Short call | SGBs an expensive headache for the govt? Cooling crude to lift IndiGo, Shilpa Medicare, Bikaji Foods in focus

With the Jackson Hole symposium hinting at a potential easing of monetary policy, the outlook for gold could become even more favorable

All that glitters is not gold, and this saying has proven true for the government. The Reserve Bank of India recently announced premature redemption of Sovereign Gold Bonds (SGBs) issued between May 2017 and March 2020. Street chatter has it that not only is the government opting for early withdrawals, but it might also be hesitant to issue any more SGB tranches.

Here’s the scoop: back in 2015, the RBI and the government launched SGBs with a clear goal—curb India’s insatiable appetite for gold, reduce imports, and help control the ballooning current account deficit. Instead of buying physical gold, investors could invest in bonds that earned a fixed annual interest of 2.5 percent, with any returns made after the bond’s eight-year maturity being completely tax-free.

The SGBs were a hit right out of the gate. In the first year alone, the government issued three series, continuing to roll out new bonds as gold prices climbed. But there’s a twist: SGBs are most beneficial when gold prices remain stable or increase gradually. If gold prices soar, the government ends up paying much more than anticipated—and that’s exactly what happened.

When the government raised Rs 245 crore from the first batch of SGBs in 2015, gold was priced at Rs 2,684 per gram. By the time those bonds matured, gold prices had more than doubled to Rs 6,132 per gram. This meant that the RBI had to pay out significantly more, plus the interest accrued over the years.

While this price surge was great news for investors, it threw a wrench in the government’s original plan to cheaply raise funds for its initiatives and manage the growing current account deficit. What started as a cost-effective strategy turned into a costly dilemma, with SGB values more than doubling in less than eight years. Out of the 67 tranches of SGBs issued so far, only four have matured, leaving the government to face 63 more tranches set to mature in the coming years.

With the Jackson Hole symposium hinting at a potential easing of monetary policy, the outlook for gold could become even more favorable. It remains to be seen whether more SGBs will be issued and how the government plans to navigate this financial conundrum.

Analysts at ICICI Securities highlighted that any drop in crude oil prices could breathe new life into aviation stocks, with Interglobe Aviation (IndiGo) set to gain the most. In the first quarter of FY25, the average price of Brent crude oil was $84 per barrel, and aviation turbine fuel (ATF) was around Rs 1 lakh per kiloliter. By August 23, 2024, the price of Brent crude had dropped to $78.2 per barrel, and the average ATF price for August was Rs 97,945 per kiloliter.

What does this mean for Indigo? If fuel prices per available seat kilometer (ASK) fall by 10 percent, the difference between revenue per available seat kilometer (RASK) and cost per available seat kilometer (CASK) would jump to Rs 0.52. In that case, IndiGo's profit before tax (PBT) would rise by 36 percent to Rs 12,200 crore. And if fuel prices drop by 20 percent, the RASK-CASK spread would increase to Rs 0.69, boosting PBT by a whopping 72 percent to Rs 15,500 crore.

Successful phase 3 clinical trials of fatty liver drug SMLNUD07, known as NorUDCA

Bull case: Robust pipeline of complex, high-margin drugs set to come into the mix by FY26, with several products currently under clinical trials. Sharp spike in institutional shareholding in the stock during the June quarter ushers further confidence.

Bear case: With several drugs caught in different phases of clinical trials, the company is extremely privy to regulatory risks. Heavy dependence on 10 customers for its CDMO business can also pose a downside risk to earnings growth.

Acquired 55 percent stake in Ariba Foods

Bull Case: Bikaji can tap into Ariba's preexisting distribution network. Acquistion is in-line with Bikaji's strategy to develop and expand the frozen snacks business in India.

Bear Case: Falling demand for quick-service food might impact the topline. Bikaji could face difficultiesd in shifting some production to Ariba's manufacturing in Ujjain, Madhya Pradesh. Export sales contribute to 50 percent of Ariba's sales, any chances in taxation or import laws in other countries can impact margins.