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Indian stock market and companies daily report (September 17, 2012, Monday)

Contributed by Angel Broking

The Indian markets are expected to open gap up on account of broad slurry of reforms that were announced in aviation, retail and broadcasting sectors on Friday. Indian shares are poised to further extend last weekRs.s rally today as the sweeping economic reforms are expected to restore investor confidence and help kick-start the dwindling economy.

US markets on Friday witnessed further upside during trading on Friday as the stocks continued to benefit from a positive reaction to the Federal ReserveRs.s announcement of additional quantitative easing. The European markets too rallied strongly on Friday, after the U.S. Federal Reserve came through with a third round of quantitative easing. The further economic stimulus had been expected and provided the boost that investors had been hoping for.

Indian shares rallied on Friday with markets posting significant gains as the government hiked the price of diesel and limited the number of subsidized LPG cylinders that a household can avail of in a year. Meanwhile, the Indian markets will closely track the RBI monetary policy which is scheduled today.

Markets Today

The trend deciding level for the day is 18,020 / 5,435 levels. If Nifty trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,064 - 18,106 / 5,448 - 5,460 levels. However, if Nifty trades below 18,020 / 5,435 levels for the first half-an-hour of trade then it may correct up to 17,977 - 17,934 / 5,422 - 5,409 levels.

WPI inflation for the month of August inches up to 7.6%

Wholesale Price Index (WPI) inflation for the month of August 2012 expectedly inched up to 7.55% as compared to 6.87% in July 2012, remaining sticky despite a high base of 9.78% in the corresponding period in 2011. On a month-on-month (m-o-m) basis, headline WPI inflation grew steeply at 1.1% in August as compared to 0.1% during July 2012 over the previous month. The rise in headline inflation is driven by an increase in fuel and power prices and inflation in manufactured products.

Inflation in Primary Articles has marginally declined to 10.08% during the month as compared to 10.39% in July 2012 due to moderation in food inflation. Inflation in food articles at 9.14%, marked a decline below the 10%-level after five months. While inflation in Food Grains continued to remain high at 15.09%, prices of Fruits and Vegetables decelerated to 5.38% in August as compared to 10.51% in July 2012. Inflation in Non-Food Articles and Minerals marked an increase to 13.75% and 9.74% respectively.

Fuel and Power inflation surged to 8.32% in August 2012 after easing considerably to 5.98% in July 2012 reflecting the revision of electricity tariff. The rise in electricity prices increased to 17.69% vis-a-vis a rise of 4% in July 2012 and a contraction of 1.32% in the corresponding period in 2011.

Inflation in Manufactured Products, having the highest weightage in the WPI, inched up for the third straight month to 6.14% as compared to 5.58% in July 2012. Amongst this category, Manufactured Food Products witnessed a rise in prices to 9.01% during the month led by an increase in sugar and edible oil prices. Rise in inflation of manufactured products has fuelled concern over core inflation in the economy since it has edged beyond the Reserve Bank of India (RBI)Rs.s comfort level of 5%.

Although the hike in diesel and LPG prices is positive on the policy reform front since it will aid the government to narrow the fiscal deficit by reducing its subsidy burden to some extent; the move is likely to have an adverse impact on inflation. The rise in diesel and LPG prices is likely to be reflected in WPI inflation directly as well as indirectly on account of the pass-through effect in generalized inflation. In addition, we expect that global commodity prices, which are already high, will continue rising following positive global cues, namely the decision by the European Central Bank (ECB) and Federal Reserve on open-ended purchase of bonds to support recovery of growth.

We believe that these developments are likely to reduce headroom for the Reserve Bank of India (RBI) to ease policy rates in its Mid Quarter Review of the Monetary Policy today (September 17, 201 2) since upside risks to inflation continue to persist in the near-term.

Reforms Unleashed

Following the hike in diesel and LPG prices, the Indian government has unleashed a flurry of reforms to help revive the investment sentiment and to bolster economic growth. The Indian Cabinet has a) amended the existing policy norms for foreign direct investment (FDI) in single brand retail b) approved - FDI in multi-brand retail upto 51%, FDI in civil aviation upto 49%, FDI in broadcasting upto 74%, FDI in power trading exchanges upto 49% and c) approved divestments in MMTC, Oil India, NALCO and Hindustan Copper.

