Coal mines controversy clouds outlook for metal stocks

The BSE Metal index has plunged since reports of irregularities in the allotment of coal mines first appeared in the media on 22 March, causing a loss in market capitalization of around Rs.13,550 crore. The parallels with the adverse impact of the 2G scam on telecom stocks are obvious.

The Comptroller and Auditor General of India’s report has disclosed seemingly arbitrary allotment of untapped coal blocks to companies without a transparent bidding process. The report lists 57 blocks with “windfall gains” and a loss of Rs.1.86 trillion to the exchequer.

What does this mean for metal stocks? There could be several outcomes. Cancellation of coal licences may look unlikely at this juncture, but the government could well decide to auction the coal blocks and let the market discover the price. The government may also impose a royalty on companies or ask them to share revenues on a regular basis for the coal blocks already allotted. In any of these scenarios, an adverse impact on earnings cannot be ruled out, say analysts. True, all this is just conjecture at this moment, but perception is reality in the stock markets and investors sell first and ask questions later.

“The government cannot be completely blamed because there was no support from the states (for a move to a bidding process). Nevertheless, there were clear lapses, since records of meetings when the blocks were awarded are missing, which indicates that blocks were not allocated in a transparent manner and the court may look at the legality of the matter,” said Sanjeev Prasad, co-head institutional equities at Kotak Securities Ltd.

The uncertainty of the outcome will continue to prey on the stocks. Moreover, there could be further delays in awarding of projects because of a policy freeze and lack of iron ore. Telecom stocks, barring Bharti Airtel Ltd and Idea Cellular Ltd, plunged 15-90% in the year following the reports of the 2G scam and same could happen to metal stocks.

One affected stock is that of Jindal Steel and Power Ltd, down 35% since the news was out. Jindal Steel has three blocks which are named in the report and was one of the earliest companies to be allotted coal blocks. Hindalco Industries Ltd (stock down 20%) and Tata Steel Ltd (down 16%) have also been allotted coal blocks. Analysts say these stocks are being beaten down on fears of a potential adverse impact, such as delay in mining approvals or imposition of conditions which could dilute returns from the mines, according to an Edelweiss Securities Ltd report dated 17 August.

Moreover, metal stocks have already been roiled by declining global steel prices, waning demand and rising input costs. Unless regulatory uncertainty is resolved and the government comes up with a fair and transparent bidding process, it would be better for investors to stay away from this space, says Bhavesh Chauhan, analyst at Angel Broking Ltd.

Sebi Lets IDR Holders Convert 25% into Equity

Move to help investors gain from higher liquidity in underlying shares in home market 

Capital markets regulator Securities & Exchange Board of India has allowed the conversion of 25% of Indian depository receipts (IDRs) of a company into underlying overseas listed equity shares in any financial year,following a promise made by former finance minister Pranab Mukherjee.

The fungibility of these IDRs may help investors take advantage of higher liquidity in the home market such as London for Standard Chartered Bank,the lone IDR listed in India.It could also lessen the price differential of the IDRs in the Indian and London stock markets.

Sebis latest move may not have much of an impact as the market for IDRs is still at a nascent stage with StanC IDR being the only listed one, said Chokkalingam G,CIO,Centrum Wealth Management.I dont think the market had a lot of expectations on the extent to which fungibility would be allowed. During the presentation of the Union Budget for FY13,former finance minister Pranab Mukherjee had said that he would allow two-way fungibility of IDRs subject to a ceiling following complaints that the market depth for IDRs was not sufficient.Standard Chartered IDRs gained 20% on the Indian stock exchanges the day it was announced.On Tuesday,it was down 1.2% at.95.25 on the BSE.The regulator had declined to permit twoway fungibility saying that there was not enough trading volume in Standard Chartered IDRs and it would take a call on conversion after observing trading for a year.But the market reacted adversely to the regulators decision forcing the then finance minister to yield to the demands of investors.

Controlling inflation will lead to interest rate cut: RBI

If inflation is controlled, it will automatically bring down interest rates, says RBI Deputy Governor K C Chakrabarty. He adds, the major focus should be on increasing productivity and efficiency of manufacturing and agriculture sectors to achieve this.

