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6 MARKETS

MUMBAI | 2 JANUARY 2016

>

Stocks gain after worst


year since 2011

THE COMPASS

Better days ahead for


Bharat Electronics
Market leadership in defence
electronics sector and focus on
R&D to help it gain from
governments defence spending
HAMSINI KARTHIK
Government-owned defence
equipment manufacturer
Bharat Electronics Limited
(BEL) is expected to outperform the broader indices in
the next two years. The
stock, a multi-bagger for
investors since 2014, thanks
to the governments renewed
focus on the defence sector,
could gain thanks to the
defence capital budget of
~94,600 crore.
Also, with home-grown
companies expected to benefit from the new defence
policy (likely in January
2016), Vijay Gyanchandani
of Way2Wealth believes
BEL, which holds a 37 per
cent market share (despite
the privatisation drive in
FY07), is poised to capture a
larger share in the defence
space. BEL has the right
execution power and scale
and if the government executes its defence plans, BEL
has to be the forerunner,
he says.
Stretched timelines for
approval from clients has
impacted the revenue
growth of BEL. Historically,
its revenues have expanded
by a mere four per cent.
However, the first half of
FY16 saw revenues grow
seven per cent on a yearon-year basis.
Earnings before interest, taxes and amortisation
(Ebitda) doubled, thanks to
improved operational efficiencies and margins
expanded from three per
cent to seven per cent.
Profits doubled (~267 crore)
in the first half of FY16
were helped by other
income (mainly dividends
of ~263).
Outsourcing non-core
products and reduced
dependency on foreign

Base=100

BLOOMBERG

140
130
120

S&P
BSE 110
Sensex
100

90
Jan 1,16
Jan 1,15
Compiled by BS Research Bureau

technology due to better


utilisation of in-house talent pool has helped
improve operational performance. Research and
development cost has
steadily climbed from 3.6
per cent in FY07 to eight
per cent in FY15. Raw material and employee costs
(85 per cent of total cost)
might, however, remain a
drag on Ebitda. Being a
zero debt public sector
firm could support BELs
working capital requirement as its scale of business increases.
An impressive order
book (~21,648 crore as on
October 1), which translates
to 3.1 times a book to bill
ratio, is a key positive for
BEL. Analysts have raised
the FY17 earnings growth
estimates by 10-12.5 per
cent, as BEL expects order
flows of ~15,000 crore in
FY17. Trading at 21 times its
FY17 price to earning ratio,
BELs stock holds the potential for investors wanting to
cash on Indias defence
theme. Analysts believe at
current valuations, BEL is
at a discount to global
defence companies, trading
at 24-25 times the price to
earnings ratio, hinting at
further room for re-rating
the stock.

USFDA warning poses


challenges for Cadila
Successful site transfers to other
FDA-approved facilities and
new product approvals are
critical for growth
UJJVAL JAUHARI
Brokerages have cut earnings estimates for Cadila
Healthcare over the next
two years by five to 15 per
cent following the two US
Food
and
Drug
Administration (USFDA)
warning letters for compliance-related issues at its
Moraiya formulation plant
and Zyfine active pharmaceutical ingredients (API)
facility, both in Gujarat.
While the stock recovered about one per cent on
Friday after falling nearly
15 per cent on Thursday, the
Street will keep an eye for
approvals of four key products. Toprol ((hypertension),
Asacol HD, Nexium and
Prevacid (gastro drugs) are
key products and their
launch is critical for the
company to boost its revenues and profits going
ahead. Asacol HD for example is important as estimates suggest $35-40 million revenues during the
first 180 days of exclusivity
and delay in launch can
impact revenues. The company has applied for site
transfer of these products
from the Moraiya facility to
its other facilities such as
the one in Baddi and the
special economic zone.
The Moraiya plant is critical as it contributes 60 per
cent of the companys US
revenues. The plant has
been under FDA scanner for
over a year now and the
company has been trying to
resolve the issues by
appointing third-party consultants and improving
standard operating procedures. While the remediation measures were going
on, the Street was not
expecting a warning letter
for this facility and thus
reacted negatively on

