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Shalimar Paints Q1 results: Net loss widens to Rs 11 crore

NEW DELHI: Shalimar Paints Ltd on Tuesday reported widening of its consolidated net loss to Rs 10.61 crore for the first quarter ended June 2020 as its performance was significantly affected due to COVID-19 pandemic and lockdown.

The company had posted a net loss of Rs 5.35 crore in April-June quarter a year ago, Shalimar Paints said in a regulatory filing.

Its revenue from operations declined 47.70 per cent to Rs 44.48 crore during the quarter under review as against Rs 85.06 crore in the year-ago period.

The company was significantly affected due to COVID-19 and lockdown announced by the Central and state governments, Shalimar Paints said.

“The company has two segments – decorative, which is mainly for residential paints, and industrial, which is mainly for commercial and manufacturing paints.

“While both the businesses were impacted…residential business has started to recover faster. This may be due to completion of ongoing projects or re-painting jobs in semi-urban areas,” the company said in a post earnings statement.

The company’s sales were limited in Q1 FY21, and with most of the cost, other than raw materials, being of fixed nature, the reduction in sales revenue impacted the bottom line significantly, Shalimar Paints said.

The company’s total expenses declined 36.82 per cent to Rs 57.70 crore as against Rs 91.34 crore a year ago.

“We, at Shalimar, are even more firm now turning the tide and getting better results in coming months. Towards that end each and every operation is being streamlined and costs being pruned to the lowest possible level,” Shalimar Paints Managing Director Ashok Kumar Gupta said.

Shares of Shalimar Paints on Tuesday closed 1.22 per cent lower at Rs 68.55 on the BSE.

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Stock Market

ONGC Q1 results: Dismal performance, new discoveries & other key takeaways

Mumbai: State-run Oil & Natural Gas Corporation witnessed a tough June quarter as Covid-19 wrecked havoc for crude oil and gas prices. Analysts say the dismal show will continue for now.

Analysts had expected a dismal show and the stock price reflected the same as it dropped 3.3 per cent to Rs 79.35 ahead of the earnings announcement.

Consolidated profit slumped 84.7 per cent, while revenues shrank 43 per cent. The only silver lining, if one, was that the exploration and production (E&P) major has notified three discoveries — two pools and one prospect — after the end of the quarter, taking the total discoveries to six in fiscal year 2021 so far.

That said, let’s run a fine comb through the numbers and see what are the key takeaways for the shareholders and if they promise good prospects ahead.

How much did the company earn?
ONGC reported a 84.7 per cent decline in consolidated net profit for the quarter ended June to Rs 1,090 crore. The oil and gas major had reported a net profit of Rs 7,120 crore a year ago.

What was the revenue like?
Its consolidated revenue from operations dropped 42.9 per cent to Rs 62,496 crore from Rs 1,09,546 crore a year ago.

How did Covid-19 impact its business?
The company said its revenue and net profit have been impacted by lower crude price realization in the wake of Covid-19 fall out in the global oil and gas industry as a direct consequence of adverse price movements in global crude prices. Lower gas prices also contributed to lower topline and bottomline.

What are the key positives to look forward to?
After June 30, ONGC has notified three discoveries — two pools and one prospect — taking the total discoveries to six in FY 2020-21 so far.

By how much did realizations drop?
Its realizations for crude oil price from nomination fields dropped by 56.7 per cent to $28.72/bbl, while those from joint venture fields declined 55.7 per cent to $29.60/bbl. The gas price dropped to $2.39/mmbtu, down 35.2 per cent from a year ago

Investment Implications

Jyoti Roy, DVP – Equity Strategist, Angel Broking, said the June quarter numbers were along expected lines.

“For ONGC, the next few quarters are going to be subdued. Q2 is going to be better than Q1 though, as realizations may have picked up,” said Roy, adding that even though it has no coverage on the stock, it does not expect the stock price to rally significantly from the current levels.

“We are avoiding E&P companies for now, as crude demand is expected to stay subdued for some time,” he said.

