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After 66,000 landmark, Sensex rally continues: who is driving up the markets?

Sensex


Foreign portfolio investors (FPIs) are driving up the stock markets to new peaks on a daily basis, sending investors into a buying euphoria. After renewed interest from FPIs helped the benchmark Sensex surge by around 10 per cent in the first quarter of fiscal 2024, the superfast Sensex has spurted 2.38 per cent, in July so far even as analysts cautioned investors against entering into an overheated market.

Domestic stock markets continued their rally on Monday with BSE Sensex, which closed above the 66,000-level last week, hit a new high of 66,310.96 and the NSE Nifty jumped to 19,641.90, a rise of nearly 0.30 per cent, in early morning trades.

The major driver is the return of FPIs, the buoyancy in the global markets, strong macroeconomic fundamentals and the easing of inflation in India. “The scenario has changed with US consumer inflation declining more-than-expected to 3% giving hopes that the US Fed is near the end of the rate hiking cycle. Consequently, the US 10-year bond yield has sharply dipped from 5.1%to 4.7% and the Dollar Index has crashed by nearly 4% from 103.57 to 99.9. This is positive for emerging markets like India, which are likely to witness more capital flows,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

This resilience of the US economy, which was not anticipated and discounted by the market, is the strongest pillar of support for the global markets now, he said.

The mood in the frontline market is very optimistic looking at the aggressive FPI inflows and settling down of global macro headwinds followed by better than strong domestic micro economic data. The 5-big positive domestic catalysts driving the current upsurge are India’s strong GST collection that crossed Rs 1.60 lakh crore mark in June, better recovery in monsoon in June and normal rains expected in July as well, expected stable interest rate scenario worldwide, the US Q1 GDP reassessment from 1.3% to 2%, and easing of US PCE inflation that offers relief to investors who were worried about further interest rate hikes.

Global markets are supported by resilient economic data, avoiding the possibility of a recession. India’s stock market trend was broad-based, owing to the outperformance from energy, financial, metal, and FMCG sectors. Economic activities are gaining strength with the manufacturing PMI level at 57.8, indicating sustained demand for products, fostering a sense of confidence in the manufacturing prospects.

Why are FPIs back with a bang?

FPIs have pumped Rs 30,660 crore into stocks in July so far, pushing up share valuations. In the April-July period, FPIs pumped in Rs 1.07 lakh crore ($12.5 billion) into equities, according to National Securities Depository Ltd (NSDL) data. They remained consistent buyers, with average daily inflows of over Rs 2,000 crore in July. In June, foreign capital flows into equities were Rs 47,148 crore, the highest since August 2022 when inflows stood at Rs 51,204 crore.

FPIs have been bullish on Indian equities on the expectation that the Reserve Bank of India (RBI) has come to the end of its rate hike cycle. Retail inflation increased marginally to 4.81 per cent in June. “India is the best-performing economy compared to the other economies. The corporate sector also showed a turnaround in the fourth quarter. These are the factors because of which we have seen more FPI interest in India,” said Madan Sabnavis, Chief Economist, Bank of Baroda (BoB) said. Higher fund flows also resulted in a stable rupee during the quarter. The domestic currency moved in a narrow range of 81.68 to 82.90 against the dollar in the April-June period.

The big question is whether investors can trust FPIs to stay back when any negative news hit the market. Any policy change in developed markets like the US can change their perception about Indian markets. “The concern, however, is the rising valuations which are getting stretched. The valuations in China (PE is 9) is hugely attractive now compared to valuations in India (PE is around 20) and, therefore, the ‘Sell China, Buy India’ policy of FPIs cannot continue for long,” Vijayakumar said.

Why are domestic institutions selling?

