUMAR HEMNANI

5 years ago

IndiaInfoline is merely taking advantage of all the rules at its disposal . I guess as a reader of Moneylife we have the advantage of making an informed choice . Just the fact that a company in 5 years has not been able to even to reasonably well while our economy was performing well. This is enough for me to know a little bit of rough weather is going to be a bit too much for this company. I am amazed at why a person like Nirmal Jain would want to create such a messy situation .The technicalities make it obvious any problem with the company ,you are not going to see your money.

REPLY

NAYAN

In Reply to SUNIL KUMAR HEMNANI 5 years ago

You are very much right. But I am confident about full subscription of this issue of public.

The interest rate they are offering is not a small carrot.


sachchidanand

5 years ago

I happen to have dealt with IIFL in the past and it was in connection with a dispute with one of my friends, whose trading account was mis used to put through unauthorised transactions , leading to heavy losses being booked in my friend's account. IIFL is reported to have "settled" the matter , without any loss to my friend.
This is just an illustration of how IIFL operates.
As to this NCD Issue, I blame SEBI for allowing the Subordinated Debt issue , under the garb of NCD . Given the illiteracy of Investors in India, IIFL will succeed in collecting even Rs. 1000 crores . My moot question is : What is RBI doing to stop this highway robbery ?

Gaurav Parikh

5 years ago

Interesting that the Consolidated Networth of the NCD Issuer,India Infoline Finance and it's two subs is just Rs 144 crs at March 31,2012 and it is raising Rs 250 crs + Rs 250 crs Greenshoe Option ! ~ Financing Companies do have a higher Debt Equity as they leverage on Networth and scale up operations living of the Interest Spread ~ Problem is that I dont see any EVA or Economic Value Added given such a poor ROE ~ and this NCD is an unsecured Debt ~ Clearly other routes of raising finance are currently blocked~ it's like you got to have personal faith in Nirmal Jain to give him this private loan !

REPLY

sachchidanand

In Reply to Gaurav Parikh 5 years ago

Remember CRB Case ? Mr. C R Bhansali took investors for a ride. He also had good reputation. He floated similar ventures Like Nirmal jain. Remember Sun earth Ceramics & Roofit Industries ? The promoters are absconding till date.

Gaurav Parikh

In Reply to sachchidanand 5 years ago

I'm not certifying Nirmal Jain and IIFL but i think you're getting carried away in comparisons with some really unscrupulous promoters in the past ~ this is a legit 'raising of finance' exercise and you have a choice not to invest in the IIFL Group NCDs given your personal experiences with the practices of this group ~ But I do agree with you that India has a long way to go before we reach an acceptable level of financial literacy where Investors can make wise decisions~in the meantime Investment and Merchant Bankers will continue their aggressive marketing hype to create successful issues ~ remember the levels of oversubscription in the Reliance Power Issue and the subsequent collapse on listing !~ these wolves run in a pack!

sachchidanand

In Reply to Gaurav Parikh 5 years ago

I do agree with you that I have a choice. But how many Investors have such a choice ?They are mis-led and mis-sold such products by Merchant Bankers & Brokers.

NAYAN

5 years ago

What is the procedure of SEBI of approving such issues?

it is the highest level fault of regulators to approve such issues.

REPLY

sachchidanand

In Reply to NAYAN 5 years ago

It is well known how SEBI works. Will SEBI explain Due Diligence compliance by BRLM's ? I suspect this has been manipulated .

PPM

5 years ago

Thank you for the wonderful article.

- Without RBI approval, can they issue NCD in the market?

- If they do not need RBI approval to issue the NCDs, why do they need to get RBI approval in repayment?

- IIFL itself is not having any market standing but their subsidiary can get AA- rating from ICRA and CRISIL..shame.

- In India, rating of Financial Instruments is a farce

End of the day, what can be expected of agencies like SEBI whose officers collude with the crooks.

REPLY

sachchidanand

In Reply to PPM 5 years ago

Credit Rating itself is a suspect business in India. SEBI's compulsion to obtain Credit rating / Issue rating is nothing but to create revenue stream for Credit rating agencies. All of them- ICRA ,Even CRISIL is having bad history in IPO rating. Better to do away with them as they are no hope for Investors

dhawanbm

5 years ago

The review of the company brings out the revenue deficit it is going to face in times to come, for certain it would trade below offer price and i am not sure if they would pay back! Thanks for the article Mr Balakrishnan.

sivaraman anant narayan

5 years ago

Wish this article had appeared two days earlier!

REPLY

NAYAN

In Reply to sivaraman anant narayan 5 years ago

That is why sir, We need strong mutual fund industry. Had you invested in some bond fund or income fund, you might be enjoying some proportion of such junk bonds for higher rate of return while its proportion to whole of your debt portfolio would be much less.

So, risk will be highly divided. There are tax benefit also. Find good mutual fund advisor in your city or if you are in Ahmedabad you can contact me.

R Balakrishnan

In Reply to sivaraman anant narayan 5 years ago

Why? The issue opens only today and closes on 18th or so

sivaraman anant narayan

In Reply to R Balakrishnan 5 years ago

Already applied and then read the article yesterday.

R Balakrishnan

In Reply to sivaraman anant narayan 5 years ago

You can withdraw if you wish to. Till the allotment is done

NAYAN

In Reply to sivaraman anant narayan 5 years ago

Have you withdrawan the application as per the advice of Mr. R. Balakrishnan?

Naveen Fernandes

5 years ago

As always, Mr. Balakrishnan is very clear in his analysis. I will follow his lead and keep my pennies in the pocket

REPLY

NAYAN

In Reply to Naveen Fernandes 5 years ago

Go, for any good bond or income fund with the help of good Mutual Fund Advisor.

Ramesh Poapt

5 years ago

will someone from ML analyse Shri Ram city union NCDs please? is it a better choice?

Jayant

5 years ago

Excellent analysis Mr. Balakrishnan. Very helpful.

c srinivas

5 years ago

is muthoot's secured NCD safe?

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