The BSE Sensex and NSE Nifty opened in red on Monday tracking weak global markets. (Photo: PTI)

9.59 am: Meanwhile, S H Kelkar stocks listed on BSE and NSE. Shares of S H Kelkar opened at a premium of 23 per cent from its issue price of Rs 180 per share. The scrip opened at Rs 222 on BSE and at Rs 223.70 on NSE.

9.44 am: The rupee weakened by 9 paise to 66.19 against the dollar in early trade, snapping its two-day winning run, on fresh demand for the US unit from importers.

9.28 am: The government has kick-started the process of disinvesting 5 per cent more in Container Corporation of India (Concor). The Department of Disinvestment has invited bids from merchant bankers to take forward the proposal to disinvest an additional 5 per cent in the Navaratna public sector unit. The government holds 61.8 per cent in Concor, the only listed public sector unit of the Railway Ministry. Concor, which was started in 1988 as the only firm with the right to move container trains, now operates in a competitive environment, but still holds over 70 percent of the containerized rail market. The share price of the company was down 0.44 per cent in the early trade.

9.18 am: Sensex was down 105.62 points at 25,504.91. Shares of Bhushan Steel will remain in focus on Monday as the company has received an approval for sale and lease back arrangements of Cock Oven Plant -I and Oxygen Plant -V of the company situated at integrated steel plant, Meramandali in state of Orissa. The board of directors at their meeting held on November 14, 2015 has given an approval for the same. Shares of Bhushan Steel were trading up over 2 per cent in the early trade.

9.15 am: Domestic equity markets opened in red on Monday tracking weak global markets. Sensex opened 30.38 points down at 25,580. Nifty opened 29.30 points down at 7732.95.

Asian stocks were hit by a sell-off early on Monday, with sentiment badly dented by Friday’s brutal terrorist attacks in Paris. US stocks snapped a six-week winning streak as retail shares tumbled on weak earnings and economic data.

As per provisional figures, foreign institutional investors (FIIs)/ Foreign Portfolio Investors (FPIs) sold shares worth net Rs 746.7 crore on Friday. Domestic institutional investors bought shares worth Rs 70.89 crore on that day.

Jindal Steel and Power (JSPL) plans to cut costs and divest some non-core assets, as it swung to a second-quarter loss due to a drop in iron and steel sales and a one-time charge linked to an overseas unit. Steelmakers including Tata Steel, JSW Steel and Jindal Steel have seen sales dented in the past few quarters due to rising imports from China, Japan, South Korea and Russia. JSPL registered a consolidated loss of 6.2 billion rupees ($94 million) in the September quarter, compared with a profit of 4.4 billion rupees in the year-ago period.

The benchmark BSE Sensex on Friday declined by 256.42 points to a two-month low of 25,610.53 on bearish macroeconomic data even as muted global cues continued to rile domestic investors. This was the sixth fall in last seven sessions.

Nifty 50 index lost 62.75 points, or 0.80 per cent, at 7,762.25 on Friday.

S H Kelkar shares will be in focus as company will get listed on the stock exchanges today. The company’s Rs 500-crore IPO which closed last month had received an overwhelming response from investors and was over-subscribed 27.08 times. (Reuters)

The downward trend in domestic markets is expected to continue on Monday ahead of announcement of wholesale inflation data later in the day, according to experts.

According to a Reuters report, global stocks are set for a short-term sell-off on Monday after Islamist militants launched coordinated attacks across Paris that killed 129 people, but few strategists expect a prolonged economic impact or change in prevailing market directions.

The benchmark BSE Sensex and NSE Nifty declined 256.42 points and 62.75 points at 25,610.53 and 7,762.25, respectively, on Friday.

Below are the stocks that are likely to be in focus today:

Jindal Steel and Power Ltd: The company said it plans to cut costs and divest some non-core assets, as it swung to a second-quarter loss due to a drop in iron and steel sales and a one-time charge linked to an overseas unit.

Tata Steel: The company wants to sell its plant in northern England to give it the “best chance of survival” as the UK industry has been struggling under a flood of cheap steel being pumped in from China, which has depressed prices.