Unlike FPIs, domestic institutions (DIIs) led by LIC, insurance companies and mutual funds, who were big buyers when the market was down in the second quarter and fourth quarter of FY2022-23, are now sellers on many days. In the last quarter (January-March) of FY 2023, DIIs had bought stocks worth Rs 83,000 crore while FPIs sold stocks worth over Rs 50,000 crore. “Domestic institutions are contrarians. They buy when other big operators like FPIs sell… and sell when FPIs and others buy. They have made good profits through this strategy,” said a fund manager.

LIC, the largest investor in the stock market, normally sells stocks when the market soars to new peaks. “We sell when others buy, and buy when others sell. LIC has been making consistent profit from its market operations in the last several years. LIC is a long-term investor in the markets,” said an official.

“Clearly, DIIs are sitting on a good profit on investments made by them in the last quarter of FY2023. They are not accumulating stocks at high levels. Ideally retail investors should follow the investment strategy being followed by DIIs. Then they won’t make losses,” said a market analyst. There’s a perception in the market that the stock markets are entering into an overbought zone with valuations hitting new highs. If there’s a major correction, DIIs won’t get any major impact while FPIs and retail investors – normally aiming at making a fast buck — who invest at high levels, will suffer losses.

Why should retail investors be cautious?

Retail investors have a tendency to enter the market directly and make aggressive purchases when prices have peaked and valuations are already stretched. “We have seen retail investors losing money in the stock market bubbles in the past. They usually buy when the prices are high and left holding the babies in the subsequent correction and falls,” said an analyst with a brokerage.

Analysts have cautioned that there is no room for exuberance or going overboard with the ongoing market rally. Globally growth is low and there is a possibility of the US economy slowing down in H2 of CY 2023. This can impact India’s exports and thereby India’s growth, too.

“The ongoing rally in the market has made valuations very rich. Nifty is trading at above 20 times estimated FY 24 earnings. This is higher than the historical average. Momentum can take the market higher, but at high valuations risk is high. Some presently unknown negative developments can trigger a sharp correction. So, even while remaining invested in the market, investors have to be cautious,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. Domestic institutions are already sellers in the market and pulled out Rs 8,129 crore from the markets in July so far. On the other hand, foreign investors have pumped in Rs 30,660 crore – which is considered as hot money. Foreign players exit the markets faster than they enter, leaving retail investors in the lurch.

What is the outlook on markets?

In July, the market trend will be influenced by auto sales numbers in June, first quarter results, progress of the monsoon and the Fed rate decision and commentary by the month end. The retail inflation for the month of June will also be an indicator about the future course of action by the RBI. As a fund manager put it, the market always fears the unknown, whatever seems to be lurking in the shadows. The RBI will review the monetary policy in August first week at a time when vegetable prices have surged and inflation has shown an uptick.

There are concerns about the rise in domestic food inflation, influenced by higher mandi prices trending above Minimum Support Prices (MSP), and muted Kharif sowing, which led investors to exercise caution. The progression of the monsoon and the trend of Kharif sowing in July will be crucial factors in determining future inflation, said an analyst. Besides, the market seems to be flooded with strong FPI inflows, and with US inflation moderating investors are hoping for a rate hike pause by the Federal Reserve later this month.

If FPI inflows continue at this level, the key indices are likely to scale new peaks in the coming days. That said, the market is likely to witness occasional correction as prices of heavyweights have already shot up. DII selling is emerging as a countervailing force putting brakes on the rally.





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Why HDFC twins are merging — and how consumers and the financial sector will be impacted


Mortgage major HDFC Ltd and India’s largest private bank HDFC Bank are set to merge on July 1 to create a combined entity with a market capitalisation of Rs 14.37 lakh crore. The merger will benefit both shareholders and customers at a time of steady growth for the Indian economy.

HDFC Chairman Deepak Parekh and HDFC Vice Chairman Keki Mistry said on June 27 that the two companies will have separate board meetings after office hours on June 30, which would be the last board meeting of HDFC Ltd. After the merger, HDFC branches will continue, but the signboards will say HDFC Bank.

