New week, old result!

There was no let up in selling activity during the closing stages. In fact if anything, selling only intensified and consequently, the indices closed the day deep in the red on yet another occasion. BSE-Sensex lost in the region of around 470 points (down 2.4%) whereas NSE-Nifty witnessed decline to the tune of 150 points. While the BSE Midcap index mirrored its large cap counterpart, BSE Small cap index suffered even more and shed some 3% from its value today. Only two stocks from the Sensex could manage to close the day in the positive. All the others suffered a decline, with a handful of them even losing as much as 5%-6%.

While majority of the Asian indices closed in the red today, European indices are also trading weak currently. Rupee was pegged at Rs 45.5 to the dollar at the time of writing.

Today’s decline comes close on the heels of last week’s dismal performance, where the index suffered a decline of around 4%. Thus, the indices seemed to have lost quite a bit of their market cap in the past few trading sessions. With inflation showing no signs of easing up and with economic prospects in the US beginning to look up, it appears that in the near term, the pressure on the indices would persist. However, if the selling is overdone, it could present a fantastic opportunity to take advantage of the long term India growth story.

Nalco, the domestic aluminium behemoth, closed lower on the bourses today as it lost around 2% of its value. This despite assertion by the company’s management that it is expecting a 25% growth in company's net profits in the current fiscal. It should be noted that the company's net profits had nosedived around 36% during the FY10 fiscal when compared to FY09 profits. This was on account of drop in realisations and higher fuel costs inspite of an increase in volumes. However, the situation has looked quite good so far this year, with the company reporting 40% YoY growth in net profits during the second quarter and on the back of a 27% YoY growth in topline. The company has lined up a huge Rs 400 bn capex program in both India as well as abroad and the same is likely to help the company in achieving revenues of Rs 250 bn by 2020.

PSU banking major, Bank of Baroda was amongst the select companies that manage to close the day on a relatively stronger note. It gained around 0.5% in value today. The buoyancy seemed a result of news doing the rounds that the bank is planning to acquire a bank in Botswana, Africa. It should be noted that the African nation has had its stock go up in recent times amongst Indian banks as the SBI and Bank of India are also planning to start operations in Botswana. Like most other Indian banks, the objective of these banks too seems to tap the vast Indian diaspora in the region and to get access to some cheap low cost funding.

Smallcaps see the most pressure
01:30 pm

The Indian markets continued to trade well below the dotted line during the previous two hours of trade. Stocks across sectors are trading weak with those from the capital goods, consumer durables and power spaces leading the pack of losers. Amongst the top performers are stocks from the IT, metal and FMCG spaces.

The BSE-Sensex is currently trading lower by around 270 points (down 1.4%), while the NSE-Nifty is down by about 90 points (down 1.5%). Stocks form the mid and small cap spaces are also under pressure with the BSE Midcap and BSE Small cap indices down by 1.2% and 1.7% respectively.

Oil & gas stocks are trading weak with Guj State Petronet, GAIL, Essar Oil and ONGC leading the losses. State-owned explorer ONGC has demanded that the royalty it pays on crude from Cairn's oilfields in Rajasthan be added to the project cost. If that happens, profit for all stakeholders, including the government, would be calculated thereafter. ONGC has a 30% stake in the field but pays 20% royalty on the entire production. This amounts to paying for Cairn's share of royalty also. It is done due to a historic anomaly in policy, according to which the finance ministry is to compensate ONGC for bearing Cairn's burden. But the finance ministry has not kept its word, making it a losing proposition for ONGC. If the profit is calculated after adding royalty to the project cost, ONGC will get back some of its money but the government and Cairn will see their profit fall.

The move may scare off London-listed Vedanta Resources, which proposes to acquire a majority stake in Cairn India for an estimated US $10 bn. Vedanta's valuation of Cairn would have assumed the royalty exemption.