Current valuation of the stock
As of Tuesday, the stock traded at Rs 79.35, commanding a P/E of 7.5 times on an EPS of Rs 10.51. Analysts reports released before this quarter earnings saw the stock attractively priced. The stock has 12 strong buys, 9 buys, 5 holds, 2 sells, and 3 strong sell ratings, data from Reuters Eikon showed. Their price targets had a mean and median of Rs 100.87 and Rs 98 respectively.

Its peer Oil India quoted a P/E of 5.98 times, suggesting a slight edge for ONGC over its rival.

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Stock Market

agr verdict: Post AGR ruling, telecom tariff hike inevitable: Sanjay Kapoor

Given an opportunity, everybody would like to get their ARPUs up by raising prices, says the telecom expert.

Over 10 years, everybody, especially Vodafone Idea will have to raise a serious amount of capital via the debt route or the equity route or they will have to consider a price hike to pay the AGR dues. What is your view?
Definitely the verdict is onerous and a 15-year or a 20-year time period would have been more palatable. But obviously even a 10-year does not bring a death knell today. It gives an opportunity for an operator to look at the next 10 years and work out what he wants to do and it is also probably good for the government because rather than writing off all the dues today, there is a fair chance that they will get it over 10 years.

Let us come down to the dynamics of the business. Obviously, the business that Voda-Idea is running requires a lot of cash infusion both to remain contemporary and competitive in the market place on current technologies and then to start planning about the future transformation into 5G and other technologies.

Both require tonnes of cash to sustain yourself but it also gives you an opportunity to reposition yourself because with the dynamics that prevail in the market today, Voda Idea does not seem to be contending for the number one position. If you do not contend for the number one or two position, but want to be amongst the top three players in the market, then there could be a more truncated strategy to follow.

Here the companies can go for lesser costs, raise prices and then choose the geographies where they want to deploy the cash and abstain themselves from areas that do not want to compete in. Those flexibilities will now come to turn though the caveat here is that when you look at the global scenario, the third player, even in high ARPU countries, really struggles for survival and does not make too much money.

But any situation for Voda Idea right now is better than the situation yesterday where there was a chance that they would have to shut shop today. At least that is not happening.

Rates going up in the Indian market is inevitable — be it Voda-Idea or Airtel or even Jio for that matter. Given an opportunity, everybody would like to get their ARPUs up by raising prices because to be serving 30 GB of data or at an average consumption 16-17 GB of data and realising less than Rs 200 for that cannot sustain any type of telecom business globally.

It is just a respite from closing down today but they will really have to work out their strategy and get funded either by debt or equity. To me, equity seems a bigger possibility than debt because it is a risk return ratio at the end of the day and there might be somebody who could be looking at an upside from there because of the current valuation of the company.

How inevitable is a price hike now? If a price hike comes through, Vodafone Idea will survive but Reliance and Bharti actually will hit a jackpot.
Yes a price hike was inevitable without this judgement. Now it makes it more imperative and they will definitely have to get more revenues from the same customers to survive and the supplies to Airtel as well. Why would Jio not want to raise prices? They are a debt free company. If they can get more revenues, their values will multiply many times. They have the advantage of a network because they have invested behind 4G and can further enhance their capability.

The entire fight between the operators who are left will be on the experience of the customers rather than on price, because price will bring in respite to all of them and it is survival for some and strategies for some. Price hike is absolutely inevitable in a market given that 5G is staring at you. We are postponing 5G by a year but we cannot postpone it indefinitely.

If we want to get there, we have to know what it takes to do a 5G. We will need a fiberised network and we will need a 100 MHz of spectrum. We will need used cases and customers who can pay up for those used cases. It is not a simple equation to solve. Let us see but the price alone, Voda Idea will have to get some equity infusion from somewhere to bridge their capability building on the network and be competitive in the market.