GMR Infrastructure: GMR Infrastructure on Saturday said its consolidated net loss in July-September quarter narrowed to Rs 398.67 crore on the back of better operating margins from power plants and robust traffic growth in airports. The company had reported a net loss of Rs 609.86 crore in the year-ago period, it said in a filing to BSE.

Apollo Hospitals Enterprise: Healthcare major Apollo Hospitals Enterprise on Saturday reported a 2.37 per cent rise in standalone net profit at Rs 93.67 crore for the quarter ended September. The company had posted a net profit of Rs 91.50 crore for the corresponding period of the previous fiscal, Apollo Hospitals said in a regulatory filing.

Dhanlaxmi Bank: Private sector lender Dhanlaxmi Bank has posted a staggering decline in net profit to Rs 45 lakh for the quarter ended September 30, 2015. The bank had a net profit of Rs 5 crore in the corresponding quarter last fiscal.

Coal India: Coal India, the world’s biggest coal miner, on Friday posted a 16 per cent rise in consolidated net profit at Rs 2,543.80 crore for the quarter ended September 30 on the back of higher sales.

S H Kelkar: Shares of fragrance maker S H Kelkar and Company will get listed on the stock exchanges, BSE and NSE, on Monday. The company’s Rs 500-crore initial public issue (IPO) which closed last month had received an overwhelming response from investors and was over-subscribed 27.08 times

Eveready Industries: Eveready Industries India on Friday reported 21.76 per cent decline in standalone net profit at Rs 13.80 crore for the quarter ended September 30, 2015, due to lower sales and higher expenses.

Wockhardt: Wockhardt on Friday reported a multi-fold jump in consolidated net profit at Rs 107.59 crore for the second quarter ended September 30, mainly on account of robust sales and lower tax expense.

Sobha Ltd: Bengaluru-based realty firm Sobha Ltd reported 33 per cent decline in consolidated net profit at Rs 40.1 crore for the quarter ended September 30, on lower sales. Its net profit stood at Rs 59.5 crore in the year-ago period.

Q2FY16 was exceptionally noisy, even by Tata’s historical standards. The two key highlights were Ebitda (earnings before interest taxes depreciation and amortisation) losses in Europe and the company’s use of one-time pension gains totaling ~Rs 97 bn to make impairments and provisions totaling ~Rs 103 bn, mostly in Europe. Tata has scored key positives in its pension schemes in Europe that make its long-term financials more robust, and India operations remain relatively robust, but the European loss is worrying, as it comes after many quarters, and management commentary was broadly negative regarding Europe. Steel prices in India are expected to decline q-o-q, though there could be a large jump in Ebitda from ferro chrome and seasonally higher steel volumes. Tata also monetised group investments totaling ~Rs 32 bn in Q2 over and above Rs 10 bn in Q1, which has essentially helped keep net debt flat q-o-q even as spending stood at Rs 26 bn. Our estimates are under review. Tata’s book value increased to Rs 360/share as of September-end vs. Rs 323/share at March-end. Tata is trading at a ~0.6x P/B (price-to-book ratio), near multi-year lows.
* The results: PAT (profit after tax) stood at Rs 15.5 bn vs. the company’s compiled consensus estimate of Rs 8.9 bn. However, this is after a series of one-offs and gains from sales of investments. Ebitda stood at Rs 18.3bn, down 34% q-o-q and sharply lower than the company’s compiled consensus estimate of Rs 24.6bn and JPMe of Rs 25.3 bn. Investment gains stood at Rs 28 bn. There were exceptional write-offs/impairments totaling Rs 103 bn, with a write-off of Rs 73 bn in UK Strip products the largest; offsetting this was a one-time credit totaling Rs 97 bn from pension scheme restructuring. Tata has undertaken large-scale impairments over the last three years, with FY15 impairments at Rs 60 bn and FY13 impairments totaling Rs 83 bn. In total, Tata has impaired Rs 246 bn of assets in the last two and a half years, mostly from Europe. Tata highlighted that a significant portion of the UK assets are now written off.
* India: Operations solid, even adjusted for the DMF write-back: Ebitda stood at Rs 18.6 bn, with Ebitda/t at Rs 7990/t, up 1% q-o-q. Reversing the DMF provision write-back of Rs 3.77 bn, Ebitda/t stood at ~Rs 6372/t, down 19% q-o-q vs. Q1 Ebitda/t of Rs 7880/t. However, Q2 also included higher purchases of imported iron ore and pellets that offset the benefit from DMF write-back. Tata consumed 0.8MT of purchased iron ore totaling Rs 4.4 bn and also had onetime water charge provisions of Rs 0.9 bn that broadly offset the DMF write-back. Steel sales volumes increased 11% y-o-y in a tough domestic environment, while implied ASP/t fell ~6% q-o-q , driven partially by an inferior product mix in Q2. Ferro alloy segment Ebit stood at Rs 0.27 bn, the highest in four quarters. SE Asia operations reported positive Ebitda, at Rs 0.7 bn, up 106% q-o-q .

