Can the bulls take Nifty, Sensex higher? Weekly Closing Report-The Total Investment & Insurance Solutions

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15  July 2016 

I had mentioned in last week’s closing report that Nifty, Sensex were to move sideways to down. The major indices of the Indian stock markets have ended up over the week. The trends of the major indices in the course of the week’s trading are given in the table below: The Total Investment & Insurance Solutions

Major Indices(The Total Investment & Insurance Solutions)

Positive global cues and fresh buying support lifted the Indian equity markets on Monday as buying support was seen in interest sensitive stocks like automobiles and banks.  The BSE market breadth was skewed in favour of the bulls -- with 1,718 advances and 1,040 declines. Iron ore producer NMDC Ltd. on Monday said its production has grown by about 28% and sales have increased nearly 17% in the April-June quarter of the current fiscal. The shares of NMDC closed at Rs96.25, up 1.69% on the BSE. UK's decision to exit the European Union will not have any significant credit impact on India and other countries in the Asia Pacific region, Moody's Investors Service said on Monday. However, in case of countries where fiscal and monetary policy space is constrained, a shift in portfolio and/or banking flows in some Asia Pacific markets might hurt growth, said the credit rating agency.  While the fiscal and monetary policy space is constrained in India its exposure to external financing is limited, it said in its latest report.

Positive global cues, combined with short covering and healthy monsoon rains, buoyed the Indian equity markets to new intra-day highs in the last 11 months on Tuesday as buying was witnessed in banking, metal and consumer durables stocks. However, the BSE market breadth was tilted in favour of the bears -- with 1,519 declines and 1,243 advances. However, gains were capped due to profit booking at higher levels and uncertainties over upcoming macro-economic data like factory output -- Index of Industrial Production (IIP) -- for May and inflation figures for June. The Total Investment & Insurance Solutions

Coal India Board approved a buyback of over 10 crore shares at a price of Rs335 per share for an aggregate consideration not exceeding Rs3,650 crore, the company said on Tuesday. The buyback offer is, however, subject to approval from shareholders and other regulators and government authorities. But Coal India shares closed at Rs316.85, down 1.14% on the BSE.

Profit booking, coupled with disappointing macro-economic inflation data and lower crude oil prices, subdued the Indian equity markets on Wednesday. Consequently, the key indices closed the day's trade on a flat note, as selling pressure was witnessed in automobile, consumer durables and capital goods stocks. The NSE Nifty market breadth was skewed in favour of the bears -- with 17 advances and 34 declines. The Total Investment & Insurance Solutions

On Wednesday, initially the benchmark indices opened on a higher note, in-sync with their Asian peers. However, equity markets soon ceded their initial gains as a weak rupee and disappointing inflation figures for June eroded investors' confidence. Nifty traded on a flat note. Banking and pharma sector stocks traded with mixed sentiments on profit booking.

Disappointing macro-economic data and mixed global cues subdued the equity markets on Thursday. Consequently, both the indices traded on a flat note. Buying was witnessed in banking, consumer durables and capital goods sectors, whereas stocks of information technology (IT) faced selling pressure. The BSE market breadth was tilted in favour of the bulls -- with 1,533 advances and 1,016 declines. The Total Investment & Insurance Solutions

On Friday, key Indian equity markets were suppressed by a weak rupee and poor results from Infosys. Indian IT major Infosys on Friday reported double-digit net profit and revenue for April-June quarter, but lowered annual revenue guidance in dollar value, resulting in its stock plunging on the bourses. Though consolidated net profit grew 13.4% year-on-year to Rs3,436 crore and revenue 16.9% to Rs16,782 crore for the quarter under review, the IT company lowered dollar guidance for fiscal 2016-17 to 10%-11.5% from 11.8%-13.8% projected in April due to currency volatility and headwinds. The revised revenue outlook is based on June 30 exchange rate of Rs67.53 per dollar and 10.8%-12.3% on March 31 exchange rate of Rs66.26 per dollar. In constancy currency, consolidated revenue for the fiscal is expected to grow 10.5%-12% at June 30 dollar rate. The key indices closed the day's trade in the red, as selling pressure was witnessed in IT (information technology) and TECK (media, entertainment and technology) stocks. However, the losses in the major indices were less than 0.50% over Thursday’s close. The Total Investment & Insurance Solutions

WPI inflation accelerates, but profit margins getting squeezed-The Total Investment & Insurance Solutions

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15  July 2016 

WPI (The Total Investment & Insurance Solutions)

India's wholesale price index (WPI)-based inflation rose to a higher-than-expected 1.6% in June from 0.8% in May entirely driven by food prices. This data from June also reflect weak pricing power of corporates, says Nomura in a report.

