Month: July 2024

Finance Minister Nirmala Sitharaman announced an increase in the securities transaction tax (STT) on futures and options (F&O) in the Union Budget 2024.

Analysts had anticipated this tax hike due to the strong participation of retail investors in the derivatives market. In recent years, derivative trading in India has grown significantly as investors seek quick profits. However, many of these investors face losses due to a lack of understanding of derivative trading.

Despite repeated warnings from SEBI, which has highlighted that 90% of active retail traders lose money in derivative contracts, the popularity of derivative trading continues to rise.

In the Union Budget, the Finance Minister proposed to increase the rates of STT on the sale of an option in securities from 0.0625% to 0.1% of the option premium and on the sale of a futures in securities from 0.0125% to 0.02% of the price at which such futures are traded.

Earlier in May, Nirmala Sitharaman and Chief Economic Advisor V. Anantha Nageswaran sounded caution about growing retail participation in the equity futures and options market.

The Economic Survey 2024, which was released a day before the budget, noted the increasing interest of these investors in derivative trading.

“Derivatives trading holds the potential for outsized gains. Thus, it caters to humans’ gambling instincts and can augment income if profitable. These considerations are likely driving active retail participation in derivatives trading,” the survey said.

The survey emphasizes the need for increased investor education and ongoing financial literacy to alert individuals about the potential for low or negative returns from derivatives trading.

“A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives. Investors’ behavioral response would be to feel ‘cheated’ by unseen more considerable forces. They may not return to capital markets for a long time. That is a loss to them and the economy,” the survey noted. 

How big is the Indian derivatives market?

Derivative trading in India has gained significant momentum post-COVID-19 pandemic, attracting retail investors who view it as a quick way to earn returns on their capital.

This surge has propelled Indian equity derivatives volumes to the highest in the world. According to recent data, the monthly turnover in the F&O segment reached ₹8,740 lakh crore in March 2024, a sharp increase from ₹217 lakh crore in March 2019.

Simultaneously, the average daily turnover in the equity cash segment was ₹1 lakh crore, while the F&O segment saw an average daily turnover of approximately ₹330 lakh crore.

RBI and SEBI raise concerns

Last week, Reserve Bank of India (RBI) Governor Shaktikanta Das expressed concerns about the widening gap between credit and deposit growth, noting a shift in household savings away from traditional deposit accounts.

Estimates suggest that a significant portion of stock market investments are now shifting towards derivative trading, raising alarms within the government.

At an asset management committee event last week, the SEBI Chairperson highlighted the substantial losses incurred by an increasing number of young investors involved in derivatives in recent years.

“It has now reached a scale where we believe that the micro-objective of protecting the individual investor has changed and morphed to thinking about the macro issue. Is this what our market is designed to do – facilitate a lot of speculative transactions?” she questioned.

From hedging tools to speculative investment

Derivatives were originally designed as hedging instruments to help investors minimize potential losses by entering into contracts such as futures and options. They were first introduced to protect farmers from crop losses and were later extended to stocks, currencies, and bonds.

However, derivatives are now widely used as speculative tools globally. Investors aim to generate substantial profits with a relatively small capital investment compared to stocks. This lower initial investment in futures and options has particularly attracted many young investors to trading.

Will there be a shift towards long-term investing?

Commenting on the recent developments, Vipul Bhowar, Senior Director, Listed Investments, Waterfield Advisors, said, “The decision to raise taxes comes amid a dramatic increase in derivative trading volumes, which have grown significantly since 2020.”

“Retail investor participation in the derivatives market has surged from 2% in 2018 to 41% in 2023. Regulators have expressed concerns that this surge in trading is leading to speculative behavior that could be detrimental to individual investors and the broader economy.”

Vipul Bhowar said that the change in tax policy should encourage retail investors to shift their focus from speculative trading to long-term investments. This shift could potentially reshape market dynamics in the near term, leading to a more stable and sustainable market environment.

“The government’s tax adjustments demonstrate a proactive approach to managing the risks associated with the rapid growth of retail participation in the derivatives market. The aim is to foster a more stable trading environment. The increase in taxes may have a significant impact on trading volumes, potentially affecting market liquidity and dynamics. High-frequency trading firms, which operate on narrow margins, are particularly sensitive to changes in transaction costs, and this sensitivity could lead to significant changes in the market landscape,” he noted.

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Budget 2024: ITC share price soared by more than 5% on Tuesday after Finance Minister (FM) Nirmala Sitharaman announced no changes to tobacco taxation in her budget address, providing comfort to businesses like ITC, which rely heavily on cigarettes for income. The rates remained unchanged following a 16% hike in National Calamity Contingent Duty (NCCD) last year. ITC was among the top performers on the benchmark indices, Nifty 50 and Sensex.