“Every employee under the age of 60 will be absorbed and salaries will not be reduced. HDFC Bank will need our people because they don’t have knowledge of mortgages,” Parekh said. There will be no golden handshake for employees of HDFC Ltd.

HDFC has said that the tentative ‘record date’ for determining shareholders of HDFC Ltd who would be allotted equity shares of HDFC Bank as per the share exchange ratio, is July 13, 2023.

“Both HDFC Ltd and HDFC Bank are working towards completing all the necessary formalities for completion of the proposed amalgamation as per the tentative dates,” HDFC said.

Mistry said the two organisations have different products. “The bank has everything other than housing and HDFC Ltd does only housing. The commonality of roles is limited. It is limited to certain corporate functions,” Mistry said.

The merger has received approvals from the Reserve Bank of India (RBI), insurance regulator Insurance Regulatory and Development Authority of India (IRDAI), the National Company Law Tribunal (NCLT) and the antitrust watchdog Competition Commission of India.

IRDAI has also approved the acquisition of shares of HDFC Life Insurance Company and HDFC ERGO General Insurance Company by HDFC Ltd, and the transfer of the entire shareholding of HDFC Ltd in HDFC Life and HDFC ERGO to HDFC Bank.

HDFC Ltd was set up by H T Parekh, the uncle of Deepak Parekh, in 1977. HDFC Bank was started in January 1995, after the RBI opened up the banking sector to private players. HDFC Bank has more than 6,300 branches globally and 18,000 ATMs. HDFC Ltd has 464 offices across India.

So why did the “HDFC twins” decide to merge?

Three key factors made it an opportune time to go ahead with the merger in April 2022. The prevailing low interest rate environment was supportive; RBI had lowered the CRR and SLR requirement from 27 per cent to 22 per cent; and there was high liquidity in the system.

According to a source, there was an additional factor as well: the leadership at HDFC Ltd was closing 70, and in view of the looming question of succession, it was felt that a merger with HDFC Bank will bring the best synergy benefits.

Banking sources said the proposal was put up even when Aditya Puri was MD of HDFC Bank, but could not go ahead due to several concerns. Puri stepped down from the position he had held for 26 years on October 26, 2020.

Although there had been speculation for long, the news of the merger was successfully kept under wraps until the actual announcement.

Does the merger make sense?

With the RBI tightening the regulatory environment for non-banking financial companies (NBFCs), especially with regard to NPA (non-performing assets) recognition norms, and making the regulations almost similar to banks, the incentive for keeping HDFC Ltd and HDFC Bank separate had been diminishing.

Also, banks, led by SBI, and new-age fintech companies have intensified the competition in the home loan segment.

However, business-related synergies could have been driven even without the merger. The bet by the management is that the increased size of the balance sheet of the entity will enable it to increase its competitiveness and create shareholder value. HDFC Ltd posted a net profit of Rs 16,239 crore in FY2023; HDFC Bank’s profit was at Rs 44,108 crore.

Will HDFC Bank benefit from the merger?

The merger will be more beneficial to HDFC Ltd since its business is less profitable — it can increase its product penetration, and funding costs are expected to come down.

However, HDFC Bank will get an unparalleled advantage through the mortgage portfolio, providing it a quantum leap in distribution to semi-urban and rural areas with a huge opportunity to cross-sell bank products to a very sticky client base.

“The combined entity will be able to extract substantial synergy benefits which abide well for all stakeholders and shareholders,” said an analyst.

While the merged entity will see some cost synergies, it is difficult to see how the merger will by itself help the merged entity increase its market share. HDFC Bank has been beset by the woes of its digital initiatives, and many parts of its retail banking are under pressure from fintech companies.

HDFC is facing increasing pressure from public sector banks in its mortgage business. However, the management does have the wherewithal to meet the short-term challenges and come out on top, an analyst said.

Another advantage of the merger is that the cost of borrowing will come down for HDFC. When this happens, the combined entity gains in terms of cost efficiencies, and is value accretive for shareholders.