The research note says, "Despite rising input costs, manufacturers did not implement commensurate increases of output prices, which reflects increased pressure on profit margins." The Total Investment & Insurance Solutions

Sequentially, prices of several manufactured categories such as machine tools, leather and wood products fell, while textiles rose marginally, reflecting weak pricing power amid the slow domestic recovery and weak external demand. Global deflationary forces (in basic metals, metallic mineral products) added to the downward pressures. However, with waning base effects, core WPI deflation eased to -0.3% y-o-y in June from -0.5% in May. 

Breakdown Of WPI 1 (The Total Investment & Insurance Solutions)

"Indeed, a breakdown of the WPI into input and output prices shows that input costs picked up sharply, rising 1.5% y-o-y (vs 0.3%), but output price inflation was unchanged at 1.6% y-o-y. This suggests that firm profit margins will likely come under pressure as they are absorbing much of the higher input costs," Nomura added. The Total Investment & Insurance Solutions

During June, the core WPI deflation (WPI manufactured ex-food) eased, in line with expectations. Core WPI deflation eased to -0.3% y-o-y in June from -0.8% y-o-y in May. However, sequentially, prices of several manufactured categories fell or were muted. The Total Investment & Insurance Solutions

WPI food price inflation (primary and manufactured) rose further to 8.2% y-o-y in June from 7.8% in May. Sequentially, the pace of pick-up in vegetables (17.1% m-o-m), cereal (1.9%) and edible oil (1.2%) prices accelerated. "Food inflation has doubled over the span of four months, contributing significantly to the rise in WPI. Although food prices typically rise in summer months, the pick-up this June was much higher than normal, at 2.3% m-o-m average over the last three years," the report pointed out. The Total Investment & Insurance Solutions

Breakdown Of WPI 2 (The Total Investment & Insurance Solutions)

Non-food primary products such as fibre and mineral prices rose amid higher global prices. Fuel price deflation also eased to -3.6% y-o-y from -6.1% in May, as prices of almost all market-linked fuels like petrol, diesel, aviation fuel, naptha and furnace oil, picked up sequentially, reflecting the lagged pass-through of higher global fuel prices. The Total Investment & Insurance Solutions

"Looking ahead, we expect year-on-year WPI inflation to continue rising because of waning base effects, albeit at a muted pace given ample manufacturing spare capacity and the recent stabilisation of global commodity prices. For the full year, we expect WPI inflation to average 0.6% y-o-y in 2016, up from -2.7% in 2015," Nomura concluded. The Total Investment & Insurance Solutions

Black money: SIT for ban on cash transactions over Rs3 lakh-The Total Investment & Insurance Solutions

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15  July 2016 

In order to tackle black money, the Special Investigation Team (SIT) has recommended a total ban on cash transactions above Rs300,000 and an act be framed to declare such transactions as illegal and punishable under law, an official statement said here on Thursday. The Total Investment & Insurance Solutions

The fifth SIT report has been submitted before the Supreme Court by the SIT.

“The SIT has felt that large amount of unaccounted wealth is stored and used in form of cash. Having considered the provisions which exist in this regard in various countries and also having considered various reports and observations of courts regarding cash transactions the SIT felt that there is a need to put an upper limit to cash transactions,” the statement said.