Tata guided that: (i) the ferro alloys and minerals division will start contributing significantly from H2FY16; and (ii) India volumes will be ramped up, among others, in second half vs. first half. The company highlighted that the safeguard duty has been of some benefit, as the fall in Chinese steel prices has partially offset the impact, and that there was an upward movement of steel prices of ~Rs 1,000/t following the safeguard duty, but there have been discounts since, and Tata did guide to lower steel prices in Q3 vs. Q2.
* Europe: First Ebitda loss after Q3FY13: The key negative was the Ebitda loss at the European operations. Ebitda/t stood at $11/t vs. JPMe of +$29/t. Steps taken in the European operations impacted deliveries and production, with sales volume down 3% y-o-y. Overall commentary on Europe was negative, with no firm comments on Ebitda profitability in European operations.
* Debt, pensions and asset sales: Underlying net debt was broadly flat q-o-q , at Rs 735 bn, as Tata made asset sales totaling Rs 32 bn in Q2 . Capex stood at R26 bn. Essentially, sales of investments allowed Tata to maintain net debt at current levels. In pensions, the UK pensions were restructured, which resulted in a one-time P&L credit of Rs 86 bn. The triennial valuation was completed, and the net deficit declined to £90m vs. £553m in 2011. The main pension scheme in the Netherlands is now considered a defined contribution scheme, which resulted in a one-time credit of Rs 11.1bn.
* Are the write-downs done with? It looks like it: Tata did its most aggressive write-off/provisions in recent history, with large write-offs not only across the UK., but also in India, South Africa and Southeast Asia.
* 2H vs. 1H: What should change? While our estimates are under review, we highlight the following changes: (i) a sharp ramp-up in the ferro chrome segment as mining ramps up? and (ii) India steel sales volume increase from new plants, with up to 0.5M  of additional sales volume from KPO with the hot strip mill ready.

Similar to last several quarters, GAIL’s reported quarterly numbers continue to have several one-off factors. Adjusted for these, we think the numbers were better than they appear at first blush. We continue to be sanguine on a much better second half and see sharp ~50% earnings growth in FY17F.