Modified existing policy norms for FDI in single brand retail

The Cabinet Committee on Economic Affairs (India) has modified the existing policy norms for FDI in single brand retail, wherein if FDI is beyond 51%, the earlier requirement of Rs.mandatoryRs. 30% sourcing from Indian micro, small and medium enterprises (MSME)Rs.s stands tweaked to Rs.preferableRs. in all sectors/goods where it is feasible. However, 30% domestic sourcing requirement is still Rs.mandatoryRs..

Thus, the amended condition relating to sourcing of 30%, of the value of goods purchased, being done from India, preferably from MSMEs, in all sectors, where feasible, is expected to benefit Indian producers (including the Indian handicrafts sector) and is expected to integrate them to the domestic and global markets.

Skill integration with craftsmen abroad is likely to help develop synergies with international brands and help generate more employment and aid higher income generation. This would also lead to up-gradation of technology, which, in turn, would have a further multiplier effect on the economy.

Approved FDI in multi-brand Retail

The Indian Cabinet has permitted FDI upto 51% in multi brand retail, subject to certain specified conditions which are reproduced below.

- Retail outlets to be set up only in those states which have agreed or agree in future to allow FDI.

Currently nine states and two union territories (majorly governed by the ruling United Progressive Alliance [UPA]) have expressed interest to allow multi brand retail in their states. Those states and union territories are Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana, Manipur, Jammu & Kashmir, Daman & Diu and Dadra & Nagar Haveli.

- Retail sales outlets may be set up only in cities with a population of more than 10lakh (as per 2011 census). In states/ union territories not having cities with population of more than 10lakh (as per 2011 census), retail sales outlets may be set up in the cities of their choice, preferably the largest city.

As per media reports, 53 cities have population above 1 0lakh (as per 2011 census) and more than 40 cities have population between 5 to 10lakh.

- At least 50% of the total FDI brought in shall be invested in Rs.backend infrastructureRs. within three years of the induction of FDI. Rs.Back-end infrastructureRs. will include capex towards setting up infrastructure in processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce etc.

However, expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure.

This condition will aid farmers to obtain remunerative price for their produce as post harvest losses would be significantly reduced due to improvement in the Rs.back-end infrastructureRs..

- At least 30% of the value of goods purchased should be sourced Rs.mandatorilyRs. from Indian small industries.

This condition would benefit Indian small producers and is expected to enable their integration with the global retail chains.

Overall, FDI in multi brand retail is expected to attract investment in Rs.back-end infrastructureRs., which is a felt need across the country. Additionally, opening up of FDI in multi brand retail will attract strategic investments/partnerships in companies like Pantaloon Retail, Shopper Stop, Trent (operating Star Bazaar and Westside), CESC (operating SpencerRs.s), Reliance Industries (operating Reliance Retail), Bharti Airtel (operating Rs.EasydayRs.), Aditya Birla Retail (operating More), Landmark group (operating Lifestyle) and Raheja GroupRs.s (Globus). Moreover, it is expected to aid the sales growth of Indian FMCG companies.

Approved FDI in Civil Aviation

Foreign airlines are now allowed to invest in companies operating in Indian civil aviation space, under the government approval route, up to a limit of 49%. The limit will subsume both FDI and FII investment. Earlier foreign investors were only allowed to invest up to 49% in an airline company, that too with a rider that the investor is in no way related to the aviation business.

As an additional condition, the investee company must also ensure that its Chairman and at least two-thirds of directors are Indian citizens and after the investment, Indian nationals retain substantial ownership and effective control of the company.

FDI from foreign airlines is expected to result in higher foreign investment flows, necessary at present juncture, in order to strengthen the sector. It is also expected to lead to higher service standards and induction of international best practices in the sector. In our view, out of the companies operating in the Indian civil aviation space, those operating with controlled leverage are lucratively placed relatively, to attract foreign investment. Being present in the high-growth, low-cost segment and having the lowest debt compared to peers make FDI investment in SpiceJet more lucrative than others. We recommend Buy on SpiceJet with a target price of ?43.