Base=100

TRENDING UPWARDS

tocks advanced on the


first day of trading in the
new year amid thin volumes after the benchmark
gauge capped the first annual
decline in four years.
Tata Motors, the owner of
Jaguar Land Rover, rose for a
third day this week to become
the top gainer on the S&P BSE
Sensex this week. State Bank of
India, the nation's biggest
lender, halted a three-day
decline. Carriers InterGlobe
Aviation, Jet Airways India
and SpiceJet all rallied more
than eight per cent each after
the region's costliest fuel prices
were cut to the lowest in five
years.
The Sensex gained 0.2 per
cent to 26,160.90 at the close in
Mumbai, after changing directions at least 15 times. The
gauge rose for a third straight
week, rising 1.3 per cent during
the period. The broader S&P
BSE 200 Index rose 0.4 per
cent on Friday and 1.4 per cent
this week.
We believe 2016 should be
much better than 2015 especially because we are seeing
the signs of economic recovery setting in, Mahesh
Nandurkar, a strategist at
CLSA Asia-Pacific Markets in
Mumbai, said in an interview

Sensex (Intra-day)

S
150

Bharat Electronics

Mumbai, 1 January

26,160.90
26,117.54

26,200

Nifty (Intra-day)

7,990

7,963.20
7,970

26,150

7,946.35
26,100

7,950

26,050

7,930

26,000
Dec 31, 15

Jan 1, 16

7,910
Dec 31, 15

Jan 1, 16

Source: Bloomberg

to Bloomberg TV India. There


are quite a few high-frequency
monthly economic indicators
which are trending up.
CLSA is overweight on
shares of software exporters,
private lenders and automobile companies, Nadurkar
said. The Sensex slid five per
cent last year, after rising 30
per cent in 2014, as the eupho-

ria over Prime Minister


Narendra Modis economic
agenda waned and concern
grew that tighter US monetary policy will curb the
appeal of higher returns
offered in emerging markets.
Global investors bought $3.1
billion of Indian shares in
2015, the smallest inflow in
four years.

Lower volumes
The Nifty 50 Index added
0.2 per cent, with volume
56 per cent less than the
30-day average. Most major
global markets are shut Friday
for the New Year holiday.
We are seeing lower participation as most people are
away on holidays and the global markets are shut,
A K Prabhakar, head of
research at IDBI Capital
Market Services in Mumbai,
said by phone . The greenshoots of the Modi government's policies should be visible this year and global growth
is also likely to be better.
Maruti Suzuki India, the
biggest carmaker, on Friday
said its December sales rose
8.5 per cent, while Mahindra &
Mahindra, the largest tractor
maker, reported a four per cent
increase in vehicle sales.
Tata Motors climbed 2.7 per
cent after declining 20 per
cent last year. Coal India, the
world's biggest miner of the
fuel, increased 1.3 per cent to
take this weeks gains to
3.7 per cent.
NTPC, Indias biggest power producer, slipped after
climbing for 11 days, the
longest winning streak on
record. Tata Steel, the biggest
producer of the alloy, retreated
0.9 per cent to extend last
year's 35 per cent plunge.

120

100

S&P BSE Sensex

80
Jan 1,16
Jan 1,15
Compiled by BS Research Bureau

Thursday.
Though the warning letter does not stop the company from exporting products
as would have been the case
if an import alert had been
issued, the complete resolution of the Moraiya plant
may take longer. The company will be submitting its
response post which US FDA
is expected to re-inspect the
affected facilities.
In the existing basket, its
anti-malarial
product,
hydroxychloroquine, has
been driving the US sales in
the recent past, with higher
volumes and as well as price
hikes (including other products) adding to the US revenues.
Thus, the companys
ability to get site transfers
(from Moraiya) will be crucial for maintaining growth.
The companys other facilities such as the new SEZ formulations facility (oral
oncology, oral solids) from
which it has filed over forty
applications has got regulatory clearance and is a
positive.
Analysts such as Sarabjit
Kour Nangra at Angel
Broking say that post correction there could be a
seven-eight per cent upside
in the best case scenario
and
remains
neutral
for now.

