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India’s Markets Surprise, Back On A Blazing 1241 Point Start To Week

Banking stocks rebounded as well and shot up as the markets appeared to have partly forgiven them their recent weak net interest margin sins, or at least some of it, notably companies like HDFC Bank

By Govindraj Ethiraj
New Update
India Markets Surprise
On today’s episode, financial journalist Govindraj Ethiraj talks to Prashant Agarwal, Partner at tax and consulting firm PwC.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (00:50) India’s markets surprise, back on a blazing 1241 point start to week.
  • (01:55) India could see 7% growth, says Government economic review
  • (03:13) Reliance Industries stock hits near 3.5 year high on oil margins. What lies ahead?
  • (08:48) China’s Evergrande goes into liquidiation. The beginning or end of the problem?


NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

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Markets On Fire On Day After

There was some trepidation going into trade yesterday, given the fall in the previous week and two holidays at the start and end of the week interspersed with different kinds of global developments.

All of which, I mean the anxiety, was flung out of the window as the stock markets shot up during the day in their best session in 2 months. 

The heroes of the day were Reliance Industries and ONGC, among other stocks, both in energy and both benefiting from the jump in crude prices. Reliance alone represented 37% of the rise in the Nifty50, according to a computation by Mint.

Banking stocks rebounded as well and shot up as the markets appeared to have partly forgiven them their recent weak net interest margin sins, or at least some of it, notably companies like HDFC Bank whose stock price has been thrashed soundly in recent weeks.

The S&P BSE Sensex ended at 1,241 points while the  Nifty50, closed at  385 points, or 1.8 per cent, higher at 21,738.

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Among other longer term news, the Government has released a report saying the economy may see another year of 7% real growth in fiscal 2025.

And if that were to pan out, India could aim to be a $7 trillion economy in the next six to seven years, the finance ministry said in its report, "Indian Economy—A Review," prepared by Chief Economic Adviser V Anantha Nageswaran's office.

The Indian Economic Review, as of January 2024, is not the government's annual economic survey, which is usually presented at this time, or ahead of a Union Budget which will now happen after elections as it always does. 

Current expectations and estimates are that the year at present will also close around 7% thanks to strong domestic demand, namely, private consumption and investment.

The report says the priority areas for future reforms include skilling, learning outcomes, health, energy security, a reduction in compliance burden for MSMEs, and gender balancing in the labour force."

OIL

Now back to the stock markets and our energy segment supported by IndiaEnergyWeek.

Reliance Industries Ltd. jumped 7%, the highest in more than 3.5 years or since September 2020. 

The driver seemed to be a likely increase in margins in oil products thanks to the disruptions caused by the ongoing Red Sea crisis. Reliance could benefit from higher refining margins and profits in the region as it exports a bulk of its production.

There is some attribution to some gains on the entertainment side thanks to lower cost of potential acquisition of Disney’s India unit but that did not seem to be a consensus opinion. Reliance of course runs a vast entertainment business too. 

Russian oil supplies to India are largely unaffected by the Houthi attacks on cargo vessels in the Red Sea, because the Houthi rebels in Yemen who are firing missiles at passing ships recognise Russia’s proximity to Iran who in turn is its sponsor.

So India benefits and so does Reliance. Who said geopolitics was simple.

Refinery margins for producing gas oil over Dubai crude in Asia have risen to $25.53 per barrel from $20 per barrel a month ago, according to third party data compiled by Bloomberg.

The rally has pushed up Reliance’s valuation to 24 times one-year forward earnings. 

ONGC also benefited. The company’s stock rallied 7.9% to a record. The spurt in Reliance and ONGC also helped a gauge of energy stocks on the BSE close at a record high.

Government owned oil refining and marketing company Bharat Petroleum Corporation  reported a 73% rise in quarterly profit on Monday, helped by strong refining and marketing margins.

The company's average gross refining margin was $13.3 per barrel in the December quarter, above estimates of $10.2 per barrel, according to research house Prabhudas Lilladher with a marketing margin of Rs 3.5 rupees per litre.

In general, Crude oil prices have eased by one-fourth from their high in the December 2022-quarter.

Elsewhere in the middle east, oil retreated despite more tensions including an attack that killed US troops in Jordan and has put pressure on President Biden to retaliate.

Brent crude fell back to $83 after hitting two month highs.