ITC’s share price today opened at ₹467.05 apiece on the BSE. The stock touched an intraday high of ₹489.80 apiece and hit an intraday low of ₹466.55. Nifty FMCG gained 2.7%, with ITC at the top of the index.

According to Ruchit Jain of 5paisa, the ITC share price has recently seen an up-move with good volumes, which is a positive sign. The immediate support for the stock is placed around 460.

Jain added that the broader trend for the FMCG index is positive, and stocks from this sector have been witnessing good price-volume action. We expect a relative outperformance from FMCG stocks in the near term.

Another advantage for ITC is the expected revival in rural demand, which would benefit the company’s non-tobacco businesses, such as FMCG and Agri. The Finance Minister boosted the Union Budget’s rural allocation by 12%.

Furthermore, T Manish, Research Analyst at SAMCO Securities, stated that the revised tax rates and higher standard deduction help FMCG firms.

Manish added that FM announced higher tax rates under the New Tax Regime, in addition to the mentioned slab modifications, and increased the standard deduction from 50,000 to 75,000 for those opting for the New Tax Regime. This will result in net tax savings of roughly Rs. 17500 for individuals. This will immediately benefit corporations in the FMCG market, including HUL, ITC, Dabur, and Nestle.

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Stock market today: Continuing their losing streak for a second consecutive session, Indian stock market benchmarks, the Nifty 50 and the Sensex, closed in the red on Monday, July 22, ahead of the Union Budget 2024.

The fall in key indices could be largely attributed to the poor show of select heavyweight stocks such as Reliance Industries, Kotak Mahindra Bank, ITC, and Wipro. However, gains in shares of HDFC Bank, Infosys and Mahindra and Mahindra underpinned the indices.

Nifty 50 closed the day 22 points, or 0.09 percent, lower at 24,509.25, while the Sensex closed the day 103 points, or 0.13 percent, lower at 80,502.08.

Mid and small-cap segments of the market witnessed healthy gains, shrugging off caution ahead of the Budget.

The BSE Midcap index rose 1.27 percent, while the Smallcap index climbed 0.83 percent.

“After a sharp fall in early trades, markets were in a recovery mode and ended with marginal losses on profit-taking in banking, IT and realty stocks. Investors traded with caution as nervousness gripped them ahead of tomorrow’s Budget. However, markets could see volatility during the Budget announcement on Tuesday, and one may see sector-based action”.

Experts expect the Budget to keep its focus on fiscal prudence and boost the manufacturing and infrastructure sectors.

Meanwhile, the Economic Survey 2023-24 highlighted the resilience of the Indian economy and projected continued strong growth in FY25, subject to geopolitical, financial market, and climatic risks.

Thanks to gains in the mid and small-cap pockets of the market, the overall market capitalization of BSE-listed firms rose to nearly ₹448.5 lakh crore from nearly ₹446.3 lakh crore in the previous session.

28 stocks ended in the green in the Nifty 50 index, while 22 stocks ended in the red.

Shares of Grasim (up 2.58 percent), UltraTech Cement (up 2.41 percent), and NTPC (up 2.22 percent) ended as the top gainers in the index. On the flip side, shares of Wipro (down 9.31 percent), Reliance Industries (down 3.42 percent), and Kotak Mahindra Bank (down 3.25 percent) ended as the top losers in the index.

Among the sectoral indices, Nifty Auto (up 1.15 percent), Healthcare (up 1.10 percent), Pharma (up 1.06 percent), and Metal (up 1.02 percent) indices clocked healthy gains.

However, Oil & Gas (down 0.62 percent), Realty (down 0.48 percent), Media (down 0.47 percent), IT (down 0.38 percent) and FMCG (down 0.34 percent) ended with losses.

Shrikant Chouhan, the head of equity research at Kotak Securities, pointed out that the Indian stock market is currently exhibiting non-directional activity around the 24,500/80,400 level following a reversal formation.

“With Budget Day looming, we anticipate heightened volatility. The 24,500/80,400 level serves as critical support for the bulls, while 24,850/81,600 could pose as the primary resistance zone for traders,” said Chouhan.

“A shift in sentiment may occur if the index falls below 24,500/80,000, potentially leading to a drop to 24,150-24,000/79,000-78,600, supported by retracements and the 20-day SMA (simple moving average). Reducing long positions during rallies is recommended as long as the market is trading below 24,850/81,600,” said Chouhan.

