The week once again belonged to Reliance as the company
formally announced the de-merger plan after market hours
on Friday. The week started on a volatile note on Monday
as the markets fluctuated considerably. The sensex managed
to cross the 7700 mark briefly in intra-day trades before
losing ground and closing below that mark.
Strong
rally in Reliance and PSU oil stocks saw the markets surge
on Tuesday and the sensex closed above the 7700 mark comfortably.
Expectations about a formal announcement about the de-merger
at the Reliance Industries AGM kept the markets excited
and the company crossed Rs1 lakh crore in market capitalisation.
Reliance is the first private company and the second after
ONGC among all companies to achieve this feat.
The
company's AGM on Wednesday was a rather tame affair with
Mukesh Ambani holding stage with huge investment plans
for the company's refinery. The disappointment led to
a sell-off in Reliance Industries and the indices closed
the day on a flat note.
Anil
Ambani provided the excitement for Thursday by announcing
the de-merger details after market hours on the previous
day. The Sensex promptly went past the 7800 mark, but
closed marginally lower on weakness in technology and
banking stocks. All round buying was seen in engineering
stocks.
Friday
turned out to be a day of profit booking though significant
buying was seen in metals and select power stocks. The
indices closed lower following the weakness in technology
and banking stocks.
After
the underperformance during previous week, mid-caps bounced
back and surged to record levels during the week. Except
on Wednesday when it closed on a flat note, the CNX Mid-Cap
100 index managed to close with strong gains through out
the week. The index closed the week on Friday at a new
lifetime high.
Domestic
economic and regulatory action
- There
are reports that the government is planning to issue
oil bonds to the PSU oil marketing companies to compensate
them for the subsidies on petroleum products. The oil
bonds would transfer the cost of subsidies from the
companies to the exchequer, rightly so since subsidies
are decided by the political leadership.
However, there is a high probability that the proposal
would not be implemented given the precarious financial
position of the government. Now that it has been formally
decided to suspend the disinvestment programme, the
government would have to find adequate resources to
meet the demands of the employment guarantee programme
and similar welfare schemes.
The report of a parliamentary committee on oil product
pricing would put further pressure on the government.
It has recommended a reduction in the various duties
imposed on petroleum products so as to keep the prices
at retail level low. The committee has also recommended
an abolition of export subsidies on petroleum products.
The committee report throws further light to the strange
ways of duties on petroleum products. Successive governments
have viewed this as an area of easy taxation, which
generates plentiful cash flows to the government kitty.
The report points out that the government has collected
over Rs55,000 crore as cess on petroleum products for
the development of energy sector ever since such a duty
was imposed. Of this, not even Rs1,000 crore was given
to the PSU oil companies!
- Inflation
for the week ended 23 July declined to 4.07 per cent
from 4.18 per cent for the previous week. The decline
was attributed to a fall in prices of food articles
while the price level of manufactured goods remained
steady.
Industry
update
- After
more than three years of fast paced growth, the automobile
industry is showing signs of a marginal slow down this
year. Volume growth in most segments has come down to
single digits as the industry is finding it difficult
to build on the large base.
Despite
the slow down in volume growth, profitability of frontline
auto companies was hardly affected during the first
quarter. This was surprising given the fact that input
costs, especially steel prices, have gone up substantially
as compared to last year. The industry was able to maintain
margins by rationalising costs and keeping average unit
realisations steady.
- The
expansion of the auto ancillary industry has helped
the automakers in rationalising costs and improving
quality. The significant export opportunities that have
opened up during the last few years have enabled the
frontline ancillary companies to build capacities and
bring down unit costs. They have also improved quality
significantly by entering into technological alliances
with overseas companies.
The
auto ancillary industry is in a position to reap significant
rewards in future if they can maintain their thrust
on technological and quality improvement. The steady
growth in the domestic auto market has enabled many
of the homegrown companies to achieve better economies
of scale, even though most of them remain tiny by global
standards. The global auto majors have brought some
of their own suppliers to the country which has helped
increase the competition and thereby improve the competencies
of domestic ancillary companies.
The
country has significant resources in terms of technically
qualified workforce, design capabilities, availability
of material inputs etc to make it big in the global
market for auto components. Many of the large global
auto parts manufacturers are shifting their base to
lower cost locations and India is emerging as one of
the better choices of them.
Domestic
ancillary companies are also expanding their geographical
reach by acquiring companies in Europe and US. The acquisitions
are tiny by US and European standards and have not attracted
much attention in those countries. However, these are
significant initial steps for the Indian companies in
their quest to acquire technology and product development
skills. More importantly, these acquisitions give the
Indian companies access to these large markets.
Corporate
Moves
- The
details of the de-merger of the Reliance group into
the Reliance Industries group and the Anil Ambani group
were formally announced after the board meeting of Reliance
Industries yesterday. The announcement has come after
months of speculation in the stock markets and media
about the way the empire would be split between the
two brothers.