And what will the merger mean for shareholders?

As part of the merger, 42 shares of HDFC Bank will be given for every 25 shares of HDFC Ltd. Post the amalgamation, HDFC Bank will be 100 per cent owned by public shareholders, and existing shareholders of HDFC Ltd will own 41 per cent stake in the bank. The foreign stake is around 8 per cent in the bank, and is likely to increase.

On June 27, the shares of HDFC rose 1.59 per cent to Rs 2,762.50; HDFC Bank gained 1.38 per cent to reach Rs 1,658.00 on the BSE.

What will be the impact on the financial sector?

Competition is expected to heat up, especially between HDFC Bank and SBI, which is India’s largest bank. The home loan segment has become attractive as non-performing assets are minimal.

According to ICICI Securities, HDFC Bank aims to double its balance sheet in five years, exhibiting 15% annual growth. Expanding its physical presence (it plans to double the number of branches in the next three years); focussing on digital capabilities (it plans to change tech stack in three to four years); enhancing the product ecosystem for better customer experience; and a push in newer segments (MSMEs) and geographies (rural and semi-urban areas) could enable the bank to achieve its targeted growth and profitability, it said.

The banking sector is expected to witness further consolidation in the coming months. Axis Bank recently acquired Citibank’s retail businesses in India for Rs 12,325 crore, and the government has put IDBI Bank on the block for privatisation.

According to a Standard & Poor’s ranking, State Bank of India retained its top position after its assets increased 2.64 per cent year-on-year to $725.08 billion. Owing to its proposed merger with HDFC Ltd, the pro forma assets of HDFC Bank rose 57.67 per cent to $441.05 billion, which enabled it to hold on to the second rank. ICICI Bank secured the third spot, with total assets of $238.49 billion.

What can be some of the challenges going forward?

While market participants feel the deal was inevitable given the current environment and shrinking of regulatory arbitrage for NBFCs, the biggest challenge was to meet the regulatory requirements.

A banker said that HDFC Ltd is into developer financing, but HDFC Bank doesn’t do it as of now. While doing it may increase risks, not doing it will weaken the mortgage finance business. Developer finance is key to sourcing mortgage customers from the project.





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Life, career, religion, marriage to Indira Gandhi


Congress leader Rahul Gandhi recently responded to Prime Minister Narendra Modi’s remarks over his last name.

PM Modi, replying to the Motion of Thanks on the President’s Address in the Rajya Sabha last week, had said: “If we miss out on mentioning (Jawaharlal) Nehru anywhere, they (the Congress) get upset. Nehru was such a great person, then why do none of them use the Nehru surname? What is the shame in using the Nehru name?”

Gandhi hit back on February 13, saying, “I asked the Prime Minister some questions. I asked him about his relationship with Mr Adani. I asked how Mr Adani has grown so fast. The Prime Minister did not answer a single question. His response to my questions was that why are you not called Nehru, why are you called Gandhi. Because generally in India… maybe Mr Modi doesn’t understand this… But generally in India our surname is the surname of our father.”

The ‘Gandhi’ in Rahul Gandhi’s name comes from Feroze Gandhi, his paternal grandfather, freedom fighter, journalist, and Member of Parliament from Raebareli. He passed away in 1960, a few days before he would have turned 48.

From Feroze Ghandy to Gandhi

Feroze Gandhi was born Feroze Jehangir Ghandy on September 12, 1912 in Bombay. His parents, Ratimai (née Commissariat) and Jehangir Faredoon Ghandy, were Parsis, with Jehangir working as a marine engineer.

A young Feroze moved to Allahabad after his father passed away, to live with his aunt Shirin Commissariat, a surgeon at the Lady Dufferin Hospital. Feroze was a student at the Ewing Christian College when, at the age of 18, he had his brush with the two forces that would change his life forever – the freedom struggle, and the Nehru family.