Speaking on the sidelines of financial conference on systemic risk, organised by Great Lakes Institute of Management, near Chennai, he said the country was facing three challenges — high inflation, current account deficit and fiscal deficit.

“To check food inflation, we don’t need to achieve the productivity level of developed countries, like the US and Australia. If we can replicate Punjab, Haryana and West Uttar Pradesh, it is sufficient”.

Countries like India and China cannot afford to import food. If they go to the global market for procurement of food, the prices will shoot up.

The second factor, manufacturing inflation, needs to be negative and to achieve this, technology should be adopted. “If we can produce same quality goods and services at lower price, which China does, we can achieve this.”

In India, manufacturing as a proportion of gross domestic product is low and investment in manufacturing sector would create employment opportunities.

This would help offset likely losses in employment in the event of foreign direct investment (FDI) in retail.

If FDI in retail comes, it will cut down number of intermediaries who have to be employed in other sectors. If you don’t employee them, the likelihood of demographic dividend will turn out to be demographic disaster.

If we could manage to curtail imports of gold and oil, we can check current account deficit. “Had we not imported $60 billion worth of gold last year, our current account would have been in surplus”.

In the case of fiscal deficit, he said, “Government should target subsidies at poor and ensure that rich are not subsidised”.

About inclusive economy, he said, the banks should reach out to poor and should extend credit facility to those who require it. Today only 10 per cent of the people have access to bank credit, he said. “The poor save and rich borrow, which will raise the systemic risk,” he said.

“We also have strong points, which could work in our country’s favour,” said Chakrabarty. He said, these include the country’s young population, lower per capita income (which offers immense scope for improvement), less complex financial system and lower credit penetration. The strong saving culture of India is also a plus, he said.

Why have gold prices shot up again?

Gold prices have climbed to an all-time high in India even though physical demand for the metal has declined. Recent reports by the World Gold Council suggest imports to India have dropped in the past fiscal. So why are prices rising again?

In the past week, investors wagered that gold would benefit from a pool of easy money amid hopes of another round of liquidity injection by the US Federal Reserve. The rally in gold prices globally was buoyed by a rise in the euro against the dollar. Also, compared with the international markets, gold prices in India have seen a sharp uptick because of the depreciating rupee.

Spot gold prices on the Multi Commodity Exchange of India closed at a record R

s.30,716 per 10 grams, up 13% year-to-date last Friday. Even the rupee snapped three sessions of gains and ended at 55.50 per dollar. Central banks around the world have also accelerated their allocations to gold to 158 tonnes in June quarter, highest since they became net buyers in the second quarter of 2009 to protect themselves from ravages of inflation and economic storm, according to a council report.

Non-official gold imports to India continue to remain intact despite efforts by the government to curb them by raising tariffs. Emkay Global Financial Services Ltd, in a 24 August report, pointed out that non-official gold import such as coins and bars climbed 36% year-on-year in 2011-12 according to the balance of payment data, while the council reported a 15% decline in demand as it does not reflect non-official gold imports completely. The note added, “Both correlation and elasticity between physical gold imports and prices turned positive during FY08-12, which indicates rise in demand at higher price levels.”

The same old reasons have gilded the allure of gold as a safe-haven asset—hedge against inflation, strong income effect and expansion in black money. Gold traders said there was a slight pick-up in physical buying in August because of the onset of the festival season. N.S. Ramaswamy, head of commodities at Ventura Securities Ltd, said, “Even physical buying and selling of scrap gold has increased in the past week because of the global sentiment.”

Gold investment demand continues to remain buoyant in India since equity markets are volatile. Lalit Nambiar, fund manager and head of research at UTI Asset Management Company Ltd, who manages a equity plus gold hybrid fund and has allocated 29% to gold, said, “Gold should be there in the portfolio for risk protection, investors would have already got the benefit of a weak rupee and surge in gold prices in the past six months.”

The worry for gold investors has always been that, with prices already so high, the contraction in disposable incomes due to sluggish economic growth may deter some buying. So far, however, the yellow metal has worked like a charm as a hedge against inflation.

Sarvesh Sharma/Mint

Growth may be back on track next year, says RBI

The positive intent shown by the government recently on key reforms such as foreign direct investment in key sectors such as insurance, retail, aviation and urban infrastructure seems to have enthused the country's central bank.