The
de-merger as announced would happen in two2 stages.
In the first stage four holding companies would be formed
under the names Reliance Energy Ventures, Reliance Capital
Ventures, Reliance Communication Ventures and Global
Fuel Management. Reliance Industries' holdings in Reliance
Energy and Reliance Capital would be transferred to
Reliance Energy Ventures and Reliance Capital Ventures.
Reliance
Communication Ventures would receive the current holdings
of Reliance Industries in the telecom ventures Reliance
Infocomm, Reliance Telecom (GSM operator in the eastern
states) and Reliance Communication Infrastructure. Global
Fuel Management would hold natural gas supply contracts
from Reliance Industries, which would feed the thermal
generation plants of Reliance Energy in future.
Reliance
Industries shareholders would get one share each in
all the four holding companies for every share held
by them. All these holding companies would be listed
on the exchanges. Energy Ventures and Capital Ventures
would have a capital base of Rs1,223 crore each while
Communication Ventures and Global Fuel Management would
have equity capital of Rs611 crore each.
Reliance
Industries' shareholders would hold 5 shares of Reliance
Capital and 7 shares of Reliance Energy indirectly through
Reliance Capital Ventures and Reliance Energy Ventures
respectively. Reliance Communication Ventures would
hold approximately 66 per cent of Reliance Infocomm
and 35 per cent of Reliance Telecom.
In
the second stage, Reliance Energy Ventures and Reliance
Capital Ventures would be merged into Reliance Energy
and Reliance Capital respectively. The Anil Ambani group
would then have four listed companies Reliance Communication
Ventures, Reliance Energy, Reliance Capital and Global
Fuel Management.
- The
announcement of de-merger details was another opportunity
for the group to display their version of transparency
and corporate governance. Much to the disappointment
of stock market traders and media, Reliance Industries
did not announce the details of the de-merger at its
AGM and stated that a team of financial and legal consultants
are preparing the details.
As
if to steal the media exposure, Anil Ambani wasted no
time and held a press conference within hours of the
conclusion of the AGM and gave out all the details of
the de-merger. How can a significant shareholder and
one of the interested parties disclose such details
when the board of directors of Reliance Industries,
which is the decision making body at least in paper,
had stated that the details are being worked out? Interestingly,
the Reliance board of directors disowned the Anil Ambani
statements the very next day though the de-merger details
approved by it later were more or less in line with
what the younger brother had announced.
Anil
Ambani later thanked the board of directors of Reliance
Industries for accepting 'his proposals' for de-merger
in the interests of transparency and fairness. Was it
really a case of Anil Ambani proposing and the board
accepting it? If so, what was the need for independent
valuations by legal and financial consultants?
If
this is the high standard of corporate governance and
transparency Anil Ambani is professing, then the group
has a long way to go even to meet the standards of some
of the other Indian corporate groups. As usual, the
market regulator SEBI remains a silent spectator.
US
markets, economy and oil
The
US indices closed on a weak note on the last day for the
second week in a row, but unlike the previous week the
frontline indices declined during this week. The Dow lost
close to a per cent during the week while losses on the
NASDAQ and S&P 500 were lower.
Ironically, strong economic growth was the leading factor
behind the decline followed by surging crude prices. Continuing
growth in US economy has led most analysts to forecast
higher interest rates.
Job additions in US for the month of July was stronger
than expected and unemployment rate at 5 per cent is at
a four-year low. Growth in income and consumer spending
for last month came out to be better than expectations.
Consumer credit for the month of June increased by over
$14 billion, which again was higher than expected.
Healthy
labour markets and strong growth in consumer spending
is keeping US economic growth buoyant. Some economists
have hiked their US economic growth projections for the
July-September quarter to 4.5 per cent and even 5 per
cent annualised. The US economy had expanded 3.4 per cent
during the April-June quarter.
The
acceleration in economic growth has pushed bond yields
to a 4 month high on expectations that the US Fed would
continue to increase rates in the foreseeable future.
Most analysts have revised upwards their Fed interest
rate forecast to between 4 and 4.5 per cent by the year-end
or by first quarter of next year.
Crude prices continued their rally from the previous week
and posted a new lifetime high of $62.5 per barrel on
the NYMEX on Wednesday. Crude closed the week on a strong
note at an all-time closing high of $62.31 on Friday.
The
death of the Saudi monarch led to speculation about political
instability in the world's largest oil producing country
and pushed up prices in the early part of the week. Unplanned
shutdowns by many US refiners led to worries about supplies
of refined products and held the prices in an upward trajectory
later in the week.
*Disclaimer:
The author doesn't have any position in the stocks
specifically mentioned above at the time of writing this
article. This analysis/report is only for the purpose
of information and is not an investment advice. Readers
are advised to consult a certified financial advisor before
taking any investment decisions. While efforts have been
made to ensure the accuracy of the information provided
in the content the author or publisher shall not be held
responsible for any loss caused to any person whatsoever.
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