Friday, 23 June 2017

Shriram EPC bags multiple orders worth Rs 165 cr

Shriram EPC Limited (SEPC), one of the leading service providers of integrated design, engineering, procurement, services has that it has won multiple orders under its water management business amounting to Rs. 165 crore.

“The first order amounting to Rs. 83.37 crore from City Corporation Davanagere, involves designing, building and improving bulk water supply for 24X7 water supply to Davanagere city and O& M of the Bulk Water Supply Scheme for 3 months.

The ADB funded project is to be executed over a period of 30 months with 3 months for O&M. The second order amounting to Rs. 82.56 crore from Tamil Nadu Water Supply & Drainage Board (TWAD Board) entails implementation of Water supply scheme in Hosur,” the company said in a filing to the Bombay Stock Exchange. Meanwhile, shares of the company were trading at Rs 26 apiece, up 9.01 per cent from the previous close

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SEBI Proposes stricter Separation on Investment Products

The Securities and Exchange Board of India (SEBI) on Thursday proposed to more clearly segregate entities advising on investment products from those selling them in an effort to prevent conflicts of interest.

Under current rules, companies are allowed both to advise and sell mutual funds or other investment products only through "separately identifiable departments or divisions", which must maintain an "arms-length relationship" between the two functions.

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Fees charged for each service must also be clearly separated.
But the SEBI on Thursday sought to make that separation more clear, proposing that companies would no longer be able to offer both advisory and distribution services unless they were split into separate subsidiaries, proposing that the division be completed within six months.

The SEBI also said those providing investment advice must have proper permission from regulators of the products about which they give advice.

The SEBI oversees equities, corporate bonds, and mutual funds, while the central bank oversees trading of currencies and government bonds.

"To prevent the conflict of interest that exists between advising of investment products and selling of investment products by the same entity/person, there should be clear segregation between these two activities," the SEBI said in a draft proposal.

GST may lead to better operating profit margin for multiplex operators

Multiplex companies—PVR Ltd and Inox Leisure Ltd—are expected to benefit from the implementation of the goods and services tax (GST). That’s mainly on account of the input tax credit on fixed costs that these firms bear such as rent, common area maintenance and so on. Ratings agency Icra Ltd estimates that input tax credit will be available on 33% of the total operating expenses. The GST rate has been fixed at 28% for tickets costing over Rs100 and 18% for those under Rs100.

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Tickets below Rs100 account for a small portion of overall ticket sales of PVR and Inox. This is disappointing considering that the entertainment tax is in a similar range (of 28%) for these firms. As analysts from Dolat Capital Market Pvt. Ltd point out, entertainment tax for PVR and Inox based on their net box-office collection is 29% and 27%, respectively, as on fiscal year 2017 (FY17) and thus a 28% GST rate would not have any impact for the multiplex chains. Note that the industry was expecting 18% rate across the board.

Amid loan waivers, foreign investors want nothing to do with state bonds

Indian states have never been able to attract dollars to finance their market borrowings. Since October 2015 when state development loans (SDL) were first allowed to be picked by foreign portfolio investors, not more than a trickle has come in. But over the last few months, foreign investors are earnestly avoiding state bonds even though their pockets are filled to brim with central government bonds and even private corporate bonds. Since April, foreign investors have bought only Rs140 crore worth of state bonds while they grabbed nearly Rs40,000 crore of central government securities. The total approved investment limit in state bonds for investors was hiked by Rs6,000 crore in April this year and that of government bonds was hiked by Rs11,000 crore. Foreign investors even willingly bought more than Rs35,000 crore worth of corporate bonds at a time when companies are fixing their over-leveraged balance sheets.

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Thursday, 22 June 2017

Oil Prices climb off 10-month lows as U.S. Stockpiles Drop

Oil prices rose on Thursday after U.S. crude and gasoline stockpiles fell, but worries over whether OPEC-led output cuts would be able to rein in a three-year glut continued to drag.

The market largely shrugged off comments overnight from Iran's oil minister that members of the Organization of Petroleum Exporting Countries (OPEC) are considering deeper cuts in production.

Brent crude futures were 4 cents higher at $44.86 a barrel at 0219 GMT, after falling 2.6 percent in the previous session to their lowest since August last year.

