Fundamentals March 20, 2013

Nik's Diary

Indian markets opened flat to negative tracking mixed positive opening in the Asian markets, with a rejection by the Cypriot parliament of a European bailout plan fueling some uncertainty. US stocks ended mixed over the course of the day yesterday as the market was weighed by concerns about the situation in Cyprus against upbeat US housing data. In the latter part of the trading day, Cyprus's parliament voted to reject a proposed European Union bailout plan that would tax bank deposits at a rate of up to 9.9%. Meanwhile, the US Commerce Department released a report showing that housing starts edged up by 0.8% to a seasonally adjusted annual rate of 917,000 (Estimate – 915,000) in February from the revised January estimate of 910,000. Indian markets fell yesterday, as worries of political instability overshadowed hopes that Cyprus could revise a deal to contribute to its bailout. In a dramatic development, the DMK withdrew its support to the UPA Government on concerns over the Sri Lankan Tamils issue. Meanwhile, the RBI monetary policy became more of a non-event amid the political crisis as it cut the repo rate by 25bp to 7.5% (in line with expectations).

Cyprus votes against tax on bank deposits

Cypriot lawmakers on Tuesday rejected a critical draft bill that would have seized part of people's bank deposits in order to qualify for a vital international bailout, with not a single vote in favor. The rejection leaves Cyprus's bailout in question. Without external funds, the country's banks face collapse and the government could go bankrupt. Nicosia will now have to come up with an alternative plan to raise the money: the government could try to offer a compromise bill that would be more palatable to lawmakers. The bill, which had been amended Tuesday morning to shield small deposit holders from the deposit tax, was rejected with 36 votes against and 19 abstentions. One deputy was absent. "No to new colonial bonds, no to subjugation, no to national dishonor and raw blackmail," said house speaker Yiannakis Omirou during the debate before the vote. After the vote failed, he said political leaders will have a meeting with the president on Wednesday to discuss the next steps. Source: PressHerald

RBI reduces repo by 25bp, along expected lines 

The Reserve Bank of India (RBI) reduced its short-term lending rate (repo rate) by 0.25 per cent to 7.5 per cent on Tuesday at its mid-quarter monetary policy review, keeping in line with market expectations. The short-term borrowing rate also came down to 6.5 per cent. The central bank, however, left its Cash Reserve Ratio (CRR) untouched at 4 per cent.  While the news was welcomed by India Inc, RBI also cautioned that there was limited scope for further rate cuts due to high food inflation and widening current account deficit (CAD). Bankers across the board dashed customers’ hopes for an interest rate cut this month saying they would wait for the current fiscal to end before passing on the benefit to home, auto and corporate loan seekers. The RBI reduced its repo rate for the second consecutive time in a bid to boost sluggish growth. “The foremost challenge for returning the economy to a high growth trajectory is to revive investment. A competitive interest rate is necessary for this but not sufficient,” RBI  Governor D Subbarao said presenting the mid-quarter policy review. “Even as the policy stance emphasis addressing the growth risks, the headroom for further monetary easing remains quite limited,” Subbarao said, adding  only a rate cut wouldn’t restore investment sentiment and that the government must remain focussed on fiscal prudence. Commenting on the monetary policy, Chief Economic Advisor Raghuram Rajan said: “RBI cutting repo rate is a welcome step.” The central bank added in its guidance that chances of further easing of rates was limited considering record high CAD and escalating food inflation. “The government has a critical role to play in this regard by remaining committed to fiscal consolidation, easing the supply bottlenecks and improving governance surrounding project implementation...Elevated food prices, including pressures stemming from MSP increase and the wedge between wholesale and retail inflation that rose to 10.9 per cent in February have adverse implications for inflation expectations,” Subbarao said adding that CAD still remained a concern. India Inc Hails Corporate honchos cheered RBI’s rate cut and hoped for further cuts in the future. “At a time when industrial production is showing nascent signs of an upturn, CAD is slated to drop on account of improved global conditions and there are expectations of a normal monsoon, it is necessary that the RBI provides the boost to green shoots of recovery,” CII President and MD of the Godrej group, Adi Godrej said. FICCI President and HSBC’s India Head, Naina Lal Kidwai hailed the RBI decision. “Banks credit to industry has witnessed moderation. Credit to the industry increased by 15.2 per cent in January, slower than the 20.2 per cent increase a year ago...We do hope that RBI will follow this up with further rate cuts even though they have indicated that headroom for further cuts is limited,” Kidwai said. FIEO President M Rafeeque Ahmed said, “While a repo rate cut may help to boost growth, addressing structural disparities in supply remain to be addressed”. ASSOCHAM, however, stated that the RBI has further dampened investment sentiment. “In a way, what RBI is telling us is that we must learn to live with high interest rates scenario even as the Governor D Subbarao himself has expressed concern over slowdown in the economy,” ASSOCHAM President and CMD of Videocon Industries, Rajkumar N Dhoot reacted. Bankers Buy Time While industrialists praised RBI’s decision, bankers however rejected any possibility of an interest rate cut for home and auto loans this month. ICICI Bank CEO and MD Chanda Kochhar said the cut in repo rates by 25 basis points is a welcome move and indicates continued focus on growth. “Today’s policy actions together with the measures taken by the government on the fiscal and investment fronts, indicate continued overall policy support for a revival in economic growth,” she said. “Banks would cut the lending rate when deposit rates, both short-term and long-term, start showing a decline. Base rate may not be cut at this point of time,” Indian Overseas Bank Chairman and Managing Director M Narendra said. Similar views were espoused by bank chiefs belonging to Central Bank of India, Bank of Baroda and Bank of India. Bankers are likely to adopt the wait and watch approach before taking a call on reduction of interest rates. “There is certain direction which is visible to us. I don’t see any immediate action. But come April or mid-April there would be much clarity on liquidity position,” Bank of Baroda Chairman and Managing Director S S Mundra said. Auto Ind Wants More The auto industry gave a lukewarm response to RBI’s decision, saying the sector needs a cut of at least 100 basis points. “The 25 bps cut is nothing, we need at least 100 basis points reduction,” Society of Indian Automobile Manufacturers (SIAM) Deputy Director General Sugato Sen said . “Though the RBI’s move is a positive step, it is unlikely to revive the sales immediately,” he added. Source: The new Indian express

