Share prices to move in a range: Wednesday Closing Report

The downward momentum has probably been contained. Watch for a close above 5,450 and 5,350 on the Nifty for short-term direction

The market opened on a positive note but lost its momentum as lower growth for the third quarter resulted in a sell-off in the second half of trade. We mentioned in out market closing report yesterday that Tuesday’s gains were not a sign of a reversal. For a reversal, the Nifty has to end well above the day’s close. The National Stock Exchange (NSE) saw a volume of 97.23 crore shares.

The market witnessed a firm opening on global cues and news that the government would divest 5% stake in state-owned explorer ONGC on Thursday. On the international front, the European Central Bank (ECB) is likely to offer cheap funds to banks in the continent, which are facing liquidity issues. Back home, the Nifty opened at 5,425, up 49 points over its previous close, and the Sensex surged 189 to resume trade at 17,920.

Across-the-board buying by institutional investors helped the market extend its gains and hit the day’s highs in early trade. At the highs, the Nifty touched 5,459 and the Sensex rose to 18,001. However, the indices were under pressure in subsequent trade ahead of the release of the gross domestic product (GDP) numbers for the December quarter.

GDP for the December 2011 quarter coming in at an over two-year low of 6.1% resulted in the benchmarks paring their gains. The market dipped into the red in post-noon trade as selling became intense. The market fell to the day’s lows a little after 1.30pm with the Nifty going down to 5,352 and the Sensex at 17,678.
The market recovered from the lows but was treading water in the last hour in the absence of any triggers. The market closed flat with a positive bias and in the green for the second day. The Nifty added 10 points to settle at 5,385 and the Sensex rose 22 points to finish the session at 17,753.

The advance-decline ratio on the NSE was 968:729.

Among the broader indices, the BSE Mid-cap index advanced 1.10% and the BSE Small-cap index gained 0.62%.

BSE Realty (up 5.91%); BSE Capital Goods (up 4.02%); BSE Bankex (up 3.93%); BSE Power (up 3.57%) and BSE Metal (up 3.43%) were the top sectoral gainers while BSE IT (down 0.56%) and BSE Fast Moving Consumer Goods (down 0.13%) were the losers.

Boosted by the ONGC stake sale news, the BSE Oil & Gas index (up 2.53%) was the top sectoral gainer today. Other gainers were BSE PSU (up 1.51%); BSE Metal (up 1.45%); BSE Realty (up 1.10%) and BSE Consumer Durables (up 0.66%). The losers were BSE Capital Goods (down1.59%); BSE Fast Moving Consumer Goods (down 0.72%) and BSE Bankex (down 0.59%).

ONGC (up 3.46%); Sterlite Industries (up 2.98%); Tata Steel (up 2.90%; Reliance Industries (up 2.84%) and Wipro (up 2.72%) were the best performing stocks on the Sensex. The laggards were led by Larsen & Toubro (down 2.91%); HDFC Bank (up 2.34%); Jindal Steel (down 1.81%); ITC (down 1.35%) and Hero MotoCorp (down 1.07%).

The Nifty toppers were SAIL (up 3.76%); ONGC (up 3.46%); Wipro (up 3.18%); Sesa Goa (up 3.12%) and Tata Power (up 2.99%). The key losers were L&T (down 3.28%); HDFC Bank (down 2.81%); Siemens (down 2.28%); Jindal Steel (down 1.62%) and Reliance Infrastructure (down 1.50%).

Markets in Asia, with the exception of the Chinese benchmark, settled in the positive on hopes that the new fund infusion by the ECB would help ease the liquidity crunch faced by European banks. The Shanghai Composite closed lower after the government reiterated its plan to keep a tab on realty prices.

The Hang Seng gained 0.52%; the Jakarta Composite jumped 2.09%; the KLSE Composite rose 0.83%; the Nikkei 225 added 0.01%, the Straits Times climbed 0.82%; the Seoul Composite advanced 1.33% and the Taiwan Weighted surged 2.04%. On the other hand, the Shanghai Composite declined 0.95%. At the time of writing, two of the three key European indices were in the green while the US stock futures were in the positive.

