Union Budget 2015-16: Sector Analysis

Sensex retreats from record highs on profit-taking, FII sales

The BSE Sensex and Nifty fell on Wednesday, retreating from record highs hit earlier in the session as investors pared positions in blue-chips such as Tata Motors after overseas investors marked their first sale of cash shares in three weeks.

Foreign institutional investors sold Indian shares worth 1.02 billion rupees ($16.5 million) on Tuesday, marking their first sale since Oct. 28.

Overseas investors have been key drivers of the stock market rally this year, buying a net $15.47 billion worth of shares so far in 2014, according to regulatory data.

But caution is now beginning to set in ahead of the winter session of the parliament scheduled to begin next week, when Prime Minister Narendra Modi's government is expected to push a slew of reforms including goods and services tax.

Investors are also looking forward to the Reserve Bank of India's policy review on Dec. 2, while also tracking global factors, including minutes of the U.S. Fed's policy meeting due later this week.

"FIIs are making good profit on Indian shares after a long time, so expect 3-5 percent correction by December-end due to profit taking," said G. Chokkalingam, founder of Equinomics, a research and fund advisory firm.

The BSE Sensex fell 0.46 percent after hitting an all-time high of 28,294.01 earlier in the day.

The Nifty settled down 0.52 percent after rising to a record high of 8,455.65.

Blue-chips led falls amid profit-taking. The 50-share Nifty has gained 35.2 percent so far this year, making India the best performing equity market in Asia during the period.

Sensex surges 500 points on BOJ easing

The BSE Sensex and Nifty surged nearly 2 percent on Friday to record highs for the second consecutive day after Bank of Japan's surprise expansion of its massive stimulus programme raised hopes for additional foreign inflows, boosting blue-chips.

In a rare split decision, the BoJ's board voted 5-4 to accelerate purchases of Japanese government bonds so that its holdings increase at an annual pace of 80 trillion yen ($725 billion), up by 30 trillion yen.

BoJ's easing is being seen as an alternative to the U.S. Federal Reserve's just concluded bond-buying programme, supporting the rally in emerging markets such as India, already underpinned by reforms and hopes of a rate cut.

"BOJ's easing would further the argument of central bankers other then Fed providing stimulus to support economies and assets," said U.R. Bhat, managing director at Dalton Capital, a unit of U.K.-based investment management firm Dalton Strategic Partnership LLP that manages nearly $2 billion in assets.

"I agree there are strong expectations of a rate cut. But there is no tax on expectations. Is it?"

Foreign portfolio investors have bought shares worth $13.45 billion and $22.44 billion in debt in Asia's third-largest economy so far this year.

India ended fuel price controls, raised gas prices, proposed opening up of the coal sector and relaxed rules for foreign investment in construction, earlier in October.

The Sensex rose as much as 2 percent to an all-time high of 27,894.32, before ending up 1.9 percent at 27,865.83.

The Nifty gained as much as 1.98 percent to mark a record high of 8,330.75, and finished 1.87 percent higher at 8,322.20. Both indexes surpassed their previous record highs hit on Thursday.

October also marked an eighth month of gains in nine for the indexes, mainly helped by optimism tied to the election of Narendra Modi as Prime Minister and thereafter by a 24 percent slump in crude oil price since June.

The Nifty rose 4.5 percent, while the Sensex advanced 3.64 percent in October.

Shares also marked their biggest weekly gains since June. The BSE rose 3.8 percent, while NSE gained 3.84 percent.

Reuters Poll - India's growth pace to pick up as reforms draw investment

India's economy will likely grow at its fastest pace in two years in the current fiscal year as Prime Minister Narendra Modi implements reforms to attract investment, a Reuters poll of economists showed on Friday.

The after-glow from Modi's election victory earlier in the year helped India's economy clock a robust 5.7 percent growth rate for the quarter ending in June.

The economy has just lumbered through the longest spell of below-5 percent growth in a quarter of a century, but forecasts are now predicting that the slump has passed.

Hopes of reforms for economic revival from Modi have attracted foreign capital inflows - before the election in May until now - triggering a massive rally in the stock market, making it one of the best performers in Asia so far this year.

That optimism looks set to continue.

"The outlook is improving and that mostly reflects the fact that the new government has pledged to prioritise economic reforms. First we saw an improvement in sentiment and now it is translating to actual pick-up in activity," said Tuuli McCully, senior economist at Scotiabank.

"Obviously, we really need to see more (reforms). But as of now, I am encouraged by how things are moving."