“Buying is advisable only at major support levels (24,150/79,000 and 24,000/78,600) with a medium to long-term perspective. If the market surpasses 24,850/81,600, it has the potential to advance towards 25,000/82,000 and 25,300/83,000 levels,” Chouhan said.

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Stock market today: An all-round selloff swept through the Indian stock market on Friday, July 19, leading to losses of approximately 1 percent for the benchmark indices, Nifty 50 and Sensex. The midcap and smallcap segments experienced even steeper declines as investors booked profits across sectors ahead of the Union Budget next week. Weak global cues also contributed to the downturn in the domestic market.

Snapping their winning streak of the last four consecutive sessions, Nifty 50 closed the day with a loss of 270 points, or 1.09 percent, at 24,530.90, while the Sensex ended at 80,604.65, down 739 points, or 0.91 percent.

The BSE Midcap and Smallcap indices cracked over 2 percent each.

The overall market capitalization of the firms listed on the BSE dropped to nearly ₹446.3 lakh crore from nearly ₹454.3 lakh crore in the previous session, making investors poorer by about ₹8 lakh crore in a single session.

During a brief surge during the session, the Sensex and Nifty 50 reached new all-time highs of 81,587.76 and 24,854.80, respectively.

As many as 46 stocks ended in the red in the Nifty 50 index and only four- Infosys (up 1.78 percent), ITC (up 0.62 percent), Asian Paints (up 0.60 percent), and Britannia (up 0.06 percent) closed in the green.

Shares of Tata Steel (down 4.97 percent), JSW Steel (down 4.68 percent), and BPCL (down 3.98 percent) closed as the top losers in the index.

Amol Athawale, the VP of technical research at Kotak Securities, observed a long bearish candle on daily charts and a shooting star candle formation on weekly charts, indicating temporary weakness shortly. However, the market’s medium-term texture is still on the positive side.

“The current market texture is non-directional and volatile; hence, level-based trading would be the ideal strategy for the traders. 24,500/80,400 and 24,350/80,000 would act as a key support zone for the bulls, while 24,850-25,000 /81,600-82,000 could be the key resistance areas for the traders,” said Athawale.

“Below 24,350/80,000, the sentiment could change. Below the same, positional traders may prefer to exit from the trading long positions,” said Athawale.

Why did the market fall today?

 

Experts have identified the following four key factors that may have triggered the selloff in the Indian stock market:

1. Weak global cues

Markets across the globe were in a somber mood on Friday amid growing uncertainty over the outcome of the US presidential race. Weak Chinese macro data and deepening China-US trade tensions also weighed on sentiment.

2. Caution ahead of Union Budget

 

Back home, apart from weak global cues, caution ahead of the Union Budget, which will be presented on Tuesday, also kept investors away from riskier equities. There is hope that the government will announce a pro-growth budget that will keep the focus on fiscal consolidation and economic growth. Still, experts also anticipate some hues of populism.

“This decline signals caution ahead of the Union Budget, as participants chose to book profits,” said Ajit Mishra, SVP – Research, Religare Broking.

“We may see further dips in the Nifty, with the next crucial support at the 24,150 level, corresponding to the 20-day EMA (exponential moving average). Traders are advised to avoid aggressive positions and opt for hedged trades. For now, it is also recommended to focus on index majors rather than midcap and smallcap stocks,” said Mishra.

3. IT outage

Experts said reports of system outages across industries due to an issue with the Microsoft update also influenced sentiment.

“The domestic market closed today with a downturn due to the global sell-off, triggered by operating system issues that caused devices to crash worldwide. The global IT outrage has led to disruptions in various Indian industries. The overvalued market is also experiencing profit-booking ahead of the Budget next week. The recent performance has been bullish in anticipation of pro-industry and populist measures,” said Vinod Nair, Head of Research at Geojit Financial Services.

“Markets plunged in the last hour trade on broad-based profit-taking. IT stocks, which held ground in early trades, too, gave up their gains, while other sectoral and broader indices incurred substantial losses after sentiment turned extremely bearish on weak global cues and reports of online businesses in several countries, including in India, hit by cyber outages,” said Prashanth Tapse, Senior VP (Research), Mehta Equities.

4. Concerns overvaluation

Concerns over rich market valuation are also seen as a factor that triggered a profit booking. Nifty 50 is trading above its two-year average price-to-earnings (PE) ratio.

As per the equity research platform Trendline, Nifty’s current PE is 23.6, which is above its two-year average PE of 21.9.

Its current price-to-book (PB) ratio is 4.2, slightly above its two-year average PB of 4.1.