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Stock Market

Market near peak, likely to trade in a range for some time: Nitin Raheja

The after effects of this moratorium and the impact that we are going to see on the balance sheets is going to play itself out, says the Co-Founder of AQF Advisors

Last week it appeared that banks had stabilised. But now it looks like it is back to square one. After five-seven days of good gains, banks are getting bashed up again.
I am afraid that is going to be a trend that we will continue to see in the market for some time. At one level, whenever the market moves up a lot, people start looking for sectors where they feel that they will get value but do not forget that the entire banking and financial sector yet has a long way to go. The after effects of this moratorium and the impact that we are going to see on the balance sheets is going to play itself out. The economy is at a far slower growth rate and there is no credit growth. Banks will see intermittent nervousness whenever some sort of broader nervousness creeps into the market. They will be the favourite places which investors will look to sell out of.

Why did the banks get hammered yesterday?
With the kind of rise that we have had, we will see these kinds of profit booking. But my own view also is that one of the factors that is probably playing itself out is that come tomorrow, you are going to have new margin norms that are coming into play for brokers where clients will have to pledge shares or they will have to put margin upfront.

Now if you match that with the NSE data, the share of retail of so called non-corporates, non-FIIs, non-DIIs has actually gone up from 47% in the trading volumes to 54% which is in line with the fact that there has been so much of retail interest that has entered the market in the last five months in the current year. There is a possibility that this new norm could be causing a little bit of selloff of pressure because now you have to actually put margins upfront and there could be readjustments taking place and that could be one of the reasons for the sell off yesterday.

Are we in a phase where the margin requirements or the new margin laws are going to change things and could push back mid and smallcap stocks decisively?
I do see some sort of correction happening. Now to what extent is that correction going to be there it is very difficult to call because I am just trying to tie in two ends that a) the fact that retail participation has gone up; b) midcaps have gone up and generally speaking we find that the retail participation happens a lot in the mid and the smaller cap names. With this margin compression, it will take some time for investors to start readjusting the way they work and even brokerages are trying their level best. They have been sending out mailers to people to create a more seamless mechanism where the client can put pledges for shares and then unpledge them and so on and so forth.

But against that, do not forget that I do not really expect a sizable correction to take place for the simple reason that you are sitting on put on the markets where at lower levels you are going to find interest coming in from the FIIs and the DIIs. I do not see the markets correcting a lot but they could have these intermittent corrections and some of them could mean that the cuts could be like what we saw yesterday in some of the pharma or the chemical names because that is where people have made a lot of money and that is where they are seeing the maximum pressure.

Even the pockets that have been running up quite consistently like pharma and IT and some of the other broader market trends all got a rub-off effect yesterday.
According to me, this is more of a technical selloff related to the new margin norms coming into play possibly. Also do not forget that because the selloff is happening in spaces and sectors like the midcaps which have seen very deep cuts, those traditional areas have seen retail participation at the highest.

Also some of these midcaps have seen a tremendous run-up. People are trying to sell somewhere to raise some margin. They are looking at where they are sitting on big profits and hence you are seeing the big difference between the Nifty and the midcap index.

As we rollover from Q2 to Q3, do you think this market for this year is pretty much near its peak, plus minus 500-600 points on the Nifty and we are not in for a strong acceleration till December?
Pretty much so. From a fundamental perspective, the market is probably close to its peak, like you rightly said 500-600 points here. Given the fact that most corporates are now only talking about closing stages of 2022 coming back to where they were from a run rate perspective. Given all that, within the market, there will be pockets which will probably be much higher from where they are. With liquidity being so loose, that could upset the calculations. But yes, from a pure fundamental perspective, we are pretty much there and we will probably trade in a range for some time.

What is your view on ITC?
My view is that ITC has been run all these years like a closed club. It generates and sits on huge amounts of cash. It had invested in businesses which have not given returns anywhere close to what the cigarette business does. Its FMCG business is large from a perspective but look at the kind of money that it makes on it. The hotel business again is capital intensive, does not give anywhere close to the ROA. So you have a business where there is a large cash generating business on which your return on equity and return on capital can be huge but you do not distribute that cash. That cash is deployed in businesses which have so far not given even remotely close to earning the cost of capital. It is sitting on huge amounts of cash and so I think it has been a very shareholder unfriendly company and precisely for those reasons, it does not get valued.

