Reports » India
Indian stock market and companies daily report (September 23, 2013, Monday)
Indian markets are expected to open on a negative note tracking negative opening in SGX Nifty and most of the Asian markets.
The US market moved mostly lower over the course of the trading day on Friday, partly due to profit booking by traders on some of the recent gains. Renewed concerns about the outlook for the Federal Reserve's stimulus program and worries about a potential government shutdown on account of stand-off over President Barack Obama's healthcare reform law also weighed on the markets. Meanwhile, the European markets ended Friday's session with mixed results. Banks and mining stocks, which were among the best performing stocks on Thursday, were weak on Friday. Investors were reluctant to take positions ahead of the German elections, which took place on Sunday.
Indian shares fell sharply on Friday, as investors booked some profits following the previous session's Fed-inspired rally. Investor sentiment took a hit after the Reserve Bank of India unexpectedly raised the repo rate by 25 basis points in a bid to contain inflation.
The trend deciding level for the day is 20,331 / 6,025 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 20,61 1 - 20,958 / 6,1 18 - 6,223 levels. However, if NIFTY trades below 20,331 / 6,025 levels for the first half-an-hour of trade then it may correct up to 19,984 -19,704 / 5,920 - 5,827 levels.
RBI calibrates policy to balance its objectives
The Reserve Bank of India (RBI) partially rolled back some of the short-term liquidity tightening measures taken to contain forex volatility since July 15. Specifically the Minimum Standing Facility (MSF) rate has now been reduced by 75bp from 10.25% to 9.50% and minimum daily maintenance of CRR has been reduced from 99% of requirement to 95%. The MSF was earlier hiked from 8.25% to 10.25% in mid-July 2013.
In a surprise move, the repo rate has been hiked by 25bp to 7.50% from 7.25%. The RBI has signaled its vigilant stance on inflation through this hike in policy rate and also its stance on the improving external situation through partial easing of the short-end rates.
Temporary v/s permanent measures
Led by positive global cues and improving current account deficit (CAD) fundamentals, the INR witnessed a 5.5% appreciation since the beginning of September 2013. Owing to the recent positive movement of the currency and the Fed's postponement of QE3 tapering, the elevated short-term rates seemed unwarranted to that extent. The RBI has also indicated that in the coming months, the MSF spread over the repo is likely to further decline to 100bp (from 200bp currently). That said, compared to pre-15th July overnight rates of 7.2%, rates are still 2.25bp higher at 9.5%. Hence, the decline all the way back to 7.2% looks unlikely due to factors like a) the current repo hike, b) if inflation persists (necessitating further rate hikes), c) if tight liquidity persists due to global factors which keeps MSF as the operational rate to that extent short-term rates would be prevented from declining all the way to pre-15th July rates.
Market expectations of rates at the long-end now higher than anticipated earlier
Going forward, in case we see the Fed tapering QE3 in the near-term there is a probability that short-term rates would continue to remain high. But on the other hand with stability returning in the forex market and in the event of prolonged continuity of liquidity infusion/ receding concern over capital outflows, we would see a respite in short-term rates as explained earlier. In this context, the RBI itself has indicated at easing of the tightening measures in a calibrated manner with normalization in MSF rate to 100bp above the repo and allowing the liquidity adjustment facility (LAF) repo rate to resume its role as the operational policy interest rate.
Notwithstanding the outcome of Fed's withdrawal of stimulus, rates at the long-end are now poised at least 25bp higher than the market's expectations before the monetary policy. This can be attributed to high medium-term inflation expectation maintaining upward pressure on rates at the long-end of the yield curve.
Short term respite, but overall macro outlook for banks remains challenging
As an immediate effect of the RBI measures (reducing MSF rate by 75bp to 9.5% and daily CRR maintenance to 95% from 99%), the cost of funds for more wholesale funded banks would reduce roughly by 10bp on an annualized basis (the reduction in cost across banks would be in congruence with its dependence on wholesale funds). Had these measures not been announced, in our view, the banks with greater reliance on more wholesale funds would have had to further increase lending rates by 25bp at the beginning of 3QFY2014, so as to mitigate the impact of higher costs of wholesale funds on the third quarter's margins. However, as the RBI partly scaled back its liquidity tightening measures, the short term interest rates are likely to come down proportionately and other things being equal the banks are unlikely to need to further increase their base rates at the beginning of 3QFY2014.