Back home, foreign institutional investors were net buyers of shares totalling Rs727.59 crore while domestic institutional investors were net sellers of stocks aggregating Rs587.21 crore on Tuesday.

AstraZeneca Pharma India today said it is undertaking voluntary recall of sterile products manufactured at its Bangalore facility. “This recall is a purely voluntary action on the part of the company taken as a measure of extra and abundant caution although there is no patient safety issue related to sterility,” the company said in a filing to the exchanges. The stock jumped 7.26% to close at Rs1,921 on the NSE today.

Sun Pharmaceutical Industries today said it has received approval from the US health regulator for its generic Zyprexa Zydis tablets, used in treating mental disorder, in the American market. The US Food and Drug Administration (USFDA) has granted approval for its abbreviated new drug application (ANDA) for generic version of Zyprexa Zydis, Olanzapine ODT, in strengths of 5 mg, 10 mg, 15 mg and 20 mg, Sun Pharma said in a statement. The stock rose 0.85% to close at Rs551 on the NSE.

Cement major ACC will set up a new clinker production facility of 2.79 million tonnes per annum and allied grinding facility at Jamul in Durg district of Chhattisgarh, phasing out the existing clinkering and grinding lines there. The new plant will help meet the demand for cement in the eastern region. The stock gained 1.42% to close at Rs1,307 on the NSE.


Wheat exports to more than double in 2012-13 on record harvest

Wheat exports from India, the world’s second-biggest producer, is expected to more than double to 1.5 million tonnes (MT) in the 2012-13 marketing year on account of back-to-back record harvest, according to the US Department of Agriculture

New Delhi: Wheat exports from India, the world’s second-biggest producer, is expected to more than double to 1.5 million tonnes (MT) in the 2012-13 marketing year on account of back-to-back record harvest, reports PTI quoting the US Department of Agriculture (USDA).

“Assuming the current export price parity for Indian wheat compared to other origins, 2012-13 marketing year wheat exports are forecast at 1.5 MT,” the report said.

In the 2011-12 marketing year (April-March), wheat shipments are estimated to touch only 7,00,000 tonnes because prices remained very uncompetitive in the global market since exports were allowed in September 2011, it said.

Wheat export prospects can improve if there is a sharp increase in global prices, it said adding that the actual export volumes will depend on the competitiveness of Indian wheat during the marketing year.

Due to the considerable delay in the decision to allow wheat export, India could not take advantage of high global wheat prices in the early part of this year, the USDA said quoting market sources.

In 2012-13, the USDA mentioned that wheat exports will mostly be “limited to private exports” to neighbouring Bangladesh, the Middle East, Africa and South Asia.

Pointing out that the Indian government will be under tremendous pressure of inadequate storage facilities for the new wheat crop, the USDA said: “The government is unlikely to subsidise exports of government wheat due to local political and World Trade Organisation commitment concerns.

“India has sufficient domestic supplies to export 5-6 MT of wheat, especially if the government allows export of government wheat in case international prices exceed total cost,” it observed.

The cost of government wheat is prohibitively high at $346 a tonne compared to current global prices, it added.

Due to record procurement this year, stocks in government godowns as on 1 April 2012 are forecast higher at 18.5 Mt compared with 15.36 MT in the same period of 2011. Thus, the ending stocks in 2011-12 are nearly three times the government’s desired stocks of 7 MT, the report said.

According to the USDA, the government’s wheat procurement is expected to be over 32 MT in 2011-12 marketing year due to record production and higher support price.

Wheat production is estimated to be bumper at 87.5 MT this year, higher than consumption of 85 MT, it added.


Perverse incentives for borrowers like Kingfisher, says Barclays

According to Barclays, restructuring loans in India imposes little pain on the borrower like Kingfisher. In fact restructuring debt creates an incentive for borrowers to ask banks to make a ‘sacrifice’, it said

Even as there are talks going on to provide a new lease of life through restructured loans to the Dr Vijay Mallya-promoted Kingfisher Airlines, British bank and financial services company Barclays said that India’s restructuring standards appear lax and thus create perverse incentives to the borrowers.