DMK withdraws support, but government stable 

Ruling out the possibility of the DMK returning to the Congress-led UPA alliance, party spokesperson and MP TKS Elangovan today said, "there is no window for reconsideration. It has grills." He added, "we are out of the alliance and now there is no coalition dharma." Five DMK ministers will formally submit their resignations to the Prime Minister today after the DMK decided to quit the government yesterday in protest against the government's stance on the US-sponsored resolution on Sri Lanka at the UN's top human rights body in Geneva. The government, in a desperate bid to salvage the situation, has said that it is open to considering some amendments the DMK wants for the UN resolution, including a call for an international probe into Sri Lanka's alleged war crimes. But, sources say that it will not accede to the DMK's demand for Sri Lanka to be accused of "genocide" during its decades-long civil war against the Tamil Tigers. The DMK's other demand, that India move a Parliament resolution against Sri Lanka, is also being considered by the government as a compromise solution to tide over the crisis. But, the BJP has made it clear that it will oppose such a move, terming it as interference in Sri Lanka's internal affairs. It also says such a move would compromise India's foreign policy. Last night, Senior DMK leader TR Baalu met President Pranab Mukherjee and handed over the letter withdrawing his party's support to the UPA. Later he said that his party chief, M Karunanidhi, will decide whether the DMK will support the Union government from the outside. Source: NDTV

2G case: Court summons Sunil Mittal and Ravikant Ruia in excess spectrum case

The Special CBI court hearing the 2G case on Tuesday issued summons to industrialists Sunil Mittal, Ravi Ruia, Asim Ghosh, former Telecom Secretary Shyamal Ghosh and 3 others over their alleged involvement in the irregularities committed in the allocation of extra spectrum. Although the premier investigation agency had accused Ghosh, Bharati Cellular, Hutchison Max Telecom (rechristened Vodafone) and Sterling Cellular of having entered into a criminal conspiracy in its chargesheet filed in December, it had left out the names of Mittal and Ruia. The charges, which had been filed under the provisions of the  Prevention of Corruption Act, 1988, allegedly resulted in `846 crore loss to exchequer. According to presiding judge O P Saini, “he had found that at the relevant time, Sunil Bharati Mittal was CMD of Bharati Cellular Ltd, Asim Ghosh was MD of Hutchinson Max Telecom and Ravi Ruia was a director in Sterling Cellular, who used to chair its director board meetings”. “In that capacity, they were/are prima facie, in control of the affairs of the respective companies. As such, they represent the directing mind and will of each company and their state of mind is the state of mind of the companies,” the court observed. Judge Saini said, “they are the alter ego of the respective firms. In this situation, the acts of the companies are to be attributed and imputed to them. Consequently, I find enough material on record to proceed against them also.” Earlier on March 8, the court had pulled up the CBI for putting the blame entirely on government servants, while failing to mention the names of any company officials in its chargesheet. CBI prosecutor K K Goyal, though, had said that the agency had tried its utmost to find out whether any of the company officials had been part of the conspiracy, but could not establish anyone’s involvement. Source: The new Indian express

BGR refutes media reports about stake sale of BGR-Hitachi JV

After the news of L&T buying stake in BGR-Hitachi JV share price of BGR Energy gained 20% to Rs 242 a share in intraday. However the company denied such move strongly. Analysts also believe that there is less probability of such action considering that the said JVs are currently having good order book and doing good business. Also, in FY14 the JVs are expected to contribute to overall revenues of the company and the cash flows which should start rewarding the investments made by BGR. That apart analysts also said that these JVs are strategic for BGR in terms of its positioning in the power equipment segment and future business particularly in the light of increasing competition. No wonder, share price of BGR Energy dropped from the high and closed marginally below its previous day close to Rs 200.95 per share. "We wish to inform all our stakeholders that the JVs with Hitachi are intact and we report ongoing business through these JVs. We wish to clarify the names of the companies and the equity held in the JVs which have been quoted wrongly by the financial daily, Mint in their report," says company in its press release. Over the last couple of years BGR Energy has seen significant downgrades as a result of poor industry environment. The power companies have cut their order for the new equipments. The ongoing projects are facing huge challenges, which is why the companies like BGR has been facing issues in terms of new orders and payments from the clients. "BGR's working capital has seen severe deterioration over the past few quarters from 74 days in FY2010 to 166 days in FY2012, mainly due to high receivables owing to the retention money from SEBs such as RRVUNL and TNEB, which are facing high financial strain," says Amit Patil who tracks the company at Angel Broking. Further, lower order intake and execution issues and higher working capital has compounded problems for BGR leading to higher debt in the books and liquidity issues. Under these circumstances, the market thought a stake sell could come as a big relief for the company. BGR Energy holds 74% stake in BGR Turbines Company along with 26% stake held by Hitachi Japan. Similarly BGR Energy also holds 70% stake in BGR Boilers remaining held by Hitachi Power Europe. Source: Business Standard