In its annual report released on Thursday, the Reserve Bank of India (RBI) said while the economic growth scenario was still gloomy, there was a ray of hope that growth would pick up later in the year. That hope, of course, hinges on how fast the government delivers on its promises.

RBI Governor Duvvuri Subbarao said the government's promises made in August 2012 should result in growth picking up by the end of the financial year and return to the trend rate in 2013-14. Subbarao, who was appointed by the new finance minister, P Chidambaram, in September 2008 when the country was fighting the contagion of the global financial crisis, will demit office after one year.

"The government in August 2012 has promised to take several steps to address macroeconomic weakness. As these steps materialise, growth could gradually start improving later this year and the trend growth can be restored next year," the RBI said in its annual report. For 2012-13, the RBI projects 6.5 per cent economic growth while inflation is expected to stay sticky, around seven per cent.

In Subbarao's prescription, sticking to the fiscal and subsidy deficit target is top priority. However, based on current indications, the RBI feels fiscal targets will again be missed this financial year if immediate remedial measures such as sticking to the subsidy cap and the envisaged large tax buoyancies are not effected.

As there is limited scope for fiscal and monetary stimuli, the central bank has suggested an expenditure switch policy, which will reduce revenue by cutting subsidy and use the resources released to beef up public capital expenditure.

"This (expenditure switch) would provide some space for monetary policy, but lower interest rates alone are unlikely to jump-start the investment cycle," the RBI's annual report said.

The central bank highlighted the need to address the twin deficits - fiscal and current account - to contain risks to macrofinancial stability. "The current assessment suggests they are likely to stay wide in 2012-13 in the absence of a sufficient policy response and no improvement in the business cycle conditions," it said.

The RBI said debt capital inflows, norms for which were relaxed in recent months to arrest the rupee slide, were not permanent in nature and had a long-term cost for debt sustainability. The central bank also suggested the adoption of the Singapore model to make doing business easy. The model entails stakeholders and ministers sitting together to quickly give a decision on clearing investment projects.

Govt Plans New Law to Regulate Watchdogs

To bring their expenditure under CAG ambit & make them directly accountable to Parliament 

The government plans to introduce a law to regulate sectoral regulators,such as TRAI and CERC,that will empower it to merge regulatory agencies and issue instructions to them on a wide range of issues,possibly undermining the independence of these statutory bodies.The law will seek to bring the expenditure of regulators under the scrutiny of the Comptroller and Auditor General (CAG) and make them directly accountable to Parliament.The Prime minister had in his 2011 Independence Day speech announced that the government intends to enact a law to monitor regulators.The Planning Commission has drafted a cabinet note and sent it to the PMO,said a senior government official.A PMO official,however,said no such file was being discussed here. The Regulatory Reforms Bill,2012,will apply to all infrastructure sectors like telecom,electricity,airports and ports that already have an existing regulator as well as coal,railways,posts,oil and gas,mass rapid transit systems,water supply and sanitation that don't have independent regulators yet.It will not cover financial services regulators such as SEBI and IRDA.It seeks to create an overarching regulatory framework to enable competition and protect consumers access to affordable and quality infrastructure.We need to streamline regulation processes and methods,including rule-making and dispute resolution, said the official.Different regulatory bodies have varying approaches to the core regulatory tasks of setting tariffs or user charges and enforcing service quality standards laid down for operators.The law proposes independent regulators in sectors that dont have regulatory bodies,at the early stages of the reform process.It also aims to lay down a common philosophy for infrastructure watchdogs to incorporate lessons learnt and global best practices while ensuring legislative and financial accountability.A controversial provision in the proposed law relates to a clause that empowers the government to issue directions to a regulatory commission with prior approval of the concerned minister and the Prime Minister. Such directions would eventually also be tabled in Parliament.Laws that govern regulators generally allow the government to issue diktats only in situations that involve interest of sovereignty and integrity of India,the security of the State,friendly relations with foreign states,public order,decency or morality. Both present and former heads of regulatory bodies are uneasy about the prospect of this bill giving the government an opportunity of interfering in their work and diluting their autonomy.The civil aviation ministrys decision to replace the former Director of General of Civil Aviation,Bharat Bhushan,under controversial circumstances has widely been perceived as an example of the government using strong arm tactics to muzzle a regulator.The DGCA 

