DMK pull out triggers sell-off

Tue, 19 Mar Closing

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Indices in the Indian share market failed to recover from the jolt it suffered earlier in the day and hence closed the day significantly in the red. Thus, while BSE-Sensex edged lower by around 285 points (down 1.5%), decline in the NSE-Nifty came in at around 90 points. BSE Mid Cap and BSE Small Cap indices performed in line with their larger counterparts, closing lower by a similar margin of around 1.5% each. Nearly four stocks fell for every one that closed the day in the positive on the Sensex.

While most Asian indices closed lower today, Europe is trading mostly in the red. The rupee was placed at Rs 54.4 to the dollar at the time of writing.

Today's fall was mostly a result of DMK, one of the key allies of the ruling UPA government, opting to pull out of the Union Government. This effectively means that managing alliance partners and not the economy could now become the number one priority of the Government. The sentiments also took a beating in wake of the RBI's warning that going forward there is very little head room to lower rates and the onus will now be on the Government. This thus points towards further muddling along of the economy at least in the near term.

As per estimates, gross NPAs of 40 listed Indian banks increased substantially to Rs 1.8 trillion from Rs 1.3 trillion in December, an increase of 43% from the year ago period. Besides, loan recasts have also totalled a whopping Rs 4 trillion, including both within the CDR and outside the CDR. With 25%-30% of such loans expected to go bad, Indian banking system is clearly not in the best of health. Little wonder, the Government is taking a strict stance towards loan defaulters. The FM sent out a strong message to business owners to infuse funds into their businesses so that they can grow and repay their debts. Failing the same, strict action would be taken to recover the dues but not before ensuring that the industry is not hurt. Despite the talk by the FM, banking stocks closed lower today with Yes Bank and Oriental Bank emerging as the biggest losers.

Is the Indian power generation equipment space about to enter an era of consolidation? There are reports doing the rounds that a venture of Larsen and Toubro Ltd (L&T) and Mitsubishi Heavy Industries Ltd (MHI) is evaluating the acquisition of units set up jointly by BGR Energy Systems Ltd and Hitachi Power Europe GmbH. The BGR-Hitachi JVs currently have orders valued at around Rs 30 bn and have a manufacturing capacity of 3,000 MW each. While the companies have denied the reports, there is a lot of uncertainty around the sector and hence, with orders drying up, few of the players might be looking to exit. The supply situation is also adverse with a lot of capacities coming up in the last few years. Both Larsen & Toubro (L&T) and BGR Energy closed lower today.