Of course, the cigarette business is a favourite whipping boy. Every time, the government wants to garner some revenues, it raises taxes on cigarettes. So it continues to disappoint. From a valuation perspective, it is attractive and it has got a business with a moat but the management just does not do enough to unlock value for shareholders.

N Chandra has vowed to reduce debt in Tata Motors to near zero in the next three years. Can he manage to pull it off?
I would like to give him the benefit of doubt because he is an efficient manager. He has been doing the right things as far as the group is concerned with a lot less fanfare than his predecessors and he is a more operational, hands-on chairman. There are enough areas within this group for it to get more efficient and more so for Tata Motors which is an extremely strong engineering based company. But it has just expanded capital in businesses which have not given returns. To be honest, all the Indian companies who have become international and have acquired businesses overseas, have ended up with their valuations over a period of time trending downwards.

They have trended more and more and more towards the international business valuation which are far lower PE because India-focussed businesses tend to create a higher PE as the growth rates in India have historically been far stronger.

Internationally what happens is that you have one geography doing well, one not doing well and so growth rates tend to be far more subdued. I think Tata Motors really suffers from that and so do a lot of other Tata businesses which are international. They trade at substantial discounts and doing some of the steps probably to unlock some of these parameters. is the right way for them to work.

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Stock Market

Will RBI measures trigger rally in bonds?

Mumbai: The Reserve Bank of India (RBI) announced fresh liquidity measures and a relaxation in mark-to-market rules to help calm investor nerves as a sudden spike in yields hit bond markets. It raised the amount of bonds that could be held without providing for losses by 2.5 percentage points, raising the demand for government bonds by as much as Rs 3 lakh crore. The central bank’s latest measures could trigger a rally in the bond market, benefitting central and state governments that can borrow at lower costs.

The central bank raised the limit on bonds held-to-maturity (HTM) to 22% from 19.5% of total deposits, known as Net Demand and Time Liabilities (NDTL). This means banks will have room to buy more bonds without bothering about short-term fluctuations in yields.

“In support of the accommodative stance of monetary policy, the RBI is committed to ensuring comfortable liquidity and financing conditions in the economy,” the central bank said in a release on Monday.

The central bank also announced it would buy Rs 20,000 crore of long-duration sovereign bonds and sell a similar quantum of short-term bonds, repeating the ‘twist’ measure announced and partly conducted last week. This will take place in two tranches on September 10 and 17.

“The RBI remains committed to conduct further such operations as warranted by market conditions,” the central bank said.

The benchmark bond yield rose over 30 basis points, pulling prices down. The gauge fell by three basis points Monday to close at 6.12%, although the central bank announcement came after truncated market hours. The bond market close has been advanced to 2 pm from 5 pm in the wake of coronavirus-induced lockdowns. A basis point is 0.01 percentage point.

“The banking system has abundant surplus liquidity without any demand for credit,” said Soumyajit Niyogi, associate director at India Ratings and Research. “The latest rise in HTM limit will open up space for banks parking money in government bonds, which in turn should check funding costs for both central and state governments. The reversing LTRO (Long-Term Repo Operation) option should ease interest rate uncertainties.”

The RBI will conduct term repo operations for an aggregate Rs 1 lakh crore
at a floating rate in the middle of September to assuage pressures on the market on account of advance tax outflows.

Banks can use the window to reduce interest costs as they availed of money at 5.15% via the LTRO, a dedicated RBI liquidity window introduced in the first few months of the calendar year. The banks may reduce their interest liability by returning funds taken at the 5.15% repo rate prevailing at that time and swapping it for money at the current repo rate of 4%, the central bank said.