will not fall within the purview of this bill.If watchdogs are treated like this,seeking prior approval from the PM for diktats to regulators would be a matter of rubber-stamping, said an infrastructure regulator,who added that this may make the PM answerable for any directives that distort fair-play or favour an operator at the cost of consumers.If the government tries to use these powers to give sweeping or case-by-case directions to us,we will be forced to legally challenge them, said another regulator who didnt want to be identified.A former chairman of telecom regulator TRAI said that the idea of introducing the Prime Ministers supervision over administrative ministries was comforting but not sufficient to discourage misuse of the provision.The power to give diktats must be limited to specific cases of public interest, he said,requesting not to be identified as he hadnt yet read the draft bill.Experts have also slammed the proposal.The original logic for creating independent regulators was to reduce ministers' discretionary powers and bring a rulebased approach into critical sectors, said Parth Shah,president of the Centre for Civil Society.Now to say that ministers can direct regulators defies that logic and seems to be the government's way of backtracking on the basic idea of liberalisation as it can't dissolve regulatory bodies. This will undermine independent regulators and be counterproductive to the growth of infrastructure sectors,marking a return to the old days of licence raj, Shah warned.As per the proposed law,all infrastructure regulators shall submit to the government an annual report of their performance as well as an annual plan of intended outcomes at the commencement of each year.The government shall table them in both Houses of Parliament.Annual plans proposed by regulators would be open for consultations with government,consumers and stakeholders before they are presented in Parliament.Regulators would draw their finances from administrative ministries budget demands,with allocations to be fully transferred to the regulator as soon as they are approved by Parliament.The CAG would audit the annual expenditure of regulators.The regulatory reforms bill proposes a fixed tenure of four years for members of regulatory bodies,though existing chairpersons and members will get to stay in office till the expiry of their current tenures.

Regulators Must Be Accountable 

It is a good idea to make regulators accountable.But it is strange that the proposed bill leaves financial sector regulators outside its ambit.The government makes laws and policy.Once these are made,their articulation should be left to regulators,whose autonomy can be ensured only if they are made answerable to Parliament.While the regulators can be appointed by the government,they should be confirmed by appropriate committees of Parliament.The regulators should mobilise their resources and their accounts should be audited by CAG and placed before Parliament.

