Sensex Opens Firm Tracking 7% Q3 GDP Growth

Wed, 1 Mar 09:30 am

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Asian equity markets are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is up 0.54% while the Hang Seng is up 0.12%. The Shanghai Composite is trading up by 0.38%. Stock markets in the US finished their previous session on a weak note.

Meanwhile, Indian share markets have opened the day on a positive note tracking economy's surprising GDP growth at 7% in the October-December quarter. The BSE Sensex is trading higher by 126 points while the NSE Nifty is trading higher by 38 points. The BSE Mid Cap index and BSE Small Cap index both have opened the day up by 0.4% & 0.5% respectively.

All the sectoral indices have opened the day in green with realty stocks and metal stocks being the top gainers on the BSE. The rupee is trading at 66.74 to the US$.

Engineering stocks have opened the day on a mixed note with Everest Kanto Cylinders and Welspun Corporation Ltd being the most active stocks in this space. As per an article in a leading financial daily, Larsen & Tourbo's (L&T) arm Larsen and Toubro Hydrocarbon Engineering Ltd has signed a 5-year Enterprise Framework Agreement (EFA) with Shell Global Solution International for Engineering, Procurement & Construction Management(EPCM) services for projects in the Middle East, South East Asia and India.

This agreement is in line with the company's strategic goals and is a breakthrough for its newly formed engineering services business vertical. The subsidiary will leverage on its core strengths of engineering and project management to deliver projects for any agreement resulting from the EFA, the reports noted.

Diversification continues to help L&T (Subscription Required) negotiate and get better terms and margins for projects. Apparently, this is because it is less desperate to win orders as compared to a company which are present in only a couple of sectors. Its reputation, extensive technical prowess, and large skilled workforce have enabled L&T to command a certain premium from customers and vendors alike. Whether, further addition to these new projects provides a cushion to its profitability will be an interesting thing to watch out for going forward.

Subscribers can access to L&T's latest result analysis and L&T stock analysis on our website.

Moving on to the news from oil & gas stocks. According to an article in a leading financial daily, the government has bailed out Oil and Natural Gas Corp (ONGC) and Oil India from a potential liability of about Rs 220 billion in royalty dues to states like Gujarat and Assam.

ONGC had to pay Gujarat Rs 83.92 billion and Assam Rs 14.04 billion in royalties for the period between 1 April 2008 and January 2014. On this amount, it faced an interest liability of Rs 28.68 billion. Similarly, Oil India had to pay the Assam government Rs 49.02 billion and another Rs 43.55 billion in interest.

However, as the central government will pay two state-owned firms' outstanding liabilities directly to the state governments, who will not insist on levy of Rs 72.2 billion interest on payments that were due from April 2008.

One must note that, ONGC and Oil India pay royalty at the rate of 20% on the crude oil produced from a state. This amount, the companies calculated based on the net price they realised after paying for Central government mandated fuel subsidies. But initially Gujarat and later Assam wanted royalty to be paid on gross or pre-subsidy price.

As per Moody's, this settlement will be credit positive for ONGC and Oil India because it removes the uncertainty over Rs 261 billion of contingent royalty liability (Subcription Required) for both companies without resulting in any further cash outlay from these companies.

Meanwhile, it was reported that expenditure on oil subsidy is expected to be increased to about Rs 300 billion in the next fiscal because of a cut in production by the Organization of the Petroleum Exporting Countries (Opec) and others.

Oil Subsidy

Moreover, ONGC, Oil India and GAIL (India) Ltd have not even shared the subsidy burden of oil marketing companies for the past three quarters because of the prices and government measures. The International Energy Agency and Opec have projected prices to remain in the region of US$60 a barrel through 2017 and go higher in 2018-20.

ONGC share price & Oil India share price opened the day up by 1.2% & 1.1% respectively.

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