Regarding cash holding it said: “SIT has suggested an upper limit of Rs15 lakh on cash holding.” The Total Investment & Insurance Solutions

Further, it said in case any person or industry requires holding more cash, “it may obtain necessary permission from the Commissioner of Income tax of the area.” The Total Investment & Insurance Solutions

It has also invited suggestions from the public on the recommendations. The Total Investment & Insurance Solutions

Infosys net up 13% in first quarter-The Total Investment & Insurance Solutions

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15  July 2016 

Global software major Infosys on Friday reported Rs3,436 crore consolidated net profit for first quarter (April-June) of this fiscal (2016-17), a 13.4% annual growth. The Total Investment & Insurance Solutions

In a regulatory filing to BSE, the IT major said consolidated revenue for the quarter (Q1) grew 16.9% year-on-year (YoY) to Rs16,782 crore, as per the Indian accounting standard. The Total Investment & Insurance Solutions

Under the International Financial Reporting Standard (IFRS), net income rose 7.4% YoY to $ 511 million and gross revenue 10.9% YoY to $2,501 million ($2.5 billion). The Total Investment & Insurance Solutions

Masala Bonds: Can it spice up Indian bond market? -The Total Investment & Insurance Solutions

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15  July 2016 

Masala Bonds(The Total Investment & Insurance Solutions)

Indian curry is quite a hit in the West. On a similar note, can global investors be tempted to try out Masala bonds? That is something the Indian Railway Finance Corp, which approved the raising of $1 billion through the issue of Masala bonds and other companies such as Indian Rail Finance Corp and NTPC are trying out now. However, it is Housing Development Finance Corp Ltd (HDFC) that is launching first sale of so-called masala bonds by an Indian entity this week, seeking to raise at least Rs2,000 crore with an option to retain oversubscription of up to Rs1,000 crore. The advent of much talked about masala bonds market is a positive precursor for corporates as it has opened up potentially significant new sources of funding over External Commercial Borrowings (ECB). This will also integrate financial markets in India further with the rest of the world. We can certainly envisage several innovative applications of the RDB option by companies going forward. The Total Investment & Insurance Solutions

The term “Masala Bonds” is used to refer to rupee-denominated borrowings by Indian entities in overseas markets. The International Finance Corp (IFC), the investment arm of the World Bank, issued a Rs1,000 crore bond in November 2014. The purpose of issue was to fund infrastructure projects in India. IFC named them ‘masala’ bonds to reflect the Indian flavor. The term masala bonds have been used ever since. The Total Investment & Insurance Solutions 

Before masala bonds, corporates raised finance from international market through external commercial borrowings or ECBs. However, since funds raised through ECBs are denominated in foreign currency, the same attracts risk of forex fluctuation. A year is a long time in forex markets where currencies fluctuate sharply. So, imagine the risk an issuer of bond has to face, especially of one with largely rupee earnings, where issue and repayment are years apart. This is how masala bond is different from other instruments as the risk of currency lies with the investor and not the issuer. 

China has been ahead. In October 2015, when President Xi Jinping was in London, the People’s Bank of China issued Yuan denominated bonds, dubbed “dimsum bonds” in Hong Kong to raise funds at a little over 3%. A key difference between these two countries is that unlike China, the Indian government has never borrowed abroad on its own — preferring to push its state owned units, instead. And Reserve Bank of India (RBI), unlike the Chinese central bank, cannot issue debt with no legal sanction for it. The Total Investment & Insurance Solutions

Market Scenario

The need for a healthy corporate debt market in India has been emphasized repeatedly. A well-developed corporate debt market will not only support the banking system in meeting the long term funding requirements of the corporate but will also be a reliable source of finance in situations when the equity market is unstable. In the recent years, the Indian corporate bond market has experienced development both in number and volume; however, when compared with the Indian government bond market, it still has a long way to go. 

The corporate bond market in India is dominated by non-banking finance companies (NBFCs) as issue of unsecured bonds by non-banking non-financial Companies (NBNFCs), until recently, were covered under the ambit of deposits. The same has been discussed at length below. So, the issue of corporate bonds in India by NBNFC is quite small as compared to that of other developed countries and the same can be viewed in the figure below: The Total Investment & Insurance Solutions

Corporate Bonds(The Total Investment & Insurance Solutions)

 Looking at the global trends, bank financing seems to be an uncommon phenomenon as compared to that of bond financing, but the current situation in India follows a totally contrary path. The reason for hindering growth of corporate debt market against that of PSU’s debt market can also be attributed to the high fiscal deficit of Indian economy.The Total Investment & Insurance Solutions

Spate of action

The regulators have now started taking steps to streamline the regulatory regime surrounding the Indian bond market. The motive of regulators behind such push is to transform the Indian bond market into a much more vibrant trading field for debt instruments from the elementary market that it was about a decade ago, but there is still a long way to go. Lately, there have been a number of changes, which is likely to cause a positive impact. 