Approved FDI in Broadcasting

CCEA has raised foreign investment limit (both FDI and FII taken together) from 49% to 74% in DTH and cable networks (including multi system operators [MSOs]). However, foreign investments upto 49% would be permitted under the automatic route while beyond 49% and upto 74%, it would be allowed after government approval via Foreign Investment Promotion Board (FIPB). Similar foreign investment limits have been made applicable for Mobile TV, which had no dispensation in earlier FDI policy regime.

However, for a) up-linking of Rs.News & Current AffairsRs. TV channels/FM Radio, b) Local cable operators c) up-linking of Non-Rs.News & Current AffairsRs. TV Channels and Down-linking of TV Channels and d) Head-end in the Sky (HITS), a satellite multiplex service that provides TV channels for cable operations, the existing limit of foreign investment (both FDI and FII taken together) upto 26%, upto 49%, upto 100% and upto 74% respectively has been maintained.

Increased FDI limits is critical for companies operating in DTH and Cable Networks sub-segments, as it will aid them to tap foreign funds to step up IndiaRs.s digitization aspirations. Therefore relaxed FDI limits are expected to augur well for companies like SunTV, DishTV, Hathway, DEN, WWIL, Tata Teleservices (Tata Sky), RCom (Reliance Big TV), Bharti Airtel (Airtel DTH).

Approved FDI in Power exchanges

CCEA has permitted foreign investment up to 49% in power trading exchanges, with FDI limit of 26% and FII limit of 23%. FII investments would be permitted under the automatic route and FDI would be permitted under the government approval route. Earlier there was no dispensation for FDI in power exchanges, though 100% FDI under the automatic route was permitted in the power sector (except atomic energy). This included generation, transmission and distribution of electricity as well as power trading, subject to the provisions of the Electricity Act, 2003.

FDI in power trading exchanges is expected to strengthen the bourses and enhance the availability of power, as well as improve its distribution for inclusive development. It is also expected to lead to higher service standards and induction of international best practices.

Currently, only two power exchanges are operational in the country, Financial Technologies promoted Indian Energy Exchange (IEX) and NSE promoted Power Exchange India (PXIL). IEX has more than 90% share in the total power traded on exchanges (which as pre media reports is pegged at ~2% of the total generation in the country). As per media reports, volume growth on these bourses has remained subdued considering controlled buying amidst power cuts by loss making discoms and discouragement amongst merchant power producers considering governmentRs.s stance of giving coal linkage to power generators with long term power purchase agreements (PPAs).

Approved Divestment in four PSUs

CCEA has approved divestment in four companiesRs. viz. NALCO, MMTC, Hindustan Copper and Oil India, thereby starting the disinvestment process that has not yielded anything in the first five months of the financial year.

They approved a disinvestment of 9.6% in Hindustan Copper, 12.2% in Nalco, 9.3% in MMTC and 10% in Oil India, all through Offer for Sale mechanism. At the last closing market price, the government is expected to raise Rs.14,255cr from these companies, nearly half of the Rs.30,000cr, estimated from disinvestment in the entire financial year.

However, decision on divestment in Neyveli Lignite and an initial public offer (IPO) of RITES Ltd, which were also on the agenda, was deferred.

Interministerial Panel recommends cancelation of a coal block of JSW Steel

Inter-Ministerial Group has recommended canceling a Gourangdih ABC coal block which was jointly held by JSW Steel and Himachal EMTA. However, Tata Steel and Reliance Power will be allowed to retain their coal blocks. For JSW Steel, we do not expect any meaningful impact on its financials as the block was in very preliminary stage of getting various approvals. Hence, we maintain our estimates and our Neutral rating on the stock.

Tata Sponge Iron coal block deallocated

As per media reports, Government cancelled Tata Sponge IronRs.s Radhikapur coal block which was allotted for captive power consumption in FY2007. The coal block had estimated reserves of 1 20mn tonnes. Hence, we reduce our target price to Rs.377 based on a reduced P/B of 0.8x for FY2014E.

Economic and Political News

- Deallocated coal blocks should be given to power projects: Moily

- Fuel price hike unlikely to narrow fiscal gap significantly

- Monsoon still active, withdrawal delayed for 7th year

Corporate News

- Biocon arm partners Manipal Education for training manpower in Malaysia

- ITC inaugurates Rs.1,200cr Grand Chola hotel

- L&T to expand ship-building, defense businessesRs. share in order book