Is the pressure on metal stocks likely to continue?

Pressure on metal stocks
19/09/2021

On Friday, 17th September, the metal stocks came under pressure across the board. The NSE Metals Index was down 6.43% on Friday. There were 8 stocks that lost more than 5% in a single day, as shown in the table below.

Stock Name

CMP Fall on 17-Sep

NMDC

-9.6%

Vedanta

-9.0%

Tata Steel

-8.3%

Jindal Steel & Power

-7.6%

SAIL

-7.3%

JSW Steel

-7.2%

National Aluminium

-6.8%

Hindalco Ltd

-5.5%

 

The fall in the metal stocks began on Friday after the iron ore futures fell sharply in the global markets from overbought territory. This was exaggerated by indications of sharply lower steel demand from China. The lower expected output was also likely to impact iron ore demand. In addition, the Evergrande fiasco in China threatens almost the entire Chinese financial ecosystem, if the company crumbles under its $305 billion pile of debt.


On Monday, metal stocks like Tata Steel, Hindalco and JSW Steel continue to be among the major losers. This has been triggered by a number of factors. There are expectations that the tapering of liquidity by the Fed could start later this year and would be followed by interest rate hikes. That is not great news for metal stocks. In addition, China has clamped down heavily on  several industries to reduce its carbon footprint. All these played a role.


Most of the steel companies have been passing on the pressure of higher input costs to the end clients. However, that would become increasingly difficult as global prices start falling. What is more important is that most of the metal stocks ranging from Hindalco to Vedanta to Tata Steel and JSW Steel have all rallied 150-200% since the beginning of 2021. With that kind of rally, some correction was inevitable.


Not much has changed structurally for the metals industry as demand remains robust and order books are full. Unless there are a series of rate hikes in the near future, any sustained correction in these metal stocks looks unlikely.

Also Read: Why did the metal index rally 5%

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Why did FIIs Invest Rs.16,300 crore in September?

FII invest
19/09/2021

During the month up to 17-September, the foreign institutional investors (FIIs) infused Rs.16,305 crore into Indian markets. Out of this, the FIIs infused Rs.11,287 crore into equities and Rs.5,018 crore into debt. This is almost equal to the total infusion by the FIIs in the entire month of August. What has driven the surge in FII flows into India? After all, the IPO scene in September is hardly as aggressive as it was in August.

FII inflows into debt were driven by 3 reasons. Firstly, there is the stable to strong rupee, which ensures that returns are protected or enhanced in dollar terms. Secondly, the yield spread between Indian bonds and US bonds widened by more than 480 basis points due to a sharp fall in US bond yields. Thirdly, FIIs are also being attracted to Indian bonds on hopes that they will be included in the JP Morgan Bond Index, encouraging passive flows.

In the last few days, a series of far-reaching reforms pushed up FII appetite for Indian equities. The government announced an aggressive Rs.26,000 crore automobile & drone PLI scheme and set in motion the creation of a bad bank to take over stressed banking assets. In addition, the Telecom Relief Policy was a pleasant surprise while the recent aviation capacity boost also enthused FII investors.

Also Read: Which auto stocks gain from Rs.26,058 crore PLI scheme?

However, flows are not restricted to India alone as most Asian emerging markets saw robust flows in September. For instance, FIIs infused $2.60 billion into Taiwan, $535 million into South Korea and $290 billion into Thailand. Even Indonesia got $162 billion of FII inflows in September. Even as valuation risks are still prominent for EMs, FIIs see these EMs as compelling alpha stories.

There are two events to watch out for. The FOMC meets on 21st and 22nd September and is expected to give a timeline for taper. The likely Evergrande implosion in China is also an event that could have negative implications for Asian EMs, including India. That may set the tone for the coming weeks.

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Will the Indian Rupee be Under Pressure this Week?

ndian Rupee be Under Pressure
by 5paisa Research Team 19/09/2021

In the first week of September, the USDINR exchange rate stood at Rs.72.99/$. The rupee has now weakened to Rs.73.63/$. That is sharp weakening in a short span of time. What exactly has triggered this weakness and what is the likely outlook for the rupee? Will it weaken further?

I. The biggest risk is crude oil. India relies on imported crude to meet 80% of its daily crude needs. There was some hope last month when Brent Crude prices tapered to $67/bbl. However, by mid-September, Brent is back at $74/bbl and the spurt in demand and supply restrictions will keep oil prices elevated. That is likely to put pressure on the rupee, especially if you consider that trade deficit was $13.81 billion in Aug-21.

II. The FOMC meet will be a key factor that could put pressure on the Indian rupee. The US Federal Reserve has already hinted, through Jerome Powell’s speech at Jackson Hole, that the taper would commence by end of 2021. If the Fed gives a clear timetable for taper and rate hikes, it could strengthen the dollar index and weaken the rupee.

III. The Evergrande crisis could be a rupee dampener. If China hard lands due to the crisis, then PBOC is likely to let the Yuan weaken. The impact will be felt across Asia and India would be no exception. We saw in September 2015, how broadening of the Yuan range led to a sharp fall in the INR. That is a key risk in the next few days.

IV. Foreign portfolio flows are the cause and the outcome of weak rupee. Hence it normally acts as a vicious cycle. If the Fed hints at an aggressive taper, there could be a surge in FPI outflows, putting pressure on the rupee.

The redeeming features it that the RBI sits on a currency chest of $641 billion, giving enough ammunition to support the rupee in a range. As ICRA has outlined, it could be a worst-case scenario of Rs.75.50/$ by next year; not beyond that.

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How China’s Evergrande Could Create a Major Crisis?