Mumbai, 1 January

The Securities and Exchange


Board of India (Sebi)
announced a ~30 lakh fine on
a leading financial services
entity, Anand Rathi (AR), for
breaching the stock broker
regulations. Sebi said AR had
repeatedly withdrawn funds
from a designated client bank
account to make payments
not to a client but to its own
group company, the commodities brokerage wing. In
doing so, it had failed to exercise due skill and care in conduct of business, breaching
the statutory requirements
under the Sebi Act.
The order said Sebi had
examined the period from
April 2012 to January 2014,
when there were 21,198
instances amounting to ~220
crore of transfer of funds
between the notice client s
account and Anand Rathi
Commodities. Of these, there
were a total of 11,220 instances
worth ~119 crore of payments
made from the noticee's bank

account to AR Commodities.
In 9,973 instances, amounting
to ~101 crore, funds were
received in the clients bank
account from the commodities wing. As an explanation,
the brokerage stated these
funds were transferred as the
specific client in the securities market was also a client
with AR Commodities and the
transfers were made with the
clients consent. They had,
since, completely stopped the
practice.
However, Sebi noted its regulations do not permit this.
(The relevant) Circular does
not permit moneys to be withdrawn from the client's
account for or towards payment of debt due to the group
company of the broker from
the client, or, money in respect
of which there is liability of
client to the group company of
the broker. The debt/ liability
of the client towards the group
company of the client cannot
become the debt/liability of
the notice with the client, said
Sebi's adjudicating officer in
the order.

SAT rejects Bhangoo's stay plea;


hearing on January 29
In the PACL case involving refund of a whopping ~60,000 crore
to investors, tribunal SAT (Securities Appellate Tribunal) on
Friday rejected an appeal by Nirmal Singh Bhangoo to stay the
recovery process initiated by Sebi and listed the matter for
hearing on January 29. An earlier plea by Bhangoo, one of the
main promoters of the PACL group, which includes companies
like Pearls Agrotech Corp and Pearls Golden Forest (PGFL), is
PTI
already pending before SAT.

Airline stocks at record high on fuel price cut Wholesale sugar prices
rise 14% in December
TAILWINDS
BS REPORTER

Mumbai, 1 January

Stock prices of airlines touched


multi-year highs on Friday, on
the back of a 10 per cent cut in
the price of jet fuel. The shares
of Jet Airways and SpiceJet
closed at five-year and sevenyear highs, respectively.
State-owned oil marketing
companies revised jet fuel
prices from Thursday midnight to ~39,892 a kilolitre in
Delhi, the lowest since
June 2010.
On a year-on-year basis,
these have declined 24 per
cent due to a drop in crude oil
prices, resulting in more profits for airlines. Jet fuel prices
have been on a decline since
last June.
On Friday, airline stocks

AVISHEK RAKSHIT

Cadila
Healthcare

BS REPORTER

N 2016 STARTS WITH A CHEER N

Price on BSE in ~

IndiGo

Jet Airways

SpiceJet

New high*
~1,341.75
Previous high# ~1,244.75

~760.60
~708.80

~82.35
~75.65

* As on Jan 1, 2016; #Dec 31, 2015

IndiGo, Jet and SpiceJet reacted positively to the latest cut


and were up nine to 10 per cent
in intra-day trade, before shedding some gains. SpiceJet
closed 7.1 per cent higher at
~82.35, a seven-year high. Jet
closed 8.3 per cent higher at

~760.60, a five-year high.


IndiGo was up 8.7 per cent to
end at ~1,341.75, an all-time
high since its listing in
November 2015.
Year 2015 has been a positive year for airline stocks.
SpiceJet's gained a little over

300 per cent and the Jet stock


rose 82 per cent. IndiGo's has
gained 75 per cent from its
Initial Public Offer price of
~765. Fuel costs account for 3035 per cent of an airlines operating expenses, down from an
earlier 40-plus per cent.
Domestic airlines pay more for
fuel than their regional peers,
owing to state and central
levies.
International Air Transport
Association expects a 10 per
cent growth in collective profit of all airlines globally, to
touch $36.3 billion in 2016.
This will be aided by lower fuel
costs and growth in demand, it
said last month. For 2015, IATA
has done an upward revision
in the estimated profit figure to
$33 bn from an earlier one of
$29.3 billion.