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U.S. crude futures were up 6 cents at $42.59 a barrel. On Wednesday, they settled down at $42.53, after touching their lowest intraday level since August 2016.

Since peaking in late February, crude has dropped around 20 percent, with only brief rallies, completely erasing gains at the end of the year in the wake of the initial OPEC-led production cut.

OPEC and other producers agreed to cut output by 1.8 million barrels per day from January for six months, subsequently extended for a further nine months.

With production rising in Nigeria and Libya, countries exempt from the deal, and output surging in the United States, which was not part of the agreement, many bulls appear to have thrown in the towel.

Oil has "now fallen into 'bear' territory," ANZ said in a research note. "OPEC (and allies) may have pared back production, but that's being offset by relentless drilling in the U.S. and more output in Libya."

A bigger-than-expected cut in U.S. crude stockpiles reported overnight is barely shifting the dial.

Uber investor Bill Gurley to leave Company’s board of Directors

Turmoil at Uber Technologies Inc. continues as longtime backer and director Bill Gurley is leaving the company’s board following the resignation of chief executive officer Travis Kalanick.

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Gurley will hand the board seat to Matt Cohler, his partner at Benchmark, a spokesman for the venture capital firm said.

This will be the third change to Uber’s board in recent weeks. TPG’s David Bonderman was replaced as director by his colleague David Trujillo on Wednesday. Bonderman resigned after he made a sexist remark to fellow board member Arianna Huffington at a company all-hands meeting meant to address Uber’s flawed corporate culture. Wan Ling Martello, an executive at Nestle SA, joined the board earlier this month.

Gurley was one of Uber’s earliest investors and biggest fans. He played a key role on the board over the years, helping to recruit many of the company’s executives. But in private Gurley became a vocal critic of Kalanick in recent months, people familiar with the matter said. The start-up has been in upheaval for most of this year, following rider protests over the company’s ties to the Trump administration and an investigation into Uber’s corporate culture conducted by former US attorney general Eric Holder.

Can niche Products drive VST Tillers into the big league?

The VST Tillers Tractors Ltd stock hit a new 52-week high this week. Despite the company’s unexciting performance in the March quarter, the stock gained almost 20% in the last one month, as the management guided for healthy growth in fiscal year 2018 (FY18).

The company expects power tiller volumes to rise this year, after dropping 7% in FY17. Tractor sales, which increased 24% in FY17, are forecast to register double-digit growth this year also.

VST Tillers is trying to reduce its dependence on power tillers, which are dependent on government subsidy, which is prone to payment delays. Given the subdued outlook for the power tillers business (projected to see an annual average growth of 5-6%), the company is focusing on tractors for growth. It launched two new tractor models and aims to increase its market share further. According to ICICI Securities Ltd, VST Tillers’ management expects tractors to power tillers sales mix to reach 60:40 by 2020. Last fiscal year, the company derived 41% of its revenues from the tractors business.

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The strategy sounds plausible. But it faces one challenge—scalability. Right now, VST Tillers operates in the less than 30 horsepower (hp) segment. It roughly constitutes less than 10% of the total tractor industry’s volumes. It is not present in the 30-40hp and 40-50hp categories, which constitute three-fourths of India’s tractor market and are seeing growth.

“While the government’s push for increased farm mechanisation by subsidising tractor purchases is likely to aid sales in the lower HP segment, a continued customer shift towards increased usage of various agro-implements is likely to lead to a further increase in market size for high HP tractors over the long term,” ratings agency Icra Ltd said in a recent note.

In the overall tractor market, VST Tillers right now has less than 2% market share. It aims to increase this to 5%. New products and geographical expansion can help the company drive sales in the near term. But as an analyst with a domestic broking firm points out, it can be tough to make significant gains in market share without a presence in the large and fast growing 30-50hp segment.

The flip side of GST: its Impact on the Informal Economy

The markets are gung-ho about the shift to the goods and services tax (GST). One factor driving this optimism is the anticipated shift of business from small, unorganized firms in some sectors to organized ones. Since the latter are already in the formal economy, comply with regulations, are generally larger in size and pay taxes, the switch will be much easier for them, which will ultimately translate into increased market share.

Analysts have been preparing lists of companies that will benefit in sectors such as apparel, tiles and sanitaryware, plywood, textile, footwear, electrical equipment and appliances, and plastics and packaging. All these sectors have a high composition of unorganized firms (see chart).