Evergrande of China
by 5paisa Research Team 20/09/2021

Evergrande of China is in the news for all the wrong reasons. It is no ordinary company. It is the second largest Chinese real estate company and has been a big beneficiary of the real estate boom across China. With over 1,300 projects spread across 280 Chinese cities, Evergrande borrowed heavily to finance its growth. Today, Evergrande stands with insufficient cash to repay $305 billion in debt.

The problems for Evergrande came as it borrowed more aggressively to finance its projects. It sold properties with lower margins to raise enough cash to fund its next project. The problems just aggravated when the Chinese government tightened debt limits on companies. The first indications of trouble were visible when the stock price of Evergrande fell 80% and its bonds crashed 30% in a day before trading was frozen.

Obviously, a company as large as Evergrande is likely to have a ripple effect. A whole range of stakeholders including banks, suppliers, home buyers, investors, trusts and mutual funds are going to feel the heat if Evergrande files for bankruptcy. It is estimated that 128 banks and 121 shadow banks are exposed to Evergrande in some form. The impact could surely be far reaching; and experts are calling it China’s Lehman moment.

The good news is that Evergrande may not be as bad as Lehman. Firstly, Evergrande is a real estate company and not a bank, hence systemic risks are limited. Secondly, the Chinese government has already committed a $14 billion bailout package for Evergrande and has the muscle to bankroll a bigger bailout. Also, the international implications of Evergrande are not as serious as Lehman.

There are 2 key risks for India. Firstly, if this leads to a hard landing for China, the demand for a whole lot of commodities could suddenly evaporate. That is not great news for commodity stocks in India. Secondly, if China hard lands, the Yuan could weaken, pulling the rupee down to remain competitive. That is a worry for FPI flows into India.

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HDFC Bank to Launch Co-Branded Credit Cards with Paytm

HDFC Bank to Launch Credit Cards with Paytm
by 5paisa Research Team 20/09/2021

HDFC Bank may have lost 2% market share in the credit cards market to SBI, Axis and ICICI Bank in the last one year. But, that was largely due to the ban on issue of fresh cards by HDFC Bank, after customers had complained about repeated outages on their online app. However, with the ban lifted in Aug-21, HDFC Bank is going aggressive to recoup its market share. The latest move is the launch of co-branded credit card with Paytm.

Also Read: RBI allows HDFC Bank to issue Cards

HDFC Bank is India’s largest private sector bank in terms of total assets and the second largest bank overall after SBI. However, in terms of market cap, HDFC Bank has been head and shoulders above the other banks, with SBI market cap at just around half that of HDFC Bank. Paytm is the largest digital payment ecosystem in India with access to over 33 crore customers and around 2.30 crore small and medium size merchants.

The alliance makes business sense for a number of reasons. Firstly, it combines the banking and customer insights and service capabilities of HDFC Bank with the digital dominance of Paytm. The co-branded credit card will target merchants, small businesses and the millennial generation. The biggest benefit for HDFC Bank will be the rapid and focused access to Tier-2 and Tier-3 cities. Customers earn reward points on their HDFC Bank and Paytm usage.

The credit cards will be under the Visa franchise due to MasterCard currently facing RBI ban on issue of new cards due to non-compliance on local data storage. The timing of the launch has been set at Diwali, so that the full power of the festive season buying can be captured. As a result of this arrangement, Paytm merchants and customers get instant credit without too much of paperwork and documentation involved.

HDFC Banks remains India’s predominant credit card issuer with 1.48 crore cards issued followed by SBI at 1.20 crore and ICICI Bank at 1.10 crore cards issued.

 

Also Read

1. Paytm IPO Update

2. 8 Interesting facts about Paytm

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Kotak Bank Buys 10% Stake in Mutual Fund Registrar, KFIN Technologies

Kotak Bank buys stake in MF
by 5paisa Research Team 20/09/2021

It looks like Kotak Bank is on an inorganic growth spree. Just a week back, Kotak Bank had picked up the vehicle financing business of Volkswagen Finance. On 20th September, Kotak Bank announced another acquisition of stake in Hyderabad based KFIN Technologies. Kotak Bank will buy a total of 1,67,25,100 crore shares of KFIN Technologies at an average price of around Rs.185.35 per share. The total consideration paid is Rs.310 crore in cash.

This purchase will give Kotak Bank ownership of 9.98% in KFIN Technologies. KFIN Technologies was formerly called Karvy Computer share and has a major ownership by General Atlantic Partners. However, post the Karvy Group being banned from the capital markets due to the scam surrounding the sale of client shares, the global partners insisted on a change of name to highlight its independent arms-length ownership.

KFIN Technologies is one of India’s leading registrars and transfer agents for corporates, mutual funds, alternative investment funds (AIF), ETFs, insurance and pensions. KFIN is registrar to 25 out of the 44 AMCs in India, although in terms of AUM, listed entity CAMS is much bigger. It also provides central record-keeping for the National Pension System (NPS). KFIN has 13 crore folios in total, holds Rs.11 trillion in assets under custody and processes nearly 1 million transactions per day.

For Kotak Bank, this is in line with their policy of making focused minority investments in niche companies in the financial sector. Kotak will also look to leverage on the deep client entrenchment of KFIN as well as its fine-tuned processes and systems over last 30 years. For KFIN, the association gives them the backing of a much larger balance sheet. However, the deal is subject to regulatory approvals.

Interestingly, while KFIN Technologies is the registrar for the shares of Kotak Mahindra Bank, the official registrar for Kotak Mutual Fund is CAMS. It remains to be seen if the regulator is OK with a bank and a mutual fund owning a stake in a registrar.

Also Read:- Beginner's Guide to 80C Tax Saving Instruments