IT Stocks Lead the Losses

Tue, 14 Jun 01:30 pm

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Witnessing marginal movements since the start of the day, the Indian indices have continued to trade on a flat note during the post-noon trading session. Sectoral indices are trading mixed with stocks from the IT and energy sectors leading the losses. Realty stocks are trading in the green.

The BSE Sensex is trading down 48 points (0.2%) and the NSE Nifty is trading down 17 points (0.2%). The BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap is trading up by 0.6%. Gold prices, per 10 grams, are trading at Rs 30,326 levels. Silver price, per kilogram, is trading at Rs 41,241 levels. Crude oil is trading at Rs 3,242 per barrel. The rupee is trading at 67.22 to the US$.

Stocks in the banking space are trading on a positive note with Oriental Bank and Union bank leading the gains. Banking stocks are in the limelight as the Reserve Bank of India (RBI) has announced a scheme for sustainable structuring of stressed assets (S4A).

The scheme allows domestic lenders to convert up to half of the loans held by corporate borrowers into equity or equity-like securities. Under this scheme, banks can split the overall loans of struggling companies on sustainable and unsustainable basis. The split of loans will be based on the cash flow of the projects. The amount of loan that current or predictable future cash flow could sustain will be considered as sustainable and would be called Part A. The remaining amount, or the Part B, can be converted into equity or convertible security.

The move is intended to help restore the flow of credit to crucial sectors such as infrastructure and iron and steel, among others. It also aims at reducing the stress on corporate borrowers and resolve the issue of bad loans across banks. The implementation and proper regulation of this scheme will bring in the much needed relief to the banking sector.

One shall note that bad loans across the 40 listed banks in India increased to Rs 5.8 trillion as of the end of March 2016. This was as against Rs 4.38 trillion recorded at the end of December. This hit the profitability of many banks during the fourth quarter ended March 2016, mainly public sector banks. Also, to counter the issue of rising bad loans, Prime Minister Narendra Modi has made repairing bank balance sheets his administration's top-most priority. Tanushree Banerjee, co-head of research at Equitymaster, has explained how banks have accumulated NPAs worth billions of rupees in one of the editions of The Equitymaster Research Digest (subscription required).

In another news update, India has exported over 1.6 million tonnes (MT) of sugar so far in 2015-16 marketing year that started from October last year. As per data provided by Indian Sugar Mills Association (ISMA), this 46% higher compared to 1.1 MT of sugar exported in the 2014-15 marketing year (October-September). The ISMA, however, stated that sugar production is estimated to decline to about 25 MT in 2015-16 marketing year, as against 28.3 MT in the previous year.

India is the second largest producer and the top consumer of sugar.

Last week, the Food Ministry proposed to levy 25% customs duty on sugar exports. This was levied in order to maintain local sugar supplies that are going to decline due to a drought in major growing regions. Reports released early this financial year had stated that the output of sugar is projected to be the lowest in five years in FY17 due to two consecutive years of drought. One shall note that many parts of India are going through a water crisis on the back of below normal monsoons for two consecutive years.

Presently, drought conditions have hit consumption levels in rural markets. The most affected is the FMCG sector where the companies are eyeing rural consumption to fuel demand. India thus needs to focus on drought mitigation measures that would solve the problem for the long-run. For this, more water storage facilities need to be added. As Vivek Kaul, editor of Vivek Kaul's Diary, states that lack of water storage facilities is the real problem for water shortage across the country.

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