Over the past month, Modi's government has stepped up economic reforms, opening up the coal industry to private investors and freeing diesel prices to market forces from government subsidies.

The latest Reuters poll of 20 economists taken over the past week shows Asia's third-largest economy will likely grow 5.5 percent this fiscal year and 6.4 percent the next, slightly better than 5.3 percent and 6.3 percent expected in the July poll.

"India is transitioning away from stagflation conditions, and the much-needed combination of higher real rates, a more friendly investment environment and structural reforms appear to be slowly coming together," wrote Manoj Pradhan, an economist at Morgan Stanley.

However, without big-bang reforms to propel the economy back to a near double-digit growth, economists say, a broader and sustained economic revival will likely remain elusive.

Also, the global economy is showing signs of weakening and is expected to weigh on overseas demand for Indian merchandise.

Indeed, the economic outlook for two of India's biggest trading partners - China and the euro zone - has dimmed and is expected to drag on the global economy.

Consumer price inflation - the biggest challenge faced by the Reserve Bank of India - cooled to 6.46 percent last month, the lowest level since this series began in January 2012, from a revised 7.73 percent in August.

But the poll showed consumer prices will average 7.5 percent this fiscal year and ease to 7.0 percent next year.

"Despite lower inflation prints and the fall in commodity prices, the communication from RBI suggests it will keep monetary policy restrictive in the near term to achieve medium-term price stability," wrote Rahul Bajoria, economist at Barclays.

The RBI is expected to keep its key repo rate steady at 8.0 percent well into next year, even as a separate Reuters poll in September showed the Sensex would keep setting record highs through to the end of 2015.

Modi govt’s big reform push: Diesel deregulated, natural gas price hiked

Prime Minister Narendra Modi unveiled its biggest reform so far on Saturday, aligning diesel prices with international crude oil costs, a move that will make the key fuel cheaper by Rs. 3.37 a litre and help control inflation. Government also hiked natural gas tariff by 46 percent that will push up fertiliser, power, CNG and PNG rates.

This will be the first reduction in diesel rates in over five years. Diesel price were last cut on January 29, 2009 when they were reduced by Rs 2 a litre to Rs 30.86. Rates had since climbed to Rs 58.97. It will cost Rs 55.6 per litre in Delhi.

The move also eases the government’s huge subsidy burden paid out of the budget. In the first quarter of this fiscal (April-June 2014), the under-recovery burden on oil marketing companies was Rs 9,037 crore which would have required a sharing mechanism between the budget, consumers, OMCs and upstream oil and gas companies.

Against the backdrop of the steep doubling of rates to USD 8.4 recommended by Ranagarajan Committee and cleared by the previous UPA government, the government today approved a 46 per cent increase in natural gas prices that will go up from current USD 4.2 per million British thermal unit to USD 6.17 per mmBtu from Nov 1.

The gas price hike, according to a modified formula approved by the Cabinet, comes to USD 5.61 per mmBtu on gross-calorific value basis and USD 6.17 as per net calorific value – the principle used for calculating current USD 4.2 rate.

RIL will however not get the new gas price for its currently producing Dhirubhai-1 and 3 gas fields in eastern offshore KG-D6 till it makes up for the shortfall in production in the past four years.D1&D3 is producing under 8 million standard cubic meters per day against a committed 80 mmscmd. Consumers of RIL gas will have to pay higher rates but RIL will get only USD 4.2, with the difference being credited to a gas pool account maintained by GAIL.

RIL will get the higher price if it is able to prove legally that output fall was not deliberate and was due to geological reasons as it claims.

Higher gas prices would increase the expense of running power stations and fertilizer plants, raising infrastructure and food costs and accelerating the rate of inflation.

Every dollar increase in gas price will lead to a Rs 1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff (for just the 7 per cent of the nation’s power generation capacity based on gas).

Also, there would be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas.

Gas price increase had been deferred on three occasions previously.

The previous UPA government had in June last year approved a price formula suggested by a panel headed by C Rangarajan and re-confirmed it in December 2013 with certain conditions for Reliance Industries’ eastern offshore KG-D6 block.The formula was to be implemented from April 1, 2014, when the tenure of USD 4.205 per million British thermal unit price fixed for KG-D6 gas was to expire, but before a rate could be notified, general elections were announced and Election Commission asked the then government to defer it till completion of polls.

On June 25, the new BJP-led government deferred it for a further three months to September-end saying the issue required “comprehensive consultations.”