Bloomberg quoted the White House saying Iranian-backed militants killed three soldiers and wounded others in a drone assault, while Tehran sought to distance itself from the attack. 

The middle east accounts for about a third of the world’s crude output but the output in itself has not been really affected at least so far which in turn explains the relatively steady prices.

It helps that non OPEC countries are threatening to hike supply even as OPEC countries want to curtail it in order to keep prices high.

Bloomberg said that refined products prices went up too, which obviously connects back to the big spikes we saw  in Reliance and ONGC stock prices. Diesel diesel futures in London gained more than 5% at one point. 

The India Energy Week energy segment..

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With the RBI tightening lending norms for banks and non bank finance companies, particularly those active in small loans, results of many institutions who fit here are being watched.

Bajaj Finance reported a smaller-than-expected 22.4% rise in third-quarter profit on Monday, as it set aside more money for bad loans.  

The company's consolidated profit after tax rose to Rs 3,639 crore (about $438 million) in the three months to Dec 31, missing analysts' average estimate of Rs 3,756 crore, according to LSEG data, reported by Reuters.  

Consolidated numbers include the businesses of the lender's subsidiaries, Bajaj Housing Finance and Bajaj Financial Securities.

Another area to watch closely is consumer products. Remember, we pointed out how companies like HUL showed little growth.

It was the same story roughly for ITC whose total revenue from operations of the company fell marginally on a year-on-year basis at Rs 17,651.85 crore.

Standalone net profit was up 13% at Rs 5,572 crore for the December quarter of FY 24 in the same quarter of the previous financial year. The results beat Street estimates, Reuters said.

The cigarettes-to-hotel conglomerate also announced an interim dividend of Rs 6.25 per share for the financial year 2023-202

And A Quick Note On Gold

India's gold imports increased 27 per cent to $36 billion during the April-December period, according to government data, reported in Business Standard.

The imports stood at $28.4 billion during the same period a year ago.

In December 2023, imports of the precious metal jumped by 156 per cent to $3 billion, as per the data released by the commerce ministry.

A rise in imports of gold, or anything, affects the country’s trade deficit.

India is the world's second-biggest gold consumer after China and the increased imports usually is seen to be feeding demand from the jewellery industry.

Evergrande Goes For Liquidation

China’s real estate giant Evergrande Group today received a liquidation order from a Hong Kong court.

Evergrande had amassed more than $300 billion of liabilities during China’s debt-fueled property boom. 

The builder was valued at just $275 million on Monday before trading in its shares was halted, down more than 99% from its peak, Bloomberg reported.

News of a liquidation in my understanding is actually good news because it signifies an attempt to begin a closure process, rather than drag the process further along. 

Evergrande’s collapse is by far the largest in a crisis that has dragged down China’s economic growth and led to a record spate of defaults by developers. 

According to Bloomberg, the liquidation will also be a test case of the legal reach of Hong Kong courts in China, where more than 90% of Evergrande’s assets reside.

Recent history does not offer any real clues as to how this could go or how successful it will be, more so given its size.

“The company has made all efforts possible and is sorry about the winding-up order,” Evergrande Chief Executive Officer Shawn Siu said in a statement. “The company will ensure home deliveries and steadily promote normal operation of the group.” It will also communicate with the appointed liquidator, he said.

Founder and Chairman Hui Ka Yan was also placed under police control in September on suspicion of committing crimes, which could complicate the proceedings.

Evergrande was the country’s largest builder by sales for a while in the last decade and  first defaulted on a dollar bond in December 2021 triggering a wave of jitters. 

China’s property market has continued to slump even after the nation introduced a slew of new measures to stem sinking prices. A Bloomberg gauge of Chinese developers has dropped 59% in the past year.

Indirect Tax Expectations

The Interim Budget is set to be presented on February 1, Thursday.

Being an interim budget, the headroom is limited but that does not mean there are no expectations.

Yesterday we spoke about potential direct tax proposals for both companies and individuals and what could or not happen.

Today, we will focus on indirect tax, which is mostly Goods & Service Tax linked though not so much as we will find out shortly.

The other area where there are expectations in general are in the area of customs.

I reached out to Prashant Agarwal, Partner at tax and consulting firm PWC and I began by asking him what were the areas one could and could not expect any announcements and of course what was the wishlist.