Until recently, the Companies (Acceptance of Deposits) Rules, 2014 barred the corporates from issuing unsecured debt instruments. However, the Ministry of Corporate Affairs (‘MCA’) vide notification issue on 29 June 2016 issued the Companies (Acceptance of Deposits) Amendment Rules, 2016 (‘Amendment Rules) thereby providing relaxation with respect to issuance of corporate bonds by excluding listed unsecured non-convertible debentures (NCDs) from the definition of deposits. Earlier, corporates, other than financial entities, were allowed to issue either secured bonds or bonds compulsorily convertible into equity within a period of five years from the date of issuance, anything apart from the said were treated as deposits. However, RBI allowed NBFCs to issue unsecured NCDs with a maturity of more than one year and minimum subscription amount being Rs1 crore per investor.The Total Investment & Insurance Solutions

Enabling Provisions by RBI

The RBI, on 29 September 2015, vide circular RBI/2015-16/193 has issued guidelines allowing Indian companies, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to issue rupee-denominated bond overseas. The Total Investment & Insurance Solutions 

As per the guidelines, the issue size by an eligible borrower has been restricted to $750 million under automatic route. The regulator also mentioned a minimum maturity period of five years. However, RBI, on 13 April 2016, vide circular RBI/2015-16/372 had reduced the tenure of such bonds to three years and allowed borrowing up to Rs5,000 crore under the automatic route. According to the RBI, the masala bonds can only be issued in a country and subscribed by a resident of a country that is a member of Financial Action Task Force (FATF) or a member of an FATF-style regional body. The country should have strategic anti-money laundering or combating the financing of terrorism deficiencies to which countermeasures apply. The Total Investment & Insurance Solutions

Reason to invest in masala bonds

The following are the reason to invest in masala bonds:

• The Ministry of Finance has slashed the withholding tax on interest income of masala bonds to 5% from 20%, making it lucrative for investors. Also, capital gains from rupee appreciation are exempted from tax. 

• On a global scale, there is abundant liquidity because of lower interest rates in developed markets, but there remain very few investment options due to weak conditions of the global financial market. India, along with China amongst others, is that rare fast-growing large economy, so investing in masala bonds is one of the rare ways for investors to take advantage of this. The Total Investment & Insurance Solutions

Reason to issue masala bonds

The following are the reason to issue masala bonds:

• It helps the Indian companies to diversify their bond portfolio as previously they one issued corporate bonds. Masala bonds are an addition to their bond portfolio.

• It helps the Indian companies to tap a large number of investors as these bonds are issued in the offshore market.

• Masala bonds will help in building up foreign investors’ confidence in Indian economy and currency which will strengthen the foreign investments in the country. The Total Investment & Insurance Solutions

Cost of funds

Borrowing from overseas is at low cost however hedging is made mandatory in the country and the cost of hedging is very high. The reduction in minimum tenure from five years to three years could have possibly been an indicator to reduce the cost of hedging, thus reducing the cost of issuance for Indian issuers. While, the cost of external commercial borrowings is around LIBOR + 150 bps but the hedging cost is as high as 6%-7%, which does not incentivize the borrowers to avail funds from overseas. Here, the investor has been allowed to hedge their exposure in Rupee through permitted derivative products with AD Category - I banks in India. 

Indian Companies desirous of playing safe and not having the natural hedge advantage like that of Reliance Industries Limited, who service the debt obligations in US dollars with the export proceeds in the same US dollars, would ebb from issue of ECBs and plumb towards masala bonds should the cost of such borrowings turnout up to be lower than that of Indian banks as well as under the ECB route with forex risk added to it. 