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Jhaveri Credits and Capital, once considered a penny stock, has emerged as a standout success story, delivering exceptional returns to its investors over both the long term and recent periods, showcasing phenomenal performance.

In the last four years alone, Jhaveri’s stock price has surged dramatically by an astounding 18642 percent, skyrocketing from ₹1.96 in July 2020 to its current value of ₹367.35. This remarkable growth underscores Jhaveri’s consistent value appreciation, solidifying its position as a highly lucrative investment opportunity within the penny stock segment.

Over the past three years as well, the stock has witnessed impressive gains, climbing by 6728 percent from ₹5.38 in July 2021. Recent performances continue to underscore Jhaveri’s stellar track record, with a notable 313 percent increase over the past year. In 2024 year-to-date, the stock has shown resilience with a positive gain of over 31 percent, despite experiencing losses in four out of seven months.

July marked a particularly strong rebound, with the stock surging nearly 8 percent, reversing losses from the previous four months. The stock shed around 4 percent in June, 2.6 percent in May, 23 percent in April, and over 5 percent in March. Earlier in the year, February saw a significant rally of 21 percent, following a massive 47 percent surge in January.

While currently trading over 30 percent below its record high of ₹527.30 achieved on March 2, 2024, Jhaveri Credits and Capital has still soared 305 percent from its 52-week low of ₹90.70 recorded on July 24, 2023. This remarkable performance highlights Jhaveri’s ability to deliver substantial returns and maintain investor confidence amid market fluctuations.

Despite its exceptional performance, it’s essential to highlight that the stock is currently under ESM: Stage 1 and has recently (on July 10) received a show cause notice from market regulator Sebi.

What is ESM?

The Enhanced Surveillance Measure (ESM) is a regulatory framework implemented by the National Stock Exchange (NSE) in India. It aims to enhance monitoring and surveillance of listed companies to ensure investor protection and market integrity.

Under Stage I, the trading of the securities is settled through a trade-for-trade mechanism with a price band of 5 percent, or 2 percent.

About the Firm

Jhaveri Credits and Capital Limited engages in the commodity broking business in India. It provides share broking activities in cash, derivatives, and currency; and other services, such as mutual fund, insurance distribution, and agricultural activities. The company is also involved in financing, investment, and broking advisory business. Jhaveri Credits and Capital was incorporated in 1993 and is based in Vadodara, India.

Earnings

In the March quarter (Q4FY24), Jhaveri reported a standalone net profit of ₹35 lahks, declining massively from ₹93 lahks in the same period last year and ₹105.5 lakh in the previous quarter (December 2023).

Meanwhile, total revenue for the quarter stood at ₹487 lahks, a fall from ₹1,142.7 lahks a year earlier but a multifold 233 percent surge from ₹146 lakh in the December quarter.

For the fiscal year 2023-24, the company achieved a standalone net profit of ₹161 lakh, a substantial jump from ₹78.5 lakh in FY23. Meanwhile, revenue for FY24 soared 124 percent to ₹2,641.7 lakh as compared to ₹1,180.3 lakh in the previous financial year.

Brokerage Views

ICICI Direct, a domestic brokerage, has pointed out several strengths of Jhaveri Credits and Capital. It emphasized that the company has shown robust annual EPS (earnings per share) growth and has consistently increased its revenue for the past three quarters. Moreover, ICICI highlighted the company’s low debt levels as another significant positive factor.

Meanwhile, its weaknesses, as per the brokerage, are:

– Promoter holding decreased by more than -2 percent QoQ.

– Poor cash generated from core business – Declining Cash Flow from Operations for the last 2 years

– Degrowth in Quarterly Revenue and Profit in Recent Results(YoY)

Investing in penny stocks offers the allure of high potential returns at relatively low entry costs, but it’s a terrain fraught with substantial risks. One of the primary challenges is liquidity; penny stocks often suffer from limited trading volumes compared to larger, more established companies. This illiquidity can amplify price swings, making them highly volatile investments. Moreover, penny stocks may operate under less stringent financial reporting standards and regulatory oversight, creating opportunities for market manipulation and fraudulent activities. These factors combine to heighten the inherent risk associated with trading in penny stocks.

To navigate this volatile landscape prudently, investors must conduct thorough research and implement robust risk management strategies. Understanding the company’s fundamentals, assessing its market position, and scrutinizing its financial health are crucial steps. Additionally, maintaining a disciplined approach to investment and setting realistic expectations can help mitigate potential losses. By exercising diligence and caution, investors can better navigate the uncertainties of penny stocks, enhancing their ability to capitalize on opportunities while safeguarding their investments against undue risks.

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