Q2 had several one-off factors:
* Gas transmission had a one-off gain of Rs 1.8 bn (R0.4 bn in Q1) on account of a ship or pay revenue accrual primarily from IOC.
* The gas marketing segment had one-off provision of Rs 1.5 bn on account of a difference between earlier non-APM and APM (administered pricing mechanism) prices that GAIL has not yet recovered from customers. Adjusted for this marketing segment, earnings would have been flat q-o-q.
* The LPG segment was impacted by a lower availability of ONGC gas during Q2, and also a shut-down at the Pata/Vijaipur LPG plants for ongoing integration of Pata petrochemical capacity.
* Similar to Q1, Petchem was in loss, as GAIL is in the process of integrating existing capacity with expanded capacity. This has impacted existing production (Q2 production down 29% y-o-y), while depreciation and interest charges have increased as GAIL had capitalised the expanded Petchem capacity in April itself. We think profitability for each key segment would improve from second half.
* Gas transmission: Volumes are likely to further improve gradually (like Dabhol terminal has restarted, spot LNG demand for power sector is stronger, LNG prices remain benign). More importantly, the regulator is committed to revise all pipeline tariffs by March 2016. As we noted earlier, the proposed ‘volume divisor’ change in tariff itself can raise the tariff by 20-33% for most pipelines.
* Gas marketing: Adjusted for a one-off factor in Q2, GAIL has clocked R3.4 bn Ebit in marketing in Q1 and Q2. The volumes will likely get better in second half, as the Dabhol terminal has resumed operations and demand from power and other sectors remains good.
* LPG and Liquid Hydrocarbon: With ONGC production back to normal, GAIL’s LPG production is likely to revive. More importantly, as GAIL gets 100% domestic gas, it will be a key beneficiary of a nearly 18% domestic gas price reduction from 1 October. We think domestic gas prices will decline further in April 2016.
* Petchem has disappointed, but can surprise from Q4: In our view, GAIL has disappointed on a long period of plant commissioning and integration. From earlier expectations of Pata-2 production commencement from September-October, expanded capacity is now likely to commence production by December 2015, and GAIL expects to reach a 70% utilisation rate in Q4FY16, and near 100% in FY17F. As expanded capacity comes online, we think profitability can sharply revive, especially if GAIL is able to use a higher share of lower priced spot LNG.

Near-term investor focus will remain on RasGas take-or-pay issue; we see low risk of take-or-pay being implemented; impact low even if take-or-pay is implemented: With the price gap high between LT RasGas contract and spot LNG prices, the large deferral of LT cargoes continues (32% in 9M since Jan-2015). Take-or-pay obligation to RasGas on lower offtake will be determined at the end of the calendar year. This issue remains a key overhang on GAIL. While contracts have take-or-pay provisions across the chain, they could be difficult to exercise, in our view.

Similar to Petronet LNG (that has back-to-back contracts with GAIL/IOC/BPCL), GAIL has back-to-back contracts with its downstream customers and can recover the bulk of take-or-payments, if these are implemented. Also, as take-or-pay provisions provide for make-up gas in subsequent periods (based on operational flexibility and, importantly, on prevailing likely much lower prices in the future), we think the impact on even the downstream consumers will not be much.

For example, for GAIL, we expect an impact of just 1.0-1.5%, due to interest outgo on advance payments. In our view, after a large deferral of LT volumes, RasGas and stakeholders will take a pragmatic view and reach an early agreement. We believe that, while the basic oil linkage (currently 12.67%) is unlikely to change, relief may come from doing away with floor pricing and raising downward volume flexibility (currently 10%).

The government has announced a revival package for state electricity distribution companies (SEBs/ DISCOMS). SEBs have accumulated losses of ~Rs 3.8tn and debt of ~Rs 4.3tn as of FY15, held largely by banks and specialised financial institutions like Rural Electrification Corporation (REC) and Power Finance Corporation (PFC). We see this as a positive for the banking sector to lower stress levels in the power sector but it will hurt margins and loan growth for REC/PFC. State governments will take 50% of DISCOM debt in FY16 and 25% in FY17 by issuing state development bonds (no SLR) carrying interest rate of 50bps over the state government yield. State guaranteed DISCOM bonds will be issued for rest at Base Rate + 0.1%. While it’s voluntary for state governments, they will be incentivised by subsidised funding from the Centre for power and coal.