Tea exporters upbeat as prices rise


140

Sebi slaps ~30-lakh


penalty on Anand Rathi

Kolkata, 1 January

Tea export sector finally has a


reason to cheer about in 2016
with export volume and prices
showing a rising trend from the
April-October 2015 period
which is likely to increase further in the new year.
While the export sector suffered a declining total earning
of ~685.45 crore or a negative
15.2 per cent in FY15, export
earnings till October has risen
4.2 per cent, which has translated into a gain of ~93.53 crore.
This is the recovery year

for tea exports and I think


export prices will be better in
2016, Kamal Baheti, director
of McLeod Russel, the world's
largest tea producer, told
Business Standard.
Provisional exports data
released by the Tea Board of
India have pegged tea exports
at 119.3 million kg, valued at
~2,318 crore, during AprilOctober 2015 against 111.19
million kg worth ~2,225 crore
in the year-ago period.
The Indian Tea Association
(ITA) as well as the Assam Tea
Planters Association (Atpa)
are also upbeat about the glob-

Pump it up
Viacom, Time Warner among
2016 merger wannabes
Walt Disney may be big enough to sit it out. But,
other US media-content producers are going to
feel the urge to merge in 2016 and beyond.
Cable companies and other distributors have
bulked up in recent years Comcast, for example, bought NBC Universal even if it later failed
to seal a deal with Time Warner Cable. Apple,
Amazon.com and the like have built new media
streaming models. The giants have 12-digit val-

Peer pressure
Ivan Glasenberg may be
mining's last man standing
Ivan Glasenberg outlasted all his major peers
after the multi-year boom in metals prices
turned into a rout in 2013. The Glencore chiefs
misjudgment of the market severely tried
investors patience in 2015. Yet, when the second wave of mining executive ousters comes, as
it may soon, its likely Glasenberg will again be
the last man standing.
Rio Tinto, BHP Billiton and Anglo American

al and domestic tea prices.


The prices are seemingly
better and steady now both on
the domestic and international markets, said Raj Barooah,
chairman of ATPA.
Auction prices in India
stood at ~125.59 a kg during
2014-15, which has marginally
increased to ~128.35 a kg. The
same auction prices in global
tea trading centres have also
shown a rising trend varying
between 8.2 per cent in Limbe
in Cameroon to 12.6 per cent in
Chittagong (Bangladesh) to 31
per cent in Mombasa in Kenya.
In FY15, Indian exports

took a hit owing to crop loss in


peak months while major teaimporting countries stocked
up the abundantly available
Kenyan tea. However, with the
Kenyan hoarding declining
now, tea exporters have a
breather.
Revenue realisation has
already increased from major
tea-importing counties such
as Russia, Kazakhstan, the UK,
Pakistan, Iran, United Arab
Emirates
and
others.
However, some countries
such as the US, Germany,
Egypt and others still remain
on the negative side.

DILIP KUMAR JHA

SWEET DEAL

Mumbai, 1 January

There is some good news for


sugar mills and shareholders
of sugar companies, as wholesale sugar prices jumped 14
per cent in December.
One reason is stock building by traders and stockists,
amid fear of a price rise after
the governments decision to
raise cess by ~100 a quintal.
Also, there were reports of a
decline in production this
year on lower availability of
cane for crushing.
The benchmark M30 variety was quoted at ~3,200 at
Navi Mumbai's main wholesale market on Friday, as compared to its prevailing price of
~2,812 a qtl at end-November.
The S30 variety was ~3,100 a
qtl on Wednesday as against
~2,697 a qtl on November 30.
The price rise has surprised all stakeholders,
expecting a subdued price
trend due to new-season output and carryover stock (7.5
million tonnes) from last year.
Despite a number of incentives offered by the government to bring the industry
back on track, experts were
expecting prices to start moving up only towards the end of
the crushing activity in April.
Normally during the peak
cane crushing season in
December, sugar prices move
down, on expected supply of
new-season output. Indian
Sugar Mills Association (Isma)

Sugar M

Sugar S

(~/quintal)