Feroze Gandhi married Indira on March 26, 1942, on Ram Navami, at Anand Bhawan. (Photo: Wikimedia Commons)

Jawaharlal Nehru’s wife Kamala Nehru, who would later become Feroze’s mother-in-law, was among the satyagrahis picketing outside Ewing Christian College. Kamala fainted in the heat and crowds, and Feroze jumped to her aid. From then on, Feroze dropped out of the British-staffed college and threw himself into the freedom struggle, spending a lot of time at Anand Bhawan, the Nehru family home and important political centre. It was also around this time that he changed his surname from Ghandy to Gandhi, in honour of Mahatma Gandhi.

Marriage to Indira Gandhi

This was the period when Feroze first came in contact with Indira Priyadarshini, Jawaharlal Nehru’s daughter, five years his junior. He first proposed to Indira when she was only 16, but Kamala Nehru objected, saying her daughter was too young.

Journalist Sagarika Ghose writes in her book Indira: India’s Most Powerful Prime Minister that over the next few years, as Kamala’s health deteriorated due to tuberculosis, Feroze remained a dependable friend to the Nehrus, even visiting Kamala at the Badenweiler clinic in Germany.

Rajiv Gandhi, Feroze Gandhi, Indira Gandhi and Jawaharlal Nehru at Anand Bhawan after Jawaharlal Nehru’s release from detention in June 1945. (Photo: Wikimedia Commons)

When Indira joined Oxford in 1937, Feroze was studying at the London School of Economics. Ghose writes that the young people fell in love then, with Indira becoming involved in the radical political movements Feroze was linked with, including the India League, led by VK Krishna Menon.

In 1941, they returned to India, both having dropped out of college and determined to get married. The Nehru family was not thrilled about Indira’s choice, as Feroze did not come from a similarly aristocratic lineage, but after Mahatma Gandhi blessed their union, the couple got married on March 26, 1942, on Ram Navami, at Anand Bhawan.

Feroze Gandhi as MP and journalist

After Independence, Feroze was elected MP from Raebareli. The Congress then had virtually no opposition. However, Feroze, even from the treasury benches, regularly raised his voice against the government and the party when he did not agree with them.

It was Feroze Gandhi who, in 1958, proved in Parliament that the Life Insurance Corporation’s (LIC) had, at the behest of high-ups in the government, invested hugely in six ailing companies owned by Haridas Mundhra, a dodgy businessman. Then Finance Minister T T Krishnamachari had to resign as a consequence of Feroze’s campaign.

Three years before that, he had exposed the financial manipulations by what was known as the Dalmia-Jain or DJ Group. His revelations led to the nationalisation of the country’s life insurance industry.

He was also the one who introduced a Private Member’s Bill making it possible for journalists to report on proceedings inside Parliament.

By now, Indira and Feroze’s marriage was deteriorating. Feroze had been unfaithful, while Indira’s increased involvement with her father’s political and social life created more distance between the couple.

Journalist Coomi Kapoor, in her book The Emergency, has written that the couple’s younger son, Sanjay Gandhi, was devoted to Feroze, and “believed that his father had been abandoned and that the neglect of his well-being had led to his early death from a heart attack.”

But apart from personal differences, Feroze also disagreed with his wife politically, displaying a firmer commitment to democracy and federalism than the more authoritarian Indira.

A particularly bitter confrontation between the couple occurred over the Centre’s decision to dismiss the democratically elected Communist government of Kerala in 1959. This was when Nehru was still alive, and Indira was the Congress president. The government of EMS Namboodiripad was bringing in land and educational institutes’ reforms, which was witnessing major opposition. The central government used this unrest as a reason to dismiss the government. Among the most strident critics of this move was Feroze, who even called her wife a ‘fascist’ over this.