The revision was again deferred by 45 days on September 24 as the government seemed wary of taking an unpopular decision on just before assembly election in crucial states of Maharashtra and Haryana.

The formula, which was notified on January 10, will more than double the current USD 4.2 per million British thermal units. The new gas price was to be applicable to both state-owned ONGC produced fuel as well as private sector RIL’s gas.

The delay in gas prices had most affected Reliance Industries and state-owned Oil and Natural Gas Corp (ONGC). RIL and its partners BP plc of UK and Canada’s Niko Resources on July 6 slapped an arbitration notice on the government seeking implementation of a gas price revision which was due to them on April 1.

For ONGC, the nation’s largest gas producer, the postponement of price increase was seen as a dampener to its stock valuation particularly when the government had plans to sell a 5 percent stake in the company to help narrow budget deficit.

India’s offshore oil and gas industry is “at risk” in the absence of higher gas prices, BP CEO Robert Dudley had said on June 17.

RIL has been selling gas from KG-D6 at the same price since it started production in April 2009. The government increased ONGC and Oil India Ltd’s selling price to match RIL’s in May 2010.

600 Million Reasons to Keep Your Eyes on India

In the wake of his rock star reception at Madison Square Garden last Sunday, Prime Minister Narendra Modi emphatically announced to our nation's top corporate and political leaders that India is now open for business. Between September 26 and 30, he met with not only President Barack Obama and other high-profile politicians but also the CEOs of some of our nation's largest and most successful companies: Google--which we own in both ourAll American Equity Fund (GBTFX) andHolmes Macro Trends Fund (MEGAX)--Boeing, PepsiCo and General Electric, among others.

The only thing missing was a ribbon cutting ceremony.

Although U.S. Global Investors typically doesn't invest in India, the country has recently found itself in the driver's seat of global resources demand and production. This is a tailwind for our Global Resources Fund (PSPFX), which maintains heavy exposure in the industries that India will increasingly need to support its more than 1.25 billion (and counting) citizens: oil and gas, chemicals, energy services and infrastructure, precious metals and food.

India's culture is ancient, dating back more than five millennia, but it has a disproportionately young population. As the world's second-most populous country, India is home to roughly 600 million people under the age of 25. That's close to half of its own population and a little less than twice the entire U.S. population. Over the next few years, this one generation will largely be responsible for charting the country's trajectory into its next stage of economic development.

As old as India's culture is, millions of its citizens seek the contemporary American dream of opportunity and prosperity. They rely on their new leader, former tea merchant Narendra Modi, as their ambassador of "hope for change," as he put it in his September 25 Wall Street Journal op-ed.

India Opening Its Wallet to International Sellers

At its current rate of population growth, the South Asian country will in the coming years be in need of biblical amounts of natural resources to meet the ambitious economic and social plans the newly-elected prime minister has laid out.

Among other goals, Modi envisions "affordable health care within everyone's reach; sanitation for all by 2019; a roof over every head by 2022; electricity for every household; and connectivity to every village."

The energy infrastructure alone will require staggering amounts of copper conductors, iron, electrical steel and oil. As I wrote back in May, Modi has a proven track record for bringing electricity to Indians who previously never had it.

The prime minister also asserts: "The number of cell phones in India has gone up from about 40 million to more than 900 million in a decade; our country is already the second-largest market for smartphones, with sales growing ever faster."

China is currently the world's largest smartphone market.

Most smartphones require a combination of many precious metals, minerals and other materials, including gold, aluminum, glass, steel, lithium and various rare earth elements you might never have heard of such as yttrium, praseodymium and dysprosium.

Since Modi's election in late May, the consumer outlook index in India has risen nearly 8 percent. At 45.2, however, it's still about five points shy of 50, the pivotal threshold that indicates, on balance, that more consumers perceive the economy to be improving.

Planes, Trains and Automobiles

As population mounts and business and manufacturing activity increases, India's need for additional cars and trucks has accelerated this year. Vehicle production uses not only many of the materials already mentioned but also palladium, lead, zinc and others.

India, the world's largest importer of weapons, also has its eyes on American-made military aircraft--more than $3 billion worth. The Asian country is already the U.S.'s leading defense market, and companies such as Boeing, Lockheed Martin and Sikorsky are no doubt pleased to hear that Modi's government is committed to ramping up its defense spending.

According to the Wall Street Journal, among the possible purchases Prime Minister Modi discussed during his visit to the U.S. were 22 Apache attack helicopters, 15 Chinook heavy-lift helicopters and 24 Harpoon anti-ship missiles.