Engineering stocks are currently trading weak led by KSB Pumps, Bharat Bijlee, L&T, BHEL and Praj Industries. A leading business daily has reported that engineering and construction major L&T is vying for a Rs 50 bn monorail project in Gujarat. As per reports, the memorandum of understanding is likely to be signed at the upcoming Vibrant Gujarat 2011 Summit. If this development is true, it would be the company's second monorail project. L&T is the company that bagged India's first monorail project in Mumbai.

Despite this piece of news, the stock is currently trading lower by about 4%. In fact, the stock has been under pressure for a while now. It has fallen by about 20% from its 52-week high price of Rs 2,212. In recent times i.e. over the past week or so, L&T's stock has fallen sharply. While high valuations seem to be one reason, the company's management also recently indicated that it is planning on splitting up L&T's businesses into nine independent companies. At present, it would be difficult for one to comment on the outcome of the same given that the details have not really been divulged.

All sectoral indices in red
11:30 am

After starting today's session on a negative note, Indian indices have failed to recover earlier losses and continue to trade in the red. However, other key Asian markets are trading mixed. Currently, heavyweights in the Sensex are trading weak with stocks from the capital goods and consumer durables space witnessing huge selling pressure.

Currently, the BSE-Sensex is trading down by around 103 points, while the NSE-Nifty is down by about 41 points. Buying interest amongst the mid and small cap stocks is muted as well with the BSE Midcap and BSE Small cap indices trading lower by 0.9% and 1.1% respectively.

Metal stocks are trading weak with Adhunik Metaliks and Jindal Steel & Power leading the pack of losers. However, Bhushan Steel is trading strong. Tata Steel is planning to raise up to Rs 70 bn through an FPO to expand its capacity by almost three times from 6.8 m tonnes (MT), currently. The offering will be in the form of warrants or shares or a mix of both. Out of the total issue size roughly Rs 11 bn is expected to be raised from FIIs from overseas markets. Post the FPO, Tata Sons' stake in the company is likely to come down to 15-18% from 32%.

We believe the fund raising is expected to culminate fast as Tata Steel plans to ramp up its expansion plans due to a virtual capacity addition race amongst the industry players. The company plans to set up a brownfield plant in Jamshedpur at an investment of around Rs 150 bn which is expected to be completed by March 2012. In addition, the company has also planned two greenfield capacities in Orissa and Chattisgarh. It may be noted that majority of the steel companies have lined up major expansion plans to meet incremental demand. For instance, both SAIL and JSW Steel plan to increase their capacity to 60 MT and 34 MT, respectively by 2020. With massive greenfield projects of foreign companies like Posco and Arcelor being held up for environmental issues, the capacity expansion spree amongst domestic companies presents first mover advantage to them.

Power stocks are trading mixed with Reliance Infra and Power Grid Corporation trading firm and GVK Power & Infra and Coal India trading weak. As per a leading financial daily, Power Grid Corporation is planning to raise about Rs 100 bn in 2011-12 through the issue of domestic bonds. These funds would be raised to meet the company's expansion needs. Power Grid has planned a capex of Rs 180 bn for 2011-12. This is an increase of 50% over the amount spent on capex in 2010-11. The company is also expected to go for a follow on public offer (FPO) to raise funds. It may be noted that in November last year, Power Grid had raised about Rs 75 bn through an FPO, of which half went to the government for divesting 10% of its stake in the company.

Power Grid owns and operates around 72,000 circuit km of transmission lines and transmits 45% of the total power generated in the country. It also owns 150,000 transmission towers across the country. About 70% of these towers are located in semi-urban and rural areas. With India planning to add 78,700 MW of generation capacity during the 11th Plan and another 100,000 MW in the 12th Plan, huge investment will be required for transmission and distribution of electricity.

