Sensex surges despite RBI's move

Thu, 16 Sep 01:30 pm

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Investors did not seem to be impacted by the RBI’s move as strong buying activity led the Indian indices to rise sharply above the dotted line during the previous hour of trade. Currently, stocks from the realty, banking and FMCG spaces are amongst the top gainers, whole those from the IT and metal spaces are the top losers.

The BSE-Sensex is trading higher by around 85 points (up 0.4%), while the NSE-Nifty is up by about 30 points (up 0.6%). Mid and small cap stocks have followed suit with the BSE-Midcap and BSE-Smallcap indices trading higher by 0.1% and 0.3% respectively. The rupee is trading at 46.22 to the US dollar.

In its fifth round of successive interest rate hikes, the RBI reiterated its strong stand against inflation as it hiked the repo rate by 0.25% and the reverse repo by 0.5%. These rates will now stand at 6% and 5% respectively, with immediate effect. RBI’s act comes on the back of its view that the economic recovery is now showing signs of consolidation. The Indian economy grew at an estimated 8.8% in Q1 of FY11. It has cited the examples of improving manufacturing growth through the index of industrial production (IIP), which surged 13.8% in July 2010. This improved from 5.8% in June this year.

The RBI raised concerns on the inflation front. The published wholesale price index (WPI) inflation rate for August 2010 was based on the new series (with the base year being FY05) for the first time. The new series has a better coverage of items with manufacturing products having a slightly higher weight. Both series, however, indicated similar broad inflation trends. Average monthly WPI inflation for 1QFY11, based on either series, is in double digits, 10.6% (new series) and 11.1% (old series). July, 2010 saw some moderation in inflation. This further continued in August. WPI inflation fell to 8.5% in August from 9.8% in July 2010 as per the new series.

Engineering stocks are currently trading mixed with Alstom Projects and Alfa Laval trading firm while Thermax and Jyoti Structures are trading weak. Air-conditioning and cooling products major Voltas is reportedly looking at going slow on the bidding process for projects in the Middle East. As per the company, competition in the electromechanical space has increased in the region and as such is looking at going slow in the bidding process. It may be noted that Voltas earns a substantial portion of its international revenues from the Middle East. International revenues contribute to about 41% of revenues.

While this may seem as a concern for the company, we believe it is a positive development as the company seems to be more concerned with profitability rather than volumes. During FY10, the company earned nearly 65% of its revenues from the Electro-Mechanical Projects & Services space. In fact, in the quarter ended June 2010, the share of revenues from this segment dropped to 49% as compared to 56% during the corresponding quarter last year. Revenues from the segment dropped by 1% YoY as well. However, at the PBIT level, the company saw a slight decline in margins which stood at 8.5% as compared to 8.7% during the corresponding quarter last year. In FY10, this segment’s margins stood at 9.9%.