Volatility plagues Indian indices

Markets had a rather volatile outing today. Although they began trading on a firm note, these gains were quickly eroded as selling pressure pushed the indices into the red. From thereon, markets oscillated to either side of yesterday’s close for the larger part of the trading session today and managed to close above the dotted line in the final trading hour. While the BSE-Sensex closed higher by around 22 points (up 0.1%), the Nse-Nifty closed flat. The BSE Midcap and the BSE Small cap were at the received end as they raked losses of 1% each. While IT and FMCG stocks found favour, metals and oil & gas stocks ended the day in the red.

As regards global markets, most Asian indices closed mixed today while European indices have opened in the red. The rupee was trading at Rs 45.56 to the dollar at the time of writing.

Barring Pfizer, most MNC pharma stocks closed weak today. Pfizer India announced good set of numbers for 4QCY10 and CY10. Sales grew by 29% YoY during 4QCY10 (November ending fiscal) led by its pharmaceutical (up 21% YoY) and animal health (up 19% YoY) businesses. Growth in the pharma business was largely due to the strong performance of its top ten products, which grew in healthy double digits. Operating margins improved by 3.5% during the quarter due to a fall in staff costs and other expenditure (as percentage of sales). Other expenditure, in particular, saw a considerable dip of 4.5% to 33.6% of sales during the quarter. Strong growth in operating profits coupled with higher other income led to the healthy 72% YoY growth in the bottomline. For the full year, sales and net profits grew by 17% YoY and 19% YoY respectively.

Plastics major, Sintex announced its 3QFY11 results. The company’s consolidated net sales grew by almost 40% YoY during 3QFY11. Growth was driven by both the plastics and the textiles divisions, especially the former which grew by 41% YoY during the quarter. Operating margins expanded to 16.6% during 3QFY11, from 15% in 3QFY10. This was led by lower staff costs and other expenditure (both as percentage of sales). Led by a strong sales growth and expansion in operating margins, net profits surged by 56% YoY during the quarter. During the nine-month period (9mFY11), net sales and profits grew by 36% and 53% YoY respectively. Further, during the quarter, the company acquired a 30% stake in Durha Constructions to boost monolithic execution capabilities. The stock closed lower today.

Fitch, in its report, has maintained a stable outlook for the Indian oil & gas sector for 2011. This is based on the assumption that the ties between the government and its majority-owned oil companies will not weaken. Having said that, the state oil companies have been bleeding on account of fuel prices being subsidized. Although petrol prices have been hiked, the government is reluctant on freeing diesel prices on account of its impact on inflation. Inflation in India has been high for quite some time now and the government has been at its wits’ end trying to bring it down. To top it all, oil prices have touched the US$ 100 a barrel mark. Thus, the rising crude prices have doused any hopes of freeing diesel prices. In fact, we should be prepared to see more rise in the petrol prices as PSUs are still losing Re 1 per litre after the recent round of price hike.

IT, FMCG in the limelight
01:30 pm

After a choppy session up till noon, the Indian indices finally gained some strong headway on the back of firm buying interest in heavy weights. Stocks from the IT and FMCG space are trading firm, while stocks from the realty, power and metal space are trading weak.

The BSE-Sensex is up by 98 points, while Nse-Nifty is trading 21 points above the dotted line. However, BSE Midcap is trading down by 0.82%, while BSE Small cap index is trading 0.81% below Friday's closing. The rupee is trading at 45.52 to the US dollar.

According to economic think tank CMIE, India's economy is expected to grow by a strong 9.2% this year. The agency believes that the economy will perform better during the second half of the year led by the agriculture sector coupled with trade, transport, communications and hotel sectors. It expects the second half growth to be at levels of 9.7% as compared to the first half growth figure of 8.9%. The projections made by CMIE are similar to that the projections of the finance industry which expects the Indian economy to grow by about 9%. However, one needs to keep an eye on the real GDP growth rate considering that the inflation numbers have been way above comfortable levels in recent times.

In another development, CMIE also believed that corporate India will only be reporting a 7% YoY increase in profits this year. This would be due to slowdown in profit growth of the manufacturing sector, whose profits are expected to decline marginally by 2% YoY. During FY10, the profit growth figure stood at about 29% YoY.

Oil and gas stocks are currently trading mixed with IOC, Cairn India and Essar Oil leading the gains, while ONGC and GAIL are trading in the red. In order to increase production, ONGC will invest Rs 177 bn (nearly US $4 bn) in Gujarat in the next three to four years. The investments will be made to scale up the operations at the company's various assets and plants. The company will do a major revamp of its production and processing capacity, laying of pipelines and drilling, among others. About Rs 81 bn would cover 90 installations, 200 km of pipeline and 65 tanks. The MoU was signed during the two-day Vibrant Gujarat investment summit during which MoUs worth Rs 7.38 trillion were inked for Gujarat's energy sector.

Heavy weights boost markets
11:30 am

After opening the day in the red, Indian indices are now trading firm as buying interest in heavy weights fuelled the markets over the previous two hours of trade. Stocks from the IT and FMCG space are trading firm, while stocks from the power and capital goods space are trading weak.

The BSE-Sensex is up by 82 points, while Nse-Nifty is trading 19 points above the dotted line. BSE Midcap is trading down by 0.4%, while BSE Small cap index is trading 0.3% below Friday's closing. The rupee is trading at 45.51 to the US dollar.

Pharma stocks are trading mixed with Orchid Chemicals and Lupin trading firm, while Glenmark and Biocon are trading weak. As per a leading financial daily, Glenmark has lost a patent case against US firm, Abbott Laboratories over the hypertension drug Tarka. Glenmark has to now pay US$ 16 m in damages to the US firm. It may be recalled that Glenmark had launched Tarka in June last year after it got US FDA's final approval to launch the generic version of the drug. However, the original patent was sold to Abbott by Sanofi Aventis earlier for US$ 290 m.