Consequent upon issue of masala bond to offshore markets, the Indian corporates will reduce their interest cost burden on the raised debt amount. Also, the funds raised can be used for infrastructural development in the country ultimately leading to the development of the nation at a global level. For this, RBI must be lauded for coming up with yet another avenue for raising international finance for Indian corporates.The Total Investment & Insurance Solutions

Global Markets & News-The Total Investment & Insurance Solutions

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14  July 2016 

OVERNIGHT MARKETS AND NEWS

Sep E-mini S&Ps (ESU16 +0.65%) are up +0.75% at a new all-time nearest-futures high and European stocks are up +1.27% at a 2-1/2 week high on speculation world central banks will increase stimulus measures in order to support economic growth. The stock indexes fell back from their best levels and GBP/USD jumped +1.45% to a 2-week high after the BOE unexpectedly voted 8-1 to keep the benchmark interest rate unchanged at 0.50% and voted 9-0 to maintain the asset purchase target at 375 billion pounds, although the post meeting statement said that " most members of the committee expect monetary policy to be loosened in August." JPMorgan Chase is up over 2% in pre-market trading and is leading financial stocks higher after it reported Q2 EPS of $1.55, better than consensus of $1.43. Energy producing stocks are also higher with the price of crude oil (CLQ16 +1.50%) up +1.18% and mining stocks and raw-material producers are up as well with the price of copper (HGU16 +0.20%) up +0.09%. Asian stocks settled mostly higher: Japan +0.95%, Hong Kong +1.12%, China -0.22%, Taiwan +0.10%, Australia +0.43%, Singapore -0.13%, South Korea +0.22%, India +0.46%. 

A rally in USD/JPY to a 2-1/2 week high gave Japanese exporter stocks a boost and led Japan's Nikkei Stock Index higher. The yen has weakened and Japanese stocks have pushed higher this week after Prime Minster Abe's party won upper-house elections and promised more stimulus.

The dollar index (DXY00 -0.26%) is up +0.08%. EUR/USD (^EURUSD) is up +0.17%. USD/JPY (^USDJPY) is up +0.84% at a 2-1/2 week high.

Sep T-note prices (ZNU16 -0.28%) are down -7.5 ticks. The Total Investment & Insurance Solutions

U.S. STOCK PREVIEW

Key U.S. news today includes: (1) weekly MBA mortgage applications (previous +14.2% with purchase sub-index +4.3% and refi sub-index +20.8%), (2) Jun import price index (expected +0.5% m/m and -4.6% y/y, May +1.4% m/m and -5.0% y/y), (3) the Treasury's auction of $12 billion of 30-year T-bonds, (4) Jun monthly budget statement (expected +$23.0 billion, May -$52.507 billion), (5) Fed Beige Book, (6) Philadelphia Fed President Patrick Harker (non-voter) speaks on the economic outlook at an event in Philadelphia, and (7) EIA Weekly Petroleum Status Report.

S&P 500 companies reporting earnings today: JPMorgan Chase (consensus $1.43), Blackrock (4.77), Delta ((1.42), Omnicom (1.33), Progressive Corp (0.33).

U.S. IPO's scheduled to price today: AdvancePierre Foods Holdings (APFH), Ageagle Aerial System (UAVS).

Equity conferences this week include: none. The Total Investment & Insurance Solutions

OVERNIGHT U.S. STOCK MOVERS

JPMorgan Chase (JPM -0.06%) climbed over 2% in pre-market trading after it reported Q2 EPS of $1.55, higher than consensus of $1.43.

Procter & Gamble (PG +0.16%) was upraded to 'Buy' from 'Neutral' at UBS with a 12-month price target of $96.

Newmont Mining (NEM +2.30%) was upgraded to 'Buy' from 'Sell' at Veritas Investment Research with a 12-month price target of $42.

Yum! Brands (YUM -0.57%) climbed over 3% in pre-market trading after it reported Q2 adjusted EPS of 75 cents, better than consensus of 74 cents, and then forecast operating profit growth this year up "at least" 14%, higher than an April view of up 12%.

Eaon Corp PLC (ETN -0.14%) was downgraded to 'Neutral' from 'Buy' at Bank of America/Merrill Lynch.