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Stock Market

Dow Jones shares: S&P 500 hits record high at open for sixth straight session

The S&P 500 hit a record high at the open on Monday for the sixth straight session, as bets on an economic revival due to prolonged central bank support put the index on course for its best August in decades.

The S&P 500 opened higher by 1.72 points, or 0.05%, at 3,509.73.

The Dow Jones Industrial Average fell 10.21 points, or 0.04%, at the open to 28,643.66 and the Nasdaq Composite gained 23.18 points, or 0.20%, to 11,718.81 at the opening bell.

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Stock Market

Warren Buffett: Buffett looks to Japan with 5% stakes in five biggest trading firms

Berkshire Hathaway Inc has bought a 5% stake in each of Japan’s five biggest trading houses, together worth over $6 billion, marking a departure for Chairman Warren Buffett as he looks beyond the United States to diversify his conglomerate.

The long-term investment in Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co Ltd and Sumitomo Corp could see the stakes rise to 9.9%, Berkshire said on Sunday, Buffett’s 90th birthday.

“The five major trading companies have many joint ventures throughout the world and are likely to have more,” Buffett said in a statement. “I hope that in the future there may be opportunities of mutual benefit.”

The investment will help reduce Berkshire’s dependence on the U.S. economy, which in the last quarter contracted the most in at least 73 years as the COVID-19 pandemic took hold. Many of its businesses have struggled, including aircraft parts maker Precision Castparts from which it bore a $9.8 billion writedown.

Buffett’s choice in Japan, however, surprised market players as trading houses have long been far from investor favorites. As well as significant exposure to the energy sector and resource price volatility, tangled business models involving commodities as varied as noodles and rockets have long been a turn-off.

“Their cheap valuation may have been an attraction,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “But it is un-Buffett-like to buy into all five companies rather than selecting a few.”

BELOW BOOK

Berkshire bought the little-over 5% stakes in about a year through insurance business National Indemnity Co. Together, five 5% stakes were worth 700 billion yen ($6.63 billion), Reuters calculations showed based on Refinitiv data.

Firms’ shares often rise when Buffett discloses investment, reflecting what investors view as his imprimatur. On Monday, Marubeni and Sumitomo ended up over 9%, followed by Mitsubishi and Mitsui at over 7%. Itochu rose 4.2% to a record high.

Even so, Marubeni, Mitsubishi and Sumitomo are still 10% down on the year, versus a 6% fall in the Topix index. Itochu, which has shifted towards consumer-related businesses, is the only one whose share price is higher than last year.

Indeed, Itochu is the only one whose stock trades above its book value. That means, for the other four, their market capitalization is less than the value of their assets, making them attractive to a value investor like Buffett.

Several have large amounts of cash on hand, raising their appeal. Mitsubishi, for instance, has seen steady growth in free cash flow per share for four years, Refinitiv data showed.

Trading houses are also deeply involved in the real economy in areas such as steel, shipping, commodities, putting them on the radar of an investor such as Buffett who famously avoids investing in businesses he claims not to understand.

Asked about the investment, Mitsui told Reuters it aims to improve returns for all shareholders. Marubeni and Mitsubishi said they will continue efforts to improve corporate value. Sumitomo said it will communicate with Berkshire as with all other shareholders. Itochu was not available to comment.

U.S. DEPENDENCE

Berkshire owns more than 90 businesses outright including the BNSF railroad and Geico car insurer outright.

It also invests in dozens of companies including American Express Co, Bank of America Corp and Coca-Cola Co. It has a roughly $125 billion stake in Apple Inc based on its holdings as of June 30.

“Buffett’s portfolio is becoming heavily skewed to Apple, so maybe he was looking for something the complete opposite of Apple,” said Monex chief strategist Hiroki Takashi in Tokyo.

Most of Berkshire’s operating businesses are American, though it has acquired a handful of foreign companies including Israel’s IMC International Metalworking and German motorcycle apparel retailer Detlev Louis.

Additional investments in Japan could also help reduce Berkshire’s cash pile, which ended June at a record $146.6 billion.