Abbott had filed a suit in court seeking US$ 25 m as compensation for profits it lost because of Glenmark's sales of the generic drug. Glenmark had challenged the validity of the patent that expires in February 2015, arguing that the patent covered an invention that was protected by an expired patent. The federal jury rejected Glenmark's claim and awarded US$ 15.2 m for lost profits and US& 803,514 for higher prices that Abbott would have been able to charge, had Glenmark not infringed the patent. However, Glenmark plans to appeal against the verdict. This highlights the riskiness of making 'at-risk' launches as it means doling out damages if the challenging generics company loses the patent suit.

Hotel stocks are trading weak led by Hotel Leelaventure and Taj GVK. As per a leading financial daily, the budget to mid-scale segment will be the new battle ground for both foreign and domestic hotel brands in India. This is because of the huge demand-supply mismatch in this segment. International brands like Carslon Hotels plans to launch 25 mid-scale hotels in the next 2-3 years while of the 100 hotels being launched by Marriott group, 40 will be in the mid-scale segment. Comfort Inn also plans to launch over 50 mid-scale hotels in India. It may be noted that Knight Frank India, in a recent report has estimated that demand for mid-scale and economy hotels in India will grow at an average annual growth rate of 9.3% YoY. Domestic players like IHCL, Sarovar Hotels & Resorts and Pride Group are also among those with aggressive plans for mid-scale and budget brands. IHCL plans to increase its mid-scale offering of Ginger Hotels from 23 properties to 80 properties in the next 5 years. The company also plans to launch a brand that will be positioned between The Gateway (upscale segment) and the Ginger brands.

Power stocks dampen the markets
09:30 am

Asian markets continue their weak trend from last week and have opened in the red today. Benchmark indices in China (down 2.1%), Indonesia (down 1.1%) and Taiwan (up 0.8%) are the biggest losers. However, markets in Japan (up 0.4%) and Malaysia (up 0.1%) are trading in the positive zone. Indian markets have opened the day in the negative as well. Power stocks are the biggest losers currently.

The BSE-Sensex is trading lower by around 65 points (0.4%), while the Nse-Nifty is down by about 20 points (0.4%). Mid and small cap stocks are trading in the negative as well with the BSE Midcap and BSE Small cap indices down by about 0.4% and 0.2% respectively. The rupee is trading at 45.51 to the US dollar.

Housing finance major, HDFC recently reported its 3QFY11 numbers. Its interest income grew by 16% YoY during the quarter, while net profits were up by 33% YoY. Interest income was driven by a 22% YoY growth in advances. Bulk of the loan growth came from an increase in the individual loans. However, net interest margin declined to 3.8% during the quarter as compared to 4.8% seen during the same period last year. The decline reflects the impact of higher interest rates. Net profits grew by 33% YoY during the quarter. This was aided by higher other income which more than trebled during the quarter. The net profits were also aided by the gain on the sale of the 10% stake in IL&FS. The company was comfortably placed in terms of asset quality. The gross NPAs (non performing assets) stood at 0.5% at the end of the quarter. The capital adequacy ratio stood at 14.1%. The stock of the company is currently trading in the green.

Media stocks have opened the day on a weak note. HT Media, Zee Entertainment and Sun TV are all trading in the red. Zee Entertainment also announced its 3QFY11 results last week. Its sales grew by 55% YoY while net profits were up by 11% YoY during the quarter. Sales grew on the back of a 62% YoY growth in advertising revenues. These were aided by higher channel shares across network, a buoyant macro environment and a continued preference of advertisers towards television. Zee's subscription revenues grew by 14% YoY during the quarter. This was on the back of an increase in subscription from domestic cable operators during the period. Operating margins declined from 30% in 3QFY10 to 27% during 3QFY11. This was on account of higher programming expenses. The current quarter results included the performance of the merged regional entertainment channels, which was not there during the same period last year.

Indian mrkts: Facing the harsh reality

Bad times continue for the Indian markets in 2011. After a distressing start in the first week, the second week also saw a sell-off in Indian stocks. The total decline for the BSE-Sensex for this year now stands at 8%. In all, the Sensex has lost 1,650 points during the first ten days of this year. This is around 54% of the gains it had recorded in the whole of 2010!

The factors leading to pressure on Indian stocks is not far to fathom. But there are two that stand out. First is the fear of higher interest rates given that inflation is not showing any signs of cooling off. And now, even the economic growth seems to be stalling. This was made clear by the industrial growth numbers that were released last week. These suggested that India's industrial growth stood at just 2.7% in November 2010, as compared to 10.8% in October.

This is like a catch-22 situation for India's central bank, the RBI. Rising inflation means that the RBI needs to raise interest rates further to control rising prices of everything. But an industrial slowdown means that any rate rise will put brakes on the economic growth.

In the meanwhile, the government maintains its optimism about a strong GDP growth in the current year. They can't be blamed for this optimism as that is what the politicians are paid to do - to remain ever-optimistic and not accept reality, especially when it is harsh.

The fact is that India's industrial growth (and subsequently GDP growth) faces a danger of slowing down even further. This is given that input prices for companies are on a rise, which will either lead to reduced demand, or most possibly cause margin pressure. Weaker margins would lead to reduction in expansion plans of companies, which will impact the country's investment rate. And if this were to come down, the GDP growth will definitely get impacted.

So there are immense concerns that the Indian economy faces as of now. Investors would do well to accept this reality and factor the same into their investment decisions. While the current stock market correction might offer some stocks at cheaper valuations, it will pay to remain cautious on the short term future of stock prices.