Is TINA Factor Driving the FMCG Stock Rally

BSE FMCG index has risen 25% in the past six months vs a 3.3% drop in Sensex 

Shares of branded electrical equipments maker V-Guard Industries hit a record high of.444.5 on the BSE last week on Friday.On the same day,the stock of another small-sized FMCG company Bajaj Corp also touched a record high of.173.60.VGuards stock price has doubled since June while that of Bajaj Corps has risen 48% since July.The stocks of several small-to-medium FMCG companies such as ice-cream maker Vadilal Industries,instant coffer &tea maker CCL Products,tea producer Mcleod Russel,personal care products maker Emami,household products maker Jyothy Labs and pizza retailer Jubilant Foodworks have also risen similarly.And it is not that this rally has been restricted only to the smaller companies in the branded consumer goods segment.Even the FMCG biggies have gained in recent months.The stocks of 16 of the 20 leading FMCG majors have hit record highs in the past five months.Outperforming the broader market indices the BSE FMCG index rose 25% in the past six months -- against a 3.3% drop by the Sensex.The 10-member index had no losers and Godrej Consumer Products emerged as the top gainer with its stock rising 45.6%.Companies such as HUL,ITC,Marico and Tata Global Beverage have registered gains ranging between 13% and 30% during the same period.The ET FMCG Index has been overvalued since 2010.In 2010,the index was trading at an average price-to-earnings (P/E) multiple of 29.1 the highest till then.It has only been rising further since then to 31.6 in 2011 and 32.04 in 2012.So,is this investor fancy for FMCG stocks a case of irrational exuberance on account of the strong performance of these companies quarter after quarter at a time when companies from many sectors are struggling.Or is it a re-rating of these stocks due to improved quality of their earnings driven by the Indian consumption story Or is it a clear case of there is no alternative It is probably a combination of all three.One of the major reasons for the sectors outperformance is that investors have little choice in the current environment of slowdown in growth,uncertainty over reforms and high interest rates.No doubt the valuations of FMCG stocks are stretched,but investors are constrained to remain optimistic about other sectors, says G Chokkalingam,chief investment officer,Centrum Wealth Management.None of other major sectors like auto,IT,capital goods,real estate,metals,shipping and cement are doing as well.The FMCG sector has reported a strong performance in the June quarter with aggregate net sales of leading 27 FMCG companies growing by over 13% over the previous year and the operating profit rising by 28.7%.This further reinforced investor confidence in the sector.Despite headwinds such as deficient rainfall,high inflation,economic slowdown and a slow down in discretionary spends casting a shadow on the prospects of FMCG companies,investors are chasing them owing to limited investment options.Till the economic slowdown persists and investors dont have any attractive alternative to park their funds in,the interest in FMCG stocks is likely to continue, points out Jagannadham Thunuguntla,strategist and research head,SMC Global Securities.Once the market starts seeing signs of revival in growth and hopes of reforms intensify,investors will start booking profits in FMCG stocks.However,this does not mean that they will also fall in the same measure as their rise.A certain amount of re-rating has taken place,which is bound to sustain even when the markets head northwards.For instance,HUL has to report a significantly bad performance in the coming quarters for its stock to slide back to the pre-rally level of.381 from.503 now.There are,of course,factors like a drop in rural demand,reduction in discretionary consumption,high inflation pushing up raw material prices and rising competition threatening the growth prospects of FMCG companies.But,if economic growth picks up,may recede.

Wall St Slips as Investors Take a Breather 

NEW US stocks edged lower on Monday as investors took a breather after Wall Street posted six consecutive weeks of gains.In addition,the ECB threw cold water on hopes for further easing soon to stimulate the economy.Limiting market losses was Aetnas acquisition of Coventry Health Care for $5.6 billion."Following six straight weeks of gains for the S&P 500 and Dow industrials,stocks enter the new week in an overbought condition,"said Bruce Bittles,chief investment strategist at Baird.The S&Ps 500 was down 2.57 points at 1,415.The Nasdaq Composite was down 7.64 points at 3,069 at 2114 IST. Reuters

Sebi board clears norms for e-IPOs, incentives for MFs

The Securities and Exchange Board of India (Sebi) board has approved a wide range of comprehensive reforms to revamp the primary markets. Sebi has announced sweeping changes to boost mutual fund industry growth and issued norms for e-IPOs too.

Addressing the press, Sebi Chairman UK Sinha said that the market regulator will ensure a minimum lot of shares for retail investors in IPOs and approves e-IPO procedure for electronic bidding in public offers.

Sebi has also made it mandatory for all listed companies must have a minimum 25% public shareholding by June 2013. The move would force many controlling stakeholders to decrease their shares.

However, it has deferred decision on safety net for retail investor. Sebi has allowed mutual funds flexibility in using expense charges. It adds that the steps are taken to expand market reach. Sebi will set up committee for a national mutual fund policy and has sought tax incentives in equity funds under Rajiv Gandhi Equity Savings Scheme.

Key takeaways

• 20 bps to be added to total expense ratio
• Service tax on MF schemes to be charged to investors
• To set up product labelling mechanism for MFs
• Additional disclosures to be made by AMCs
• AMCs to disclose more on fund inflow data
• To recommend RGEs to govt to make it available to equity MFs
• To ask govt to okay MF eligible under Rajiv scheme
• SEBI clears details for e-IPO
• Long-term growth strategy needed for MFs
• Aim to ensure all IPO applications filed via ASBA
• All IPO applicants must get minimum allocation of shares
• Minimum IPO application limit hiked to Rs 10,000-15,000
• e-IPO facility to be available at 1,000 points initially
• Bonus, right shares eligible for 25% public float norm
• Can decide public float norm on case-to-case basis
• To set up self-regulation body for MF distribution
• No need to file new DRHP if issue size changes up to 20%
• Compulsory book build issue to have 75% for QIBs
• Board approves criteria for rejection of share offer docu
• Non-retail investors cannot cut, withdraw IPO bid
• Non-retail investors can enhance IPO bid price, size
• To cap general corp purpose fund raising at 25% of IPO
• To regulate investment advisors who levy fees
• Standardised disclosure formats for debt issues
• Minimum profit norm for IPOs at Rs 15 crore
• Price band to be disclosed 5 days before IPO opens
• Service tax on MF investor will not be over 2-3 bps