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For example, analysts expect the share of the informal segment in the tiles industry to decline from 40% currently to 20%. Similarly, nearly 60% of the ready-mixed concrete market is unorganized. In the light electrical segment, more than 35% of the businesses are in the informal sector. Certainly, this augurs well for larger companies in the organized sector. This also comes at a time when volume growth has just recovered from the effects of demonetisation and corporate India is desperate for a much-awaited earnings recovery.

But the gain in market share of listed companies means a corresponding fall in the share of units operating in the informal economy. GST is sure to take a toll on the financial health of small- and medium-sized enterprises (SMEs) operating in these sectors. Economists say that the informal or unorganized sector accounts for nearly 50% of India’s gross domestic product and is responsible for more than 80% of total job creation in the country.

Many of the firms operating in this part of the economy make profits largely due to tax evasion and non-compliance with regulatory norms, which allows them to offer products at comparatively lower prices. However, in the GST-era, it will be a struggle for survival for such firms because they will be faced with taxes, lower margins and a sharp spike in the cost of compliance. Some firms in the unorganized sector may go under, while others could find their profits curtailed. 

To be sure, in some instances the two sets of companies cater to different customers, but there is always some overlap. And it is not just the manufacturers in the informal economy who will suffer but also the smaller dealers and wholesalers.

The economics of logistics under the GST regime also favour large companies in the organized sector.

Minutes Reveal two Poles of the Monetary policy Committee

The minutes of the monetary policy committee meeting should put to rest the misgivings one (including this publication) had as to whether the committee members echo a party line. The fact that one member, Ravindra Dholakia, dissented is known but the minutes reveal the real vigour behind the discussions.

Dholakia wanted a 50 basis points cut in the repo rate but the Reserve Bank of India (RBI) had the vote of five to hold rates. He disagreed on almost every outlook that the central bank provided and not just the inflation forecast.

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The most interesting revelation from the minutes is the emergence of two poles, the dissenter Dholakia and the notable hawk Michael Patra, an RBI official. Both the members have polar opposite outlooks based on the same set of data.

While Dholakia said that core inflation figures indicate a clear declining trend and not stickiness, Patra read the opposite. The two members differed strongly even on the output gap. Patra believes that an output gap calculated on historic data will be wider than otherwise and a projected growth of 7.3% in gross value-added for fiscal year 2018 makes a case for a narrowing of the gap. However, Dholakia argued, “There cannot be disagreement on the Indian economy significantly under-performing compared to its potential now for quite some time.” The output gap is here to stay and will keep a lid on inflation, he said.

Dholakia also argued that farm loan waivers and state fiscal profligacy won’t be inflationary, in direct contrast to all other members’ statements.

Wednesday, 21 June 2017

Daily revision of fuel prices Structurally Positive for OMCs

The shift to daily revision in prices of petrol and diesel from fortnightly revision starting 16 June is structurally positive for Indian oil marketing companies (OMCs)—Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC). With this, India joins countries such as the US and Australia where fuel prices are revised on a daily basis.

This means OMCs will be able to pass on daily changes in product prices and exchange rate fluctuations without delays.
IOC said daily revision of petrol and diesel prices will set new standards of transparency, encourage the automation drive of petrol pumps and lead to better stock management practices.

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However, it will probably be a while before OMCs see benefits in the form of higher marketing margins in their financials. Every Re0.1/litre increase in petrol/diesel price adds 1.9-3.5% to OMC earnings per share, according to Credit Suisse Securities (India) Pvt. Ltd.

It’s also worth remembering here that competition from private sector companies will pose a threat to expansion in marketing margins. Already, OMCs have lost market share in the fuel retailing business to private sector firms in fiscal year 2017 (FY17).

Nevertheless, all three stocks have outperformed the Nifty 50 index in the past year, supported by earnings growth. Even so, valuations aren’t expensive.

Kotak Institutional Equities highlights in a report on 19 June that OMCs may look optically inexpensive trading at 10-12 times price-to-earnings multiples or 6-6.7 times EV/Ebitda for FY19. EV is short for enterprise value and Ebitda stands for earnings before interest, tax, depreciation and amortization.

“However, it may be justified as a significant portion of the business is cyclical and it also requires meaningful amount of capex for upgradation and modernization, let alone to raise capacities,” added Kotak.