Sea of red on Dalal Street, IL&FS on contagion fears

The market continued its downward move on Monday after wrapping up the previous week on a low, with the BSE Sensex closing in the red for the fifth straight day. The Sensex dropped over 600 points in intraday trade, before closing down 537 points at 36,305.

All eyes were on NBFCs and financials after the IL&FS fiasco unfolded last week. The company was unable to fulfil its interest payment obligations and had also missed commercial paper dues. With experts labelling this as a possible “Lehman Brothers moment”, fears of a contagion in the Indian financial space and eventually across capital markets started to weigh on investors.

On Friday, the Sensex saw a 1,500 point swing as investors panicked at the prospect of a default in housing finance companies. The panic was triggered after DSP Mutual Fund sold a commercial paper of Dewan Housing Finance Corporation Ltd (DHFL) at a high yield. Selling off debt instruments at a high yield indicates a threat of default.

But, DHFL’s top management clarified that any threat of default was simply rumours and the stock made a comeback on Monday, erasing some of the losses to close nearly 12% in the green.

Concerns over higher cost of funds caused NBFC stocks to fall in trade; Indiabulls Housing Finance closed over 7.5% in the red, while LIC Housing Finance was down 2.6%. This, despite finance minister Arun Jaitley assuring that the government will be making efforts to aid NBFCs. “The government will take all measures to ensure that adequate liquidity is maintained/provided to the NBFCs, the mutual funds and the SMEs,” he tweeted early on Monday.

On the back of reports that IL&FS is looking to sell 25 assets to raise Rs 30,000 crore, and that Japan’s Orix Corp is interested in acquiring a majority stake in the crisis-hit firm, its companies closed in the green on Monday.

The other stock in focus was Yes Bank, which has taken a beating since the RBI refused to grant its MD and CEO Rana Kapoor another full term. After closing down nearly 30% on Friday, Yes Bank’s shares ended the day in the red yet again, closing 0.35% down from the previous close. The bank’s board is meeting on Tuesday to decide on the future course of action in terms of succession.

Experts weighed in on the current pressure on the markets; Samir Arora, founder & fund manager, Helios Capital, used the opportunity to suggest that the long-term capital gains tax should be deferred. “Government should use market forces to turn the market. Defer/take back long-term capital gains tax for next 3 years. After that can review whether to impose. Anyway no real taxes will be collected for many years if current market conditions continue,” he tweeted.

Noted portfolio manager Porinju Veliyath posted a tweet, suggesting he sees a silver lining. “Equity market has corrected by 20-25% for an average investor in 2018. Not sure about the highest quality high PEx [price-earnings multiple] stocks, but well-corrected 'medium quality' stocks with long-term growth visibility are at attractive valuations,” he tweeted.