Gold demand fell to its lowest level in more than two years in the second quarter, the World Gold Council said on Thursday,

Gold demand fell to its lowest level in more than two
years in the second quarter, the World Gold Council said on Thursday,
as a drop in buying in major consumers India and China outweighed a
record quarter for central bank purchases.

Overall gold consumption fell 7 percent or nearly 76 tonnes to 990
tonnes in the three months to June, its lowest quarterly level since
the first three months of 2010, the WGC said in its quarterly Gold
Demand Trends report.

Jewellery and investment demand both fell substantially. Jewellery
consumption was down 72.3 tonnes at 418.3 tonnes, while investment
fell 88.3 tonnes to 302 tonnes.

The WGC's managing director for investment research, Marcus Grubb,
said he still expected demand growth in the full year but that
forecast was heavily dependent on gold-friendly policy moves from
central banks and a recovery in Indian demand.

"The real wild card is India. It depends how weak the latter part of
the year is and/or how much of an improvement we see," he said. "It
also depends on what happens from a macro perspective between now and
the end of the year to catalyse more buying.

"The obvious one would be a Greek exit from the euro zone," he said.
"It also depends on how things pan out in North America and whether we
get a policy response of more quantitative easing in North America and
Europe.

"In that scenario, you would see gold demand higher than last year. In
a scenario that is more benign, where we don't have a major event by
the end of the year, and India improves (only) a bit, it will be very
close to last year."

Investment and jewellery demand from consumers in India, the world's
number one gold market, plummeted 38 percent to 181.3 tonnes in the
second quarter. Buying has been hit by a hike in import duties and
record-high local prices due to a weak rupee.

"It's probable that the rupee will have a better second half, and that
might stem some of the decline in gold demand," Grubb said.

"Also, you have a seasonally stronger period for gold demand because
you have Diwali and other festivals," he added. "So we're forecasting
a better second half but still a very challenging environment in India
for gold."

Grubb said the WGC expected Indian demand to fall to 650-750 tonnes
this year from 933 tonnes in 2011 and Chinese demand to rise 10
percent to 850 tonnes.

"We're predicting that for the first time ever, China will be the
largest gold market in the world for the full year," he said.

CHINESE DEMAND FALLS

In the first half Chinese demand also fell 7 percent to 144.9 tonnes.
A slowdown in economic growth and a lack of clear price direction in
gold was behind the drop, the WGC said.

"This is the first negative quarter we've had in China in a long time,
but again we think this is linked to broader economic issues in China
rather than the gold market in particular," Grubb said.

Jewellery and investment purchases in the United States fell 17
percent to 34.2 tonnes, the same offtake that was seen in Germany
after a 51 percent jump in coin and bar investment. European Union
demand was a rare bright spot, rising 11 percent to 86.4 tonnes.

European buying has increased as consumers have sought refuge from the
euro zone debt crisis and its impact on the single currency, which is
down 5 percent against the dollar this year.

Grubb attributed a drop in U.S. demand to a stagnating price
environment. Spot prices had a lacklustre second quarter after a more
buoyant start to the year, trading at an average $1,612 an ounce,
their weakest quarter in a year.

"When the price has been in a range for this length of time, nearly 12
months, for investment products in particular, that does take the
market off the boil," he said.

"Investors will hang fire until they can see a clearer picture of how
the next price trend is going to develop. That is true in China of
investment products, and in America as well."

Official sector purchases of gold more than doubled, meanwhile, to a
record 157.5 tonnes in the last quarter, with Russia, Kazakhstan,
Turkey and Ukraine all announcing a rise in bullion reserves in that
period.

"If you look to the half-year, central banks have bought 254 tonnes
against 200 tonnes for the half-year last year," Grubb said. "At this
rate, we'll be looking at a record central bank year, higher than last
year, which was a record since 1964."