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Stock Market

Ahead of Market: 12 things that will decide stock action on Monday

NEW DELHI: As Nifty ended above the 11,650 level on Friday, it formed a bullish candle on the daily chart.

Nirali Shah of Samco Securities said traders should remain careful about the fact that Nifty50 is in overbought levels now and potential upside might be limited.

“The immediate support is placed at 11,200. Maintain a bullish outlook on the index, as long as the said support is not violated,” she said.

Nagaraj Shetti of HDFC Securities said Nifty’s near-term trend remains positive. “A sustainable move next week is likely to pull the index towards the next upside target of 12,000 and higher. Formation of any significant reversal pattern at the highs is expected to trigger profit booking,” he said.

Chandan Taparia of Motilal Oswal Financial Services said the index has to hold above 11,500 level to witness an upmove towards 11,750 and then 12,000 levels, while on the downside medium-term support shifts to 11,400-11,350 zone.

That said, here’s a look at what some of the key indicators are suggesting for Monday’s action:

US stocks upbeat, Dow in positive for 2020
S&P 500 closed up 0.67% for its seventh straight positive day on Friday to hit a new record close, its 20th of the year and the first ever above 3,500. For the week, S&P500 closed up 3.26%, marking its best week since July 2, and fifth straight week of gains for the first time this year. For the month, S&P500 is up 7.24% on pace for its best month since April. Nasdaq closed up 0.6% for its sixth positive day in seven at a new record close, its 40th of the year. The Dow closed up 0.57% for its sixth positive day in seven. For the week, it added 2.59% for its third positive week in four, and is now in positive territory for the year.

European shares shed weight
European stocks closed lower on Friday as investors digested a major policy shift by the US Federal Reserve and news that Japanese Prime Minister Shinzo Abe is resigning because of health concerns. The pan-European Stoxx 600 provisionally closed down by 0.4%, with most sectors trading in negative territory. FTSE shed 0.61 per cent, DAX 0.48 per cent and CAC 0.26 per cent.

Tech View: Nifty climbs for 6th session
Nifty50 on Friday climbed for the sixth straight session and topped the 11,650 level. It formed a bullish candle on the daily chart and continued to form higher highs and lows, suggesting supports are gradually shifting higher. Analysts said the momentum remains strong, but the possibility of a profit booking move has risen.

F&O: Nifty range now at 11,200-12,000
India VIX fell 2.92 per cent at 18.34 level. Volatility is gradually cooling down on a week-on-week basis, which suggests bullish stance and the buy-on-decline strategy could continue in the market. Options data suggested a shift in higher positional trading range between 11,200 and 12,000 levels.

Stocks showing bullish bias

Momentum indicator Moving Average Convergence Divergence (MACD) on Friday showed bullish trade setup on the counters of Sun Pharma, UPL, PC Jeweller, Piramal Enterprises, Godrej Properties, BSE, Quess Corp, Spandana Sphoorty Finance, Prajay Engineers, InfoBeans Tech, Panache Digilife and Balaxi Ventures, among others.

Stocks signalling weakness ahead

The MACD showed bearish signs on the counters of Steel Authority, Hindalco Industries, Meghmani Organics, Eicher Motors, Rashtriya Chemicals, Phillips Carbon, Hexaware Technologies, Berger Paints, Cupid, Prakash Industries, Kansai Nerolac Paint, Sunflag Iron, Kopran, Dalmia Bharat Sugar, Orient Cement, Sonata Software, Shalby, Godrej Agrovet, KIOCL, Star Cement, Elgi Equipments, PG Electroplast, Sanghvi Movers, Hercules Hoists, Bosch, Accelya Solutions, Jocil, M Forgings, Grindwell Norton, Damodar Industries, Sagardeep Alloys, Allsec Technologies, Dhunseri Investments and Zenith Exports, among others

Friday’s most active stocks

IndusInd Bank (Rs 3563.21 crore) , ICICI Bank (Rs 3394.05 crore) , Axis Bank (Rs 2968.80 crore) , RIL (Rs 2655.49 crore) , HDFC Bank (Rs 2149.77 crore) , SBI (Rs 2130.47 crore) , Sun Pharma (Rs 1596.94 crore) , Bajaj Finance (Rs 1551.76 crore) , Kotak Bank (Rs 1532.46 crore) and Bandhan Bank (Rs 1380.61 crore) were among the most active stocks on Dalal Street on Friday in value terms.