Downgrading REC and PFC to Neutral; Cut EPS and PO

PFC and REC are most negatively impacted having an estimated 23% and 33% loans to DISCOMs. We estimate earnings hit of 18/23% in FY17 owing to margin compression and lower loan growth. This assumes only the state governments having the big lossmaking SEBs accepting the proposal. Earnings hit can be +30% in a scenario in which all states implement. We downgrade REC (XULEF) and PFC (PWFEF) to a Neutral (from Buy) after cutting net profit estimates by ~18/23% for FY17 and PO to Rs 260 (from Rs 375) for REC and to Rs 255 (from Rs 350) for PFC. On nominal book, both REC and PFC trade at ~0.8-0.9x one year forward book. But adjusting for estimated NPLs, REC trades at 1.5x FY17 and PFC trades at 1.2x FY17. We think stocks are unlikely to re-rate given the earnings risk overhang arising from the DISCOM package. Hence, we peg our target multiples at 1.5x FY17 adjusted book for REC and at 1.2x FY17 adjusted book for PFC, based on Gordon model with 16.8% average RoEs for REC and 15.5% for PFC for FY17-18e. Given that we believe the overall risk reward still appears reasonable, we don’t cut our ratings to Underperform.

Banks’ impact is likely to be much lower: The overall earnings impact is likely to be much lower for banks given their smaller share of SEB loans as percentage of their total loans. On the positive side, it would lower the share of impaired loans as most of these exposures are classified as restructured and release provisions (5% of loans).

Scheme, if successful, very positive longer term: We think the scheme, if implemented successfully, could be very beneficial over the longer term. In particular, the scheme focusses on bringing cost-side efficiency through reduction of interest service burden, fuel costs through coal swapping, etc. On the revenue side, it seeks to have quarterly fuel cost adjustments, annual tariff increases, taking regulators on board and including discoms losses in the FRBM limits for states.

Key challenges

The key challenges for this scheme are: (i) The states’ ability to finance these by finding takers for state issued bonds; (ii) Ability of state governments to ensure SEBs package is successfully implemented in terms of tariff hikes, cost side efficiency etc.

SEB package hurts power financiers; Downgrade REC and PFC to Neutral

The scheme announced by the government to help the finances of the SEBs while very beneficial for potentially easing the pain of the SEBs/Discoms, is likely to cause severe margin compression and volume growth to be lower for the specialised lenders like REC and, to a lesser extent, PFC. Hence, we are downgrading both REC and PFC to Neutral from Buy.

Ujwal Discom Assurance Yojana (UDAY) to help SEBs

The government has announced—Ujwal Discom Assurance Yojana (UDAY)—to help the finances of state electricity distribution companies (DISCOM). The DISCOMs have accumulated losses of approximately Rs 3.8tn and outstanding debt of ~Rs 4.3tn as of March 2015. These are largely held by banks and financial institutions As per the scheme, the state governments will take over 50% of DISCOM debt in FY16 and 25% in FY17. This would not be counted as part of that states’ fiscal deficit. These bonds, issued by the state government would, however, not qualify for SLR status. These bonds would be issued to the banks/FIs in lieu of existing loans to DISCOMs at an interest rate of 50bps above the state government yields. Any shortfall would be auctioned. The balance would be converted into state guaranteed DISCOM bonds at Base Rate+ 0.1%. The portion of the discoms’ debt which is under restructuring would also be converted to bonds.

States will be incentivised by providing them subsidised funding from the central government’s power schemes and easier supply of coal.

Downgrade REC, PFC to Neutral (from Buy); Cut EPS, price objectives: We are downgrading both REC and PFC to a Neutral (from Buy) after cutting net profit estimates by ~18% and 23% for FY17 and PO to Rs 260 (from Rs 375) for REC and to Rs 255 (from Rs 350) for PFC. REC and PFC are most impacted as we estimate 33% and 23% of their loans are to DISCOMs. These will earn a lower yield and their loan book will also shrink as they convert into bonds.

Re-rating unlikely as earnings risk overhang persists till full clarity: The market is unlikely to re-rate these stocks to what our original target multiples were on REC (1.9x FY17 adj. BV) and PFC (1.9x FY17 adj. BV) owing to the high earnings risk arising from the DISCOM package. While the package is voluntary (for state governments), many of the key states having the high loss making SEBs will be keen to take the package. This amounts to over 50-60% of the total SEB debt.

Hence, even assuming some states do not implement the package, we see REC and PFC earnings being impacted by 17/23% arising from the margin compression and the slower loan growth. Further, we see more downside risk to earnings if the entire package is implemented extending the earnings hit to +30% for PFC/REC.