Below is a video courtesy of National Geographic that illustrates just how many metals, chemicals and other materials go into the assembly of a single Apache helicopter. 

Going Long in India

Many economists and pundits have already likened Prime Minister Modi's transformative pro-business position to that of Ronald Reagan and Margaret Thatcher--and his media darling status to that of Barack Obama circa 2008.

Even before Modi's election, India was drawing the attention of global investors seeking growth and opportunity. Last month the portfolio manager of our China Region Fund (USCOX), Xian Liang, had the pleasure to attend a presentation in Hong Kong by CLSA's Chris Wood, recognized as the one of the best strategists in Asian markets. During his speech, Wood maintained that India has been and continues to be his favorite market in the region, now more than ever since Modi's ascent:

"I have, in fact, allocated 41 percent of my long only portfolio to India... I am not going to pull out because I am viewing India as a five-year story given the fact that Modi has been elected for five years. Modi is the most pro-business, pro-investment political leader in the world today."

Wood went on to argue that among the four BRIC countries--Brazil, Russia and China included--India is the best place for investors to be right now.

But with Brazil's economy limping along at less than a 1-percent growth rate and Russia's wounded by international sanctions, it's hardly an intellectual feat to declare India the BRIC country with the greatest potential.

The chart below places India in context with other emerging Asian countries. As you can see, whereas the economies of China, Indonesia and the Philippines are flat or slowing, India's is growing rapidly and projected to have a 7.2-percent growth rate by 2016, a 60-percent jump since 2012.

With Modi actively seeking partnerships with some of America's largest companies, it appears more and more likely that India can realize this optimistic growth rate.

The Challenges Ahead

Despite all of the good news, India faces many economic and political challenges that must be overcome before it can truly take off and achieve legitimate powerhouse status. According to the World Bank Group, the country ranks 134 in its Ease of Doing Business 2014 Rank, just below Yemen and Uganda. And out of 144 countries, India ranks 71 in the World Economic Forum's recently-released Global Competitiveness Report 2014-2015, scoring 4.21 out of 7.

Tortuous trade barriers, which Modi has expressed his resolve to liberalize, still hinder constructive international business dealings. Gold import duties remain in effect, which has allegedly led to an increase in smuggling.

Also, although India's manufacturing sector in September showed modest growth for the eleventh consecutive month, the pace at which it grew is the slowest we've seen since December 2013. For the first time since March, the one-month moving average for the country's purchasing managers' index (PMI) crossed below the three-month. This move contributed to the J.P. Morgan Global Manufacturing PMI's recent cross below the three-month, which, as I discussed recently, could be a headwind for commodities and commodity stocks.

But such challenges don't appear to daunt the new prime minister.

"India is going to march ahead at a very fast pace," Modi told his nearly 20,000 attendees at Madison Square Garden on Sunday. "The 21st century will be that of India. By 2020, only India will be in a position to provide workforce to the world."

We at U.S. Global Investors wish Prime Minister Modi, his new government and the 1.25 billion Indians all the best.

By: Frank Holmes Author:  Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

India poised to overtake China as world’s largest coal consumer

India is set to overtake China as the world’s largest importer of coal used in power plants, as the country battles chronic power shortages that are crippling its growth while domestic sources of natural gas are being depleted at an alarming rate.

That was the main outcome of the Financial Times’ inaugural Commodities Retreat in Singapore held last week, the newspaper reports (subs. required).

Miners and traders gathered at the convention agree that the country, alongside Korea, is emerging as one of the few bright spots in the 1bn tonne a year seaborne thermal coal industry, FT reports.

Currently the world’s third-largest consumer of coal, behind China and Japan, has imported 43% more coal than it did a year ago

India, currently the world’s third-largest consumer of coal, behind China and Japan, has imported 43% more coal than it did a year ago, as demand from power stations and steelmakers increases, data from the World Coal Association shows.

In the year ended March 2013, India imported 20% of its total coal requirements, a number that is expected to grow to 23% by 2017, according to a BP Plc. report.

The demand for power station fuel is estimated to rise 43% to 730 million tons by 2017, while the supply from domestic sources is expected to jump 38% in the same period.

In China instead the future looks more and more like a coal-free one. While the nation remains the biggest user of coal, Beijing is struggling with high pollution levels brought on by an excessive use of thermal power plants, and has been taking drastic measures to reduce its reliance on coal and shift to cleaner sources like natural gas for its energy needs.