Friday’s most active stocks in volume terms

Vodafone Idea (shares traded: 128.60 crore) , YES Bank (shares traded: 27.26 crore) , BHEL (shares traded: 13.36 crore) , Federal Bank (shares traded: 13.11 crore) , GMR Infra (shares traded: 11.73 crore) , Bank of Baroda (shares traded: 10.16 crore) , SBI (shares traded: 9.60 crore) , Tata Motors (shares traded: 9.51 crore) , SAIL (shares traded: 9.42 crore) and PNB (shares traded: 8.58 crore) were among the most traded stocks in the session.

Stocks seeing buying interest

Sun Pharma, SBI Card, Central Depository Services (India), Coromandel International and Larsen & Toubro Infotech witnessed strong buying interest from market participants as they scaled their fresh 52-week highs on Friday signalling bullish sentiment.

Stocks seeing selling pressure

Max India and Minda Industries – Rights Entitlement witnessed strong selling pressure in Friday’s session and hit their 52-week lows, signalling bearish sentiment on these counters.

Sentiment meter favours bears

Overall, market breadth remained in favour of bears. As many as 207 stocks on the BSE 500 index settled the day in green, while 289 settled the day in red.

Podcast: Can the bank stocks rally sustain?

Stock market bulls managed an impressive comeback last week from after what looked like am end of the bull run during the week before. A lot of macro data points await us in the week ahead, and that will decide the way forward for the market. So, what awaits us on the macro front, what the Fed police tweak means for emerging markets like India and if the bank rally can sustain at a time when the EMI moratorium is coming to an end. Listen in.

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Stock Market

Crude oil or cooking oil? For some US refiners, it’s now a choice

NEW YORK: Refiners have always produced fuel using crude oil. Now some are using grease.

A slump in demand for gasoline since the onset of the coronavirus pandemic has several refining companies accelerating their plans to retrofit facilities to produce so-called renewable diesel made from, among other things, used cooking oil from fast-food restaurants.

The shift helps, they say, because it allows them to tap into lucrative federal and state incentives for production of low carbon fuels at a time when slumping fuel demand has squeezed profit margins for conventional fuels like gasoline.

Companies that have recently announced moves to produce renewable diesel include CVR Energy, Marathon Petroleum Corp, Phillips 66 and HollyFrontier Corp, according to a Reuters review of company earnings statements in the first half of 2020.

The planned conversion of Phillips 66’s refinery in Rodeo, California, for example, is “expected to deliver strong returns through the sale of high value products while lowering the plant’s operating costs,” the company said in a statement.

The project is not expected to come online until 2024.

Renewable diesel fuel burns cleaner than conventional diesel and can run without blending. Refiners can produce it by converting gasoline-making units to hydrotreaters that can process soybean oil or used cooking grease.

In California, such a conversion can mean big money. Under the state’s Low Carbon Fuel Standard, refiners can generate tradable credits by producing renewable diesel because it has a lower carbon intensity than fossil fuels, and sell them to other fuel producers for profit.

Oregon has a similar credit program, and several other U.S. states are also developing standards.

“California’s LCFS (Low Carbon Fuel Standard) program is currently a key driver of renewable diesel production,” said Charles Kemp, refining consultant at Baker O’Brien, which estimates that renewable diesel will make up 20% of California’s diesel pool in 2020 and that the percentage will double by 2030.

