Auto Stocks Lead the Gains

Wed, 13 Apr 01:30 pm

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Indian Markets continued to rally in the post-noon trading session. Sectoral indices are trading on a mixed note with stocks from the banking and auto sectors leading the gains.

The BSE Sensex is trading up 433 points (up 1.8%) and the NSE Nifty is trading up 130 points (up 1.7%). The BSE Mid Cap index is trading up 1.3% while the BSE Small Cap index is trading up by 1.4%. Gold prices, per 10 grams, are trading at Rs 29,200 levels. Silver price, per kilogram is trading at Rs 38,100 levels. Crude oil is trading at Rs 2,754 per barrel. The rupee is trading at 66.50 to the US$.

Stocks in the banking space are trading on a positive note with Oriental Bank and Canara Bank witnessing maximum buying interest. As per an article in Economic Times, the Reserve Bank of India (RBI) is planning to put in place a system wherein banks have to comply with the irregularities pointed out in annual financial inspection (AFI) within a stipulated period. The banks will face regulatory action if they fail to comply with the pointed irregularities.

In its monetary policy, the RBI said that it plans to put in place a supervisory enforcement framework wherein action against banks would be taken for non-compliance of RBI instructions. The framework is said to be formalised by June this year.

The above move is initiated to standardize bad loan recognition across all banks and to put an end to decade-old volatility in banks' earnings.

Ones shall note that the rising bad loans has been a serious concern for Indian banks, especially for the PSUs. According to RBI's website, the Indian public sector banks account for 72% of total banking sector assets, but they accounted for only 42% in total profits during 2014-15.

For this, Finance Minister Arun Jaitley had announced that the government will provide sufficient funds to recapitalise public sector banks (PSUs) to ensure that they play a significant part in boosting growth. The announcement made in the Union Budget 2016-17 was an allocation of Rs 250 billion towards the recapitalization of PSU banks. Apart from this, Rs 100 billion each will be infused in 2017-18 and 2018-19 by the government for the recapitalisation of PSU banks. In one of our editions of The 5 Minute Wrap Up Premium we had highlighted what the budget holds for the future of PSU banks (subscription required).

With all these developments one can say that the government is doing all it can to bring down the level of bad loans in Indian banks. Also, it is using its mandate as a great opportunity to unlock the untapped value from its PSU assets. If the government succeeds, then PSU shareholders could multiply their wealth in such stocks. Only time will show the practicalities that these reforms will bring.

Stocks in the IT space are trading on a positive note with Wipro and Info Edge leading the gains. In another news update it was reported that Wipro is planning to buyback its equity shares. For this, the company's board will consider a proposal for buyback of equity shares on April 20, the day of its fourth quarter results.

The current promoter holding stands at 73.35% while institutions and non-institutions hold 15.52% and 10.53% each in the company.

In a buyback, the company purchases its own shares from the market; the result of which is that the number of shares outstanding for the company is brought down. The general perception is that companies tend to buyback their shares when they are available at cheap prices.

Reportedly, an article in Business Standard states that share buybacks have seen an uptick in FY16 as the benchmark indices witnessed a decline of 10% during the same period. A total of sixteen companies went in for buybacks in FY16. The count a year before stood at ten -when the Sensex rallied by as much as 25%.

Buyback of shares allows a company to use its adequate cash to buy its own shares, thereby lowering the equity base, which leads to higher profit per share for the balance. This tends to bring about an improvement in financial ratios.

However, should investors fall for companies that announce buyback? Are these companies buying opportunities? We believe that forming your investment decisions by simply relying on the above activities can be risky. Buyback of shares can be seen as a healthy development for that particular company. However, that should be only one of the criterion that investors should consider.

Ultimately, it boils down to management integrity, the nature of the business as well as the health of the company's balance sheet. In case these are not as per one's comfort levels, investors would do well to exercise caution while investing in such companies.

Wipro is a global information technology, consulting and outsourcing company serving clients in over 175 cities across 6 continents. The company has picked up a minority stake in US-based Emailage Corporation. The company stated that it has made a strategic investment in and signed a partnership with Emailage Corporation, a risk assessment and fraud prevention company. Also, the company has entered into a five-year partnership with Jubilant FoodWorks, the country's top food service company. These developments augurs well for the company. As we had stated in our result analysis report of the company (subscription required) ... "The company's focus on these new areas as well as on productivity enhancing measures like automation will hold it in good stead."

Presently its stock is trading up by 2.2%.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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