Most of the private banks had already revised their base rate upwards in 2QFY2014 so as to mitigate the short term margin pressures emanating from elevated cost of wholesale short term funds. As far as PSU banks are concerned, excluding select banks like SBI, UNBK, BOI, BOM, CNTBK and ANDBK, most others had kept their base rate unchanged during 2QFY2014 until now, even as RBI liquidity tightening measures pushed up their cost of funds (sharply higher for the more wholesale funded ones). Those banks would now have to reassess their base lending rates in light of their ALM reprising situation, persisting elevated short term interest rates (though 75bp lower now than in recent times) and the upward bias to the long term rates emerging from the policy rate increase. Depending upon their current asset liabilities profile assessment (on which we still await clarity from their managements), these banks may choose to either catch up with their private peers or maintain status quo (as further calibration in short term rates is possible even before the next policy announcement).
Overall, at the systemic level, we believe that the long term rates are unlikely to return back to normalcy (to the pre RBI tightening levels) anytime soon and further calibration in short term rates is dependent on the results of the steps taken by Government of India/RBI to put domestic elements in order. Moreover, our current inflation-growth dynamics paints a weak picture of our economy. Consequently, the asset quality pressures for the banking sector are likely to prevail and would continue to dent the sector's performance. Earnings pressures are most likely to further increase due to meaningful marked to market (MTM) losses as bond yields still remain elevated. Though stocks are trading near their historic low valuations, there is no positive catalyst which would warrant a change in our current medium term cautious stance on the banking sector. We recommend investors to avoid PSU banks and stay with the defensives (HDFC Bank is an Accumulate for us). We also like ICICI Bank and Axis Bank, which in our view, offer value over a medium to long term perspective, though we do not rule the possibilities of these stocks undershooting the fair value estimates in the near term, given the fragile macro environment.
TTMT plans to raise product prices by up to 1.5%
According to media report, Tata Motors (TTMT) is planning to raise the prices of its commercial and passenger vehicles by 1% to 1.5% to mitigate the impact of rising input costs. The price hike comes on the expected lines and follows similar moves by the rival companies as the company aims to shield its operating margins by continuous cost control initiatives coupled with price increases. We believe that the price hikes of 1% to 1.5% will not completely offset the impact of input cost pressures given that the average discounts offered by the company to boost sales amid the slowdown has reached record levels. We maintain our Accumulate rating on the stock with an SOTP target Price of Rs.360.
Ranbaxy receives Paragraph IV Certification
Ranbaxy Laboratories Inc. (RLI), a wholly owned subsidiary of Ranbaxy Laboratories Limited, announced that the company has received a Paragraph IV Certification notice of filing from Watson Laboratories Inc. of an Abbreviated New Drug Application ("ANDA") to the U.S. Food and Drug Administration (FDA) for a generic version of Absorica (isotretinoin capsules), a product that is licensed from Cipher Pharmaceuticals Inc. ("Cipher") of Mississauga, Ontario. RLI and Cipher intend to vigorously defend Absorica's intellectual property rights and pursue all available legal and regulatory pathways in defense of the product. Absorica is currently protected by two issued patents listed in the FDA's Approved Drug Products List (Orange Book), which expire in September 2021.
RLI will take appropriate actions in response to the Paragraph IV notice letter, and FDA approval of the ANDA shall then be governed by the Hatch-Waxman Act. Absorica was approved by the FDA in May 201 2, and granted a three-year market exclusivity period, which expires in May 2015. While Absorica, is a key product in the company's US branded portfolio, over the next three to four years, as of now the news will have no impact on the financials of the company. We maintain our neutral stance on the stock.
IVRCL bags orders worth Rs.842cr
IVRCL said that its water division has bagged an order worth Rs.249cr order for execution of a cluster scheme of 205 villages from Haripura Chouraha Head works under the Chambal-Bhilwara Water Supply Project Phase-II. The company also said it has bagged another order for supply of water to 106 villages from Office of the Chief Engineer Project under the Pokran-Falsood-Baltora-Siwana lift project worth Rs.143.5cr. IVRCL's irrigation division has secured various orders worth Rs.447.8cr. This includes a major order from Krishna Bhagya Jala Nigam Limited of Karnataka worth Rs.386.45cr for execution. However, we continue to maintain our Neutral rating on the stock.
Economic and Political News
- August IIP likely to be 1-2% : Dun & Bradstreet
- Govt releases second set of draft rules for new Companies Act
- Non-oil trade deficit to be much lower in current fiscal: Assocham
- India keeps Iran on Rs.watch list for oilmeal exports
- FDI in services sector dips 36.5% during Apr-Jul
- MTNL unlikely to surrender 900 MHz spectrum
- Aban Offshore expects to reduce debt by $200 mn this fiscal
- SAIL to invest around Rs.800cr to develop Bhilwara mine
- US FDA alert puts Ranbaxy under scanner of other regulators
- Hindustan Copper lines up Rs.688cr capex on mine expansion in FY14
- IOB gets board nod for Rs.2,1 00cr capital infusion from govt
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