Federal policy has also encouraged refiners to produce renewable diesel through incentives such as a blender’s credit of $1 per gallon expiring in 2022. The industry expects more federal incentives for renewables if Democratic presidential candidate Joe Biden, a proponent of efforts to fight climate change, wins the presidency in November.

The United States now consumes 21.4 million barrels of renewable diesel per year, a fraction of the 4.1 million barrels used every day for conventional distillate fuel oil, according to U.S. Energy Department data.

If all the renewable diesel projects that have been announced so far come online, it could take roughly 300,000 barrels per day or more of crude-based refined products out of the market, according to estimates by energy intelligence firm Genscape.

The timing for taking down gasoline units for retrofitting is good for some refiners.

Gasoline demand is down around 10% from a year ago due to the pandemic, though it still makes up a major chunk of refinery production and has historically been a money-maker.

The biggest hurdle for refiners seeking to produce renewable diesel could be locating enough grease.

Renewable diesel made from animal fats and used cooking oil provide more credits under California’s low carbon fuel program than that made from soybean oil, because it is considered less carbon-intensive, but soybean oil is much more plentiful.

U.S. animal fat and used cooking oil production, for example, has grown about 4.5% percent since 2011 to about 54 million barrels a year, according to the National Renders Association. Soybean oil production, by contrast, has increased by 26% to about 105 million barrels a year, according to the U.S. Agriculture Department.

Refiner Valero Energy Corp (VLO.N) has locked in a supply agreement for animal fats and used cooking oil with Darling Ingredients, while Neste, a renewable fuels producer, bought Mahoney Environmental, a company that collects used cooking oil in 31 states.

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Stock Market

RBI signals quick withdrawal of liberal measures to stem economic slowdown

Mumbai: The Reserve Bank of India has red flagged the disconnect between the real economy and the exuberance in stock markets in Covid times, and has signalled a quick withdrawal of the liberal measures to counter the slowdown as soon as the economy returns to normalcy.

There is “a growing disconnect between the movements in certain segments of financial markets and real sector activity,” RBI Governor Shaktikanta Das wrote in the latest Financial Stability Report. “Once we enter the post-pandemic phase, the focus would be on calibrated unwinding of regulatory and other dispensations.’’

RBI Governor’s warning comes amid a strong rally in equities when the lockdown has led to shuttering of businesses for months and loss of income. Economists are forecasting the gross domestic product to shrink more than 5 percent and a surge in defaults. But the benchmark Sensex has climbed more than 45 percent since its March lows. The central bank has declared moratorium on payments for six months till August end.

While the RBI’s Financial Stability Report does not provide an assessment of what could be impact of the moratorium on banks, it has warned that banks could see a spike in defaults. It said in the first few weeks of moratorium nearly half the borrowers across the spectrum availed the benefit. Bank have since said that these have been falling as cash flows improve.

“The regulatory dispensations that the pandemic has necessitated in terms of the moratorium on loan instalments and deferment of interest payments may have implications for the financial health of SCBs,’’ it said.

The bad loans situation that has been easing for the past few quarters could climb again.

“The stress tests indicate that the GNPA (gross non performing asset) ratio of all banks may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario,’’ it said. “If the macroeconomic environment worsens further, the ratio may escalate to 14.7 per cent under the very severely stressed scenario.’’

The central bank since March has come up many measures including interest rate cuts and flooded the market with liquidity. But still government finances could get out of shape, it said.

“Central Government finances are likely to suffer some deterioration in 2020-21, with fiscal revenues badly hit by COVID-19 related disruptions even as expenditures come under strain on account of the fiscal stimulus,’’ the FSR said.

Yet another disturbing trend in the financial markets is the slowing of deleveraging by corporates and unproductive use of borrowed funds.

“Deleveraging by the private corporate sector over the recent years stalled during the second half of 2019-20 as leverage ratios (measured by the debt to asset ratio) increased due to higher borrowings,’’’ it said. “Incremental borrowings were used towards creating financial assets (loans and advances to subsidiary/ other companies and financial investments) and not for capex formation, as demand conditions remained muted.

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