Swedish journalist Bertil Falk, in his book Feroze The Forgotten Gandhi, writes, “According to Janardan Thakur, well-known political correspondent: ‘It was her husband who perhaps first called her a “fascist”… The [Kerala] issue had come up at breakfast table at Teen Murti, and there had been quite a row between Indira and Feroze, with Nehru looking on very distressed. “It is just not right,” Feroze had said, “you are bullying people. You are a fascist.” Indira Gandhi had flared up. “You are calling me a fascist. I can’t take that.” And she had walked out of the room in rage.’”

On September 8, 1960, Feroze Gandhi died of a heart attack. Hindustan Times reported about his funeral that “verses from the Gita and the Ramayana, and from the Quran and the Bible were chanted. A special prayer was conducted for the departed soul by Parsi priests”.

Feroze Gandhi’s grave is in the Parsi cemetery at Allahabad, where his life had found a new direction.





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Everyday Economics: What is an IPO?


An IPO or initial public offering is the process by which a privately held company, or a company owned by the government such as LIC, raises funds by offering shares to the public or to new investors. Following the IPO, the company is listed on the stock exchange.

While coming with an IPO, the company has to file its offer document with the market regulator Securities and Exchange Board of India (Sebi). The offer document contains all relevant information about the company, its promoters, its projects, financial details, the object of raising the money, terms of the issue, etc.

Which companies can come out with an IPO?

In order to protect investors, Sebi has laid down rules that require companies to meet certain criteria before they can go to the public to raise funds. Among other conditions, the company must have net tangible assets of at least Rs 3 crore, and net worth of Rs 1 crore in each of the preceding three full years, and it must have a minimum average pre-tax profit of Rs 15 crore in at least three of the immediately preceding five years.

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Where do the proceeds of the IPO go?

If the issue raises fresh capital, the proceeds of the IPO go to the company, and can be utilised for future growth, expansion, debt reduction, etc. If the issue involves offer for sale by promoters or existing investors, then the money goes to them and not to the company. In the case of LIC, the issue is an offer for sale by the government, and the IPO proceeds will go to the Government of India.

Who fixes the price of securities in an issue?

The per-share price of the public issue is fixed by the issuer in consultation with the merchant banker. They arrive at the total valuation of the company based on parameters such as assets, revenues, profits, and future cash flow projections, and the total value of the company is then divided by the post-offer shares outstanding to arrive at the price of each share.

The regulator, Sebi, does not play a role in price fixation.

What are the advantages of listing a company?

While listing on the stock exchange calls for additional disclosures by companies on a regular basis, leading thereby to more stringent compliance requirements, it may help a company raise capital, and diversify and broaden its shareholder base.

Listing provides an exit to existing investors of the company. A listed company can raise share capital for growth and expansion in the future through a follow-on public offering or FPO.

Who can invest in an IPO?

There are various categories of investors who can invest in an IPO. Qualified institutional buyers (QIBs) is a category of investors that includes foreign portfolio investors (FPIs), mutual funds, commercial banks, insurance companies, pension funds, etc.

All individuals who invest up to Rs 2 lakh in an issue are classified as retail investors. Retail investors investing above Rs 2 lakh are classified as high net worth individuals.

You have to be 18 years of age to become an investor. A brokerage account is needed to invest, and you have to be at least 18 years old to have one.

What should you look for before investing?

The credibility of the promoter should be the top consideration. But investors must also do a financial analysis of the company, and compare it with peers in the same sector before investing in the IPO.

If there is a company in the same sector that is already listed, and if it has strong fundamentals and its shares are available at a competitive price, investors should consider that as well, rather than going for the public issue of a company that is proposing to list.

Investors must follow QIBs, who are perceived to have the expertise for assessment and evaluation, and a greater ability to do due diligence.

These institutional investors invest in the first few days of the issue opening, and retail investors, who have a wider window for investing, can assess the demand from the interest shown by the QIBs, and can simply follow them. If QIBs show a lot of interest, retail investors can go for the issue. If the QIBs are cold, it is better to avoid.





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