Capital goods drag down indices
09:30 am

Asian markets have started the week on a dull note. Benchmark indices in Indonesia (down 3.4%), Korea (down 0.5%) and China (down 0.4%) are the biggest losers. However, Japan (up 0.1%) is seeing some buying interest. Indian markets have opened the day in the negative as well. Stocks from the capital goods space are the biggest losers. However, IT stocks are witnessing buying interest and have opened in the green.

The BSE-Sensex is trading lower by around 60 points (0.3%), while the NSE-Nifty is down by about 10 points (0.1%). Mid and small cap stocks are trading in the negative as well, with the BSE Midcap BSE Small cap indices down by 0.1% each. The rupee is trading at 45.36 to the US dollar.

IPOs are the bread and butter of investment banks. However, if the government gets its way, then the investment bankers will have to work for free. Or almost for free. Recently the government has set the reserve price of Re 1 for the prestigious Rs 130 bn issue of oil major ONGC. An issue of this size would have earlier commanded a fee of Rs 1.3-2.5 bn. However, buoyed by investment bankers’ keenness to work almost free of cost, the government has decided to set the reserve price to Re 1. The reason as to why the investment bankers are willing to forego their fees is the prestige of being involved in such a large issue. It would help them gain credibility especially in the overseas markets. The government plans to appoint six investment bankers for managing the issue of ONGC. The selection would be based on the bankers’ past performance. Let us hope that this gamble pays off for the investment bankers who have already seen revenues from this stream dwindling in recent times. The stock of ONGC is currently trading in the red. Other oil majors BPCL, HPCL and IOC are trading in the red as well.

Pharma stocks have opened the day in the red. Glenmark Pharma, GSK Pharma and Piramal Healthcare are the biggest losers currently. The Drug Controller General of India (DCGI) has banned the pharma companies from advertising their products through awareness campaigns. The DGCI has stated that the companies are using awareness campaigns as a marketing campaign and are not educating the consumers of the possible side effects of the drugs. The latest to receive the notice from DCGI is Piramal Healthcare. The DCGI has asked the company to stop airing the ad for its emergency contraceptive pill. The government had banned advertisements for emergency contraceptives last July. However, the company had decided to launch a marketing campaign this year. The company had acquired the drug from Cipla early last year. The drug is now a leading brand in the Rs 1,000 m market. The company derives annual sales of Rs 310 m from this segment. Pharma companies generally undertake nation-wide product awareness programmes and campaigns to boost the sales of the products. Such a ban by DCGI may have an adverse impact in sales from the segment in times to come.

What's ailing banking stocks?

Indian markets had a poor start to 2011. The first week of the year saw the BSE-Sensex lose 4%, even as most other key global markets closed with good gains. India's weakness was largely a result of pressure on auto and banking stocks. While the BSE-Auto index dropped by 7.3%, the BSE-Bankex declined 6.5%.

Let's talk about banking stocks here. The sell-off in these stocks was seemingly a result of the fears of further interest rate hikes by the RBI. India's inflation is not showing any signs of cooling down. Instead the monster is just growing in size. Just last week, food inflation came in higher at 18.3%. This was a sharp 4% higher than the inflation figure that came earlier than this. Vegetables, food grains, fruits, you name it and the prices are surging.

This is adding to the RBI's concerns that stem from rising prices of commodities like crude oil. So there is a general fear that the central bank will announce an interest rate hike sooner than later. An interest rate hike, or a tightened money supply – both go towards reigning in inflation – will have an adverse impact on India Inc. This is especially given that a lot of companies are going for large scale capacity expansion. As such, any further rise in borrowing costs will spoil the party for them.

Another concern that surrounds investors in banking stocks is their valuations. After the rise seen last year, and in face of the current problems, these do not have much headroom to go up from here on. At least the fundamentals do not justify the same. With little upside in margins, banks are expected to rely heavily on their fee income generating abilities in addition to their operating leverage.

Also, most banks envisage higher loan restructuring and provisioning costs in the next financial year (FY12, which starts in March), which may eat into their profits. So, buyers of banking stocks need to be very careful about the choices they make.