“(Indian) banks are allowed to classify restructured assets as standard even when they have relatively long repayment periods, take a long time to attain viability and most importantly even when the restructuring imposes little pain on the borrower. Specifically, restructuring is allowed even if the promoter’s ‘sacrifice’ is only 15% of the banks’ ‘sacrifice’. In our view, this reduces the discipline that the threat of default normally places on the borrower in other countries. In fact, it creates an incentive for borrowers to ask banks to make a ‘sacrifice’," Barclays said in a research note.

Kingfisher Airlines, one of the prominent accounts restructured in the previous round underwent Rs750 crore bank debt conversions into equity in April 2011 at a premium of 61.6% or at a price of Rs64.48 a share, while its prevailing share price was Rs39.90 and the Indian airline industry was still in trouble—facing growth and profitability challenges. Subsequently, the airline continued to make losses and is pitching for another round of restructuring since December 2011, with current price at Rs24.40 as on end-of-day on 28 February 2012.

Bank chiefs have been quoted as saying that Kingfisher would need to arrange fresh equity of Rs1,000-Rs2,000 crore before seeking additional funds from the consortium of banks, led by State Bank of India (SBI). A consortium of 18 banks, comprising 14 state-owned and four private banks, have provided huge sums to the cash-strapped airline, which has a total debt of about Rs7,057 crore and accumulated losses of about Rs6,000 crore.

Expressing concerns about the high level of loan restructuring being undertaken by Indian lenders, Barclays said it expect the bank's experience with loan restructuring in the current environment to be worse than in the FY08-09 and FY09-10 round. “Our analysis shows that monetary easing played a major role in easing debt burdens in the past. Furthermore, borrowers were also able to recapitalise and manage their debt burdens by taking on un-hedged forex liabilities. These factors are unlikely to be repeated in the current round,” it said in the report.

During the financial crisis of FY08-09 and FY09-10, Indian banks undertook a significant amount of loan restructuring (under special dispensation from the Reserve Bank of India). This restructuring program was widely seen as being a success as a relatively small proportion of the accounts that were restructured became non-performing assets. After a decline in FY10-11, restructuring activity has picked up again in FY11-12.

Barclays said, “Our analysis shows monetary easing played a major role in easing debt burdens in the past. Furthermore, borrowers were also able to recapitalise and managed their debt burdens by taking on un-hedged forex liabilities. These factors are unlikely to be repeated in the current round.”

Surprisingly, SBI and HDFC Bank, two of the biggest lenders in the country, have undertaken relatively low restructuring activity in the current financial year, compared with other banks.

Jindal Stainless and Essar Oil, the two large companies that underwent debt restructuring in the previous round, showed marked improvement in their interest cover ratios in FY09-10. However, according to Barclays’ analysis, a substantial part of the improvement came as a consequence of falling interest rates.

During FY08-09-FY10-11, Jindal Stainless increased its forex debt exposure to Rs3,400 crore from Rs1,800 crore, thus increasing the total proportion of its foreign currency debt to 40% from 30%. During this period, the un-hedged proportion of this debt remained high at 60%-70% levels. If the company had not taken on this un-hedged exposure, interest coverage in FY09-10 would have improved to only 0.7–1.2. Similarly, Essar Oil managed to improve its interest coverage from negative levels in FY09-10 to 1.4 in FY10-11. However, in the absence of rate softening coverage, levels would have improved only to 1.1 on our estimates, said Barclays.
The British bank said from an accounting perspective, the provisioning norms in India are relatively low in comparison with those of other Asian economies and, in its view do not conform to the accounting principles of conservatism. While Singapore and China require restructured assets to be classified as sub-standard or below, Indian banks can classify restructured assets as standard as long as they are classified similarly in books of 90% of the borrower’s creditors. Due to this classification, banks in the other economies are also required to maintain a minimum specific provision for the restructured assets, 10% in Singapore and 25% in China on sub-standard assets.



Ashok M Rane

5 years ago

In India restructuring is based on political influence and decisions. Banks are forced to lend by Government at the cost of common citizens. Kingfisher should not be bailed out.

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