The WSJ reports that Viacom (VIA -1.20%) is in talks to sell a 49% stake in its Paramount Pictures move studio to China's Dalian Wanda.

LSB Industries (LXU -2.91%) dropped 2% in after-hours trading after it registered 4.5 million shares for top holder LSB Funding.

Coeur Mining (CDE +5.34%) was upgraded to 'Outperform' from 'Sector Perform' at RBC Capital Markets with a 12-month target price of $18.

Novovure Ltd. (NVCR -1.97%) jumped nearly 6% in after-hours trading after the FDA approved its second-generation Optune System for glioblastoma patients.

Lions Gate Entertainment (LGF +1.12%) fell 1% in after-hours trading after it was downgraded to 'Market Perform' from 'Outperform' at Bernstein.

Summit Materials (SUM -0.18%) said its preliminary Q2 adjusted EPS will be 43 cents-44 cents, below consensus of 47 cents.

Monsanto (MON -1.17%) gained over 1% in after-hours trading after people familiar with the matter said the company has revived talks with BASF about a possible combination of their agrochemicals businesses.

Philadelphia Fed President Harker (non-voter) said "considering the economic projections, he anticipates it may be appropriate for up to two additional rate hikes this year and that the funds rate will approach 3% by the end of 2018." The Total Investment & Insurance Solutions

MARKET COMMENTS

Sep E-mini S&Ps (ESU16 +0.65%) this morning are up +16.00 points (+0.75%) at a fresh all-time nearest-futures high. Wednesday's closes: S&P 500 +0.01%, Dow Jones +0.13%, Nasdaq -0.26%. The S&P 500 on Wednesday climbed to a new record high and closed slightly higher on a rally in mining stocks and raw-material producers after copper prices rose +1.22% to a 2-1/4 month high. Stocks were also boosted by the Fed Beige Book comment that "the outlook was generally positive across broad segments of the economy." Stocks were undercut by a sell-off in energy producer stocks after crude oil prices fell sharply by -4.38%.

Sep 10-year T-note prices (ZNU16 -0.28%) this morning are down -7.5 ticks. Wednesday's closes: TYU6 +10.00, FVU6 +3.75. Sep T-bonds on Wednesday closed higher on the slide in stocks and on strong demand for the Treasury's $12 billion auction of 30-year T-bonds that had a bid-to-cover ratio of 2.48, higher than the 12-auction average of 2.34.

The dollar index (DXY00 -0.26%) this morning is up +0.073 (+0.08%), EUR/USD (^EURUSD) is up +0.0019 (+0.17%) and USD/JPY (^USDJPY) is up +0.88 (+0.84%) at a 2-1/2 week high. Wednesday's closes: Dollar index -0.225 (-0.23%), EUR/USD +0.0029 (+0.26%), USD/JPY -0.20 (-0.19%). The dollar index on Wednesday closed lower on the the steeper-than-expected decline in China May imports, which signals weakness in China's economy that may restrain global growth and keep the Fed from raising interest rates. The dollar was undercut by the Fed Beige Book that said the U.S. economy grew "modestly" amid "slight" price pressures, which bolsters the case for the Fed to refrain from raising interest rates.

Aug WTI crude oil (CLQ16 +1.50%) prices this morning are up +53 cents (+1.18%) and Aug gasoline prices (RBQ16 +2.07%) are up +0.0197 (+1.43%). Wednesday's closes: CLQ6 -2.05 (-4.38%), RBQ6 -0.0517 (-3.62%). Aug crude oil and gasoline on Wednesday closed sharply lower on comments by Iranian Deputy Oil Minister Ali Kardor who said his country is pushing to raise its crude production to 4.0 million bpd by the end of Sep, earlier than previous forecasts for output to rise to 4.0 million bpd by year end. Crude oil and gasoline prices were also undercut by the unexpected +1.21 million bbl increase in EIA gasoline stockpiles (more than expectations of -1.0 million bbl) and the +0.7% increase in U.S. crude production to 8.485 million bpd, the first increase in five weeks. The Total Investment & Insurance Solutions