Sugar stocks rose by a mere 2% on Friday, reacting to news reports that that the government had cleared a relief package for the industry. The market’s evident lack of enthusiasm stems from the nature of the relief package. According to reports, excise duty payable by sugar manufacturers for the next three years can be deferred, and then paid in instalments after 2010.
Sugar companies pay excise at the flat rate of Rs850 per tonne, and considering this year’s projected output of 27 million tonnes, the total outgo on excise would have amounted to Rs2,295 crore. Since it’s just a deferment, companies would be booking this expense in their profit and loss statements, say analysts. Their EPS (earnings per share), therefore, would not change. But the postponement of the excise payout would certainly free up cash about Rs2,295 crore. This can be used to clear most of the dues companies owe to cane farmers. Analysts are relieved, as it would at least ensure smooth cane supplies for the coming season. The problem of oversupply in the industry, however, still remains. This explains the muted increase in sugar stocks.
There’s now no doubt that bank credit growth is slowing. Growth has decelerated from an annual rate of 29.8% on 2 March to 23.6% on 25 May. And while it’s true that this is the slack season, it’s worth remembering that the rise in bank credit during the same period last year was as high as 30.9% year-on-year. In fact, the current rate of credit growth is not very far from the central bank’s target of 24-25% for 2007-08.
However, in contrast to credit growth, money supply growth has refused to come down and is still at a high 19.6%. It was 18.5% at this time last year. How can money supply growth be higher and credit growth lower when credit is the biggest source of money supply? The answer lies in bank credit to the government. Year-on-year growth in investments is much higher now than in the same period last year. More recently, however, even this has slowed on account of the lack of issues by the government. The upshot has been much higher liquidity with banks, reflected in very low overnight rates.
At first glance, it does look as if the combination of decelerating credit growth and lower inflation will lead to the Reserve Bank of India (RBI) reining in any further interest rate hikes. But that depends on many factors. The money supply data shows that growth in net foreign exchange assets with RBI has been a negative 2.7% this fiscal, against a growth of 12.4% for the same period last year. Simply put, it’s because RBI has not intervened in the foreign exchange market and allowed the rupee to appreciate that liquidity hasn’t gone up further.
In other words, in recent months RBI chose to tighten money supply, not by raising the cash reserve ratio or interest rates, but by letting the rupee appreciate. Given the vocal opposition to further rupee appreciation, it may not find it easy to do choose that option in future.
The market’s view on DLF Ltd’s valuation hinges on two factors. The main one, of course, is the estimate on the company’s net asset value—this depends on which stockbroker one wants to believe. Another number the markets would keep an eye on is the share price of Unitech Ltd, DLF’s largest competitor. Things haven’t been great on that front. When DLF kicked off its IPO road show in Mumbai in late May, Unitech traded at Rs600 per share. As the IPO book-building kicks off this Monday, Unitech trades at around Rs505, 16% lower. This doesn’t seem to bode well for the DLF IPO which, according to people in the merchant banking industry, has already been priced at a premium to its NAV.
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