3,250

3,202
3,150
3,050

2,812
2,950

3,106

2,850
2,750

2,697
Nov 30

2015

2,650
Dec 30

Source: Sugar Associations,


Bloomberg
Compiled by BS Research Bureau

had revised its earlier production estimate of 28 million


tonnes this crushing season
to 27 mt due to drought in
Maharashtra, the country's
largest producing state.
While the drop of around
1.3 mt this year (output was
28.3 mt last year) might not
impact the domestic situation
unduly, there is an expected
drop in cane production in
2016-17. A prolonged El Nio
impact might adversely affect
cane production in the coming year. Besides, an aggressive sugar export strategy,
with declining domestic production, is likely to mount
pressure on domestic prices
from the 2016 summer, said
an Assocham study.
For full reports, visit
www.business-standard.com

uations. Most traditional content makOther businesses that pipe proers are puny by comparison, Time
grams have been consolidating,
Warner and Twenty-First Century Fox
too. Cellphone operator AT&T
are each worth less than $60 billion,
bought satellite broadcaster
and CBS and Viacom, Sumner
DirecTV in July, creating a compaRedstones companies, dont even
ny now worth some $200 billion.
reach that figure combined.
Charter Communications is set to
The gulf in market capitalizations,
buy Time Warner Cable and Bright
from Apple at more than $650 billion BY JENNIFER SABA House Networks in a nearly $70 bilto Viacom at $20 billion, is a proxy for
lion tie-up.
the groups relative negotiating power
Distributors pay so-called carwhen it comes to getting television shows
riage fees to content creators, generaland movies to the public. Even Disney, with ly on a per-subscriber, per-month basis, to air
$190 billion of market value, hardly looks invin- networks like Time Warners CNN or TNT.
cible next to Apple or Alphabet, the parent of Negotiating those fees is getting tougher. The
Google and YouTube.
number of US cities affected by blackouts, when

consumers cant access certain channels or networks, ballooned to 94 in 2014 from eight in
2010, according to the American Television
Alliance. Thats an indication of the failure of
content producers and distributors to reach
agreement.
Moreover, players like Amazon and
YouTube, as well as Netflix, are increasingly
creating their own shows as well as paying for
others output. Now relatively small content
makers will have little choice but to become
larger. Rupert Murdochs grip at Fox and
Redstones at his two fiefdoms may have held
that process back, but the pressure for, say,
Time Warner to get together with Fox or CBS
will only intensify.

all changed chief executives two years


helped to gear up Glencore at a time
ago, as the supercycle in commodiwhen Chinese demand for metals
ties turned out to be a myth. But the
was expected to remain strong. He
incomers Sam Walsh, Andrew
admits now that doing so was a misMackenzie and Mark Cutifani
take. Rivals bosses have been ousted
havent been able to arrest the decline.
for similar missteps.
They have cut capital expenditure,
The big difference is that
sold assets and in Anglos case, belatGlasenberg remains Glencores
edly slashed dividends. Since the
largest individual shareholder, with
BY ANDY
beginning of 2013, their combined
an 8.4 per cent stake according to
market value has fallen by 59 per cent CRITCHLOW
Eikon data. Meanwhile, he still
to $143 billion.
appears to have support from his
Glasenberg has fared no better. Glencores colleagues, who along with him own around
shares had declined 70 per cent in the year to 30 per cent of the company, according to a perDecember 30. Worse, unlike rivals, the company is son familiar with the situation. That makes him
still laden with debt. The tough-talking Glasenberg almost impossible to remove.

Loyalty cant be taken for granted. Powerful


investors such as Qatar Holding and Harris
Associates which together own more than 13
percent of the company have seen the value of
their holdings collapse. So, have many senior
managers, turned into billionaires in their own
right after the company listed in 2011.
But, that might explain the biggest change of
all: Glasenbergs brush with humility. He has cut
the dividend and pledged to reduce net debt to
$18 billion, from a previous forecast of $27 billion, by the end of 2016. Moreover, he has effectively admitted that he got it wrong something unthinkable a couple of years ago. That
might be what sees the Glencore boss through
the next shakeout.

The authors are Reuters Breakingviews columnists. The opinions expressed are their own. For further commentary see www.breakingviews.com