IT stocks contribute to a firm close

Markets had a field day today, showing a strong performance. They were trading on a firm note on the back of a good quarterly performance by IT biggie TCS. The rest of the IT pack was also pulled upwards on the back of its strong results. While the BSE-Sensex closed higher by around 210 points (up 1.1%), the Nse-Nifty closed higher by 69 points (1.2%). This was a big change from the either flat or negative sessions witnessed in the past few trading days. The BSE Midcap and the BSE Small cap could not replicate the large caps' strong performance and were trading higher by 0.5% and 0.3% respectively. IT and metal stocks found strong investor favour. But oil and gas and power stocks did not evince much interest.

India was one of the strongest performers among Asia's major markets. European indices have all opened in the green. The rupee was trading at Rs 45.44 to the dollar at the time of writing.

The government may just fall short of its Rs 400 bn divestment target on the back of some hanky-panky by big name merchant bankers. SAIL recently called off its investor road-shows for its Rs 65 bn follow on public offer (FPO). Bankers like SBI Capital Markets, HSBC, Deutsche Bank and Kotak Mahindra Capital may be stripped of their mandate for the FPO. These banks were also involved in the Rs 35 bn follow-on offer of Tata Steel, the biggest rival of SAIL. This is a huge conflict of interest for the investment banks involved.

Of the six hired for the SAIL issue only JP Morgan and Enam Securities were not involved in the rival Tata Steel issue. The state-run steel major has already sent 'showcause' notices to these banks. They will need to explain why they took up an FPO of a competing steel company when the first mandate was alive, during a similar period. Anyway, with the Sensex being extremely volatile in the past few months, further IPOs and FPOs may be deferred till the market uncertainty reduces to an extent.

The Banking Index closed positive today with Axis Bank being one of the top performing stocks on the back of its impressive 3QFY11 results declared yesterday. The company reported a whopping 37% growth in net interest income on a 46% advance growth. Even in a period of tight liquidity the company managed to put out very impressive credit growth. The growth in the loan book was nearly 2 times the average sector growth. Profits grew by 35% in 9mFY11 due to the above reasons. Its net interest margins (NIMs) however fell slightly to 3.8% from 4% previously on higher cost of funds. The bank continued to stamp its all India presence through 1,120 branches and 5,303 ATMs across 734 cities. During 9mFY11, the bank added 137 branches and 91 ATMs. Net NPAs (non performing assets), as a percentage of advances, saw a marginal improvement in the quarter and stood at 0.3%. However, the management cited concerns over possible delinquencies in the restructured assets.

Medical equipment manufacturer and distributor Opto Circuits displayed a spectacular performance in 3QFY11 (Oct-Dec 2010). Its consolidated revenues grew by 63% YoY during the quarter. Operating profits increased 39% YoY during the period. On the flip side, however, margins declined by 4.9% due to increase in overall expenditure as a percentage of sales. Bottomline increased 46% YoY in 3QFY11 due to increase in other income, compared to a loss in the corresponding period last year. This was offset by higher depreciation and tax expenses. The stock closed up over 10% today.

Exide fails to meet expectations
01:30 pm

The Indian market traded in a range bound manner during the previous two hours of trade. Currently, investors seem to be favoring stocks from the IT, FMCG and banking spaces as their respective indices are trading higher by about 1% to 2% each. On the other hand, stocks from the realty, oil & gas and power spaces are amongst the top underperformers at the moment.

The BSE-Sensex is currently trading higher by about 90 points or 0.5%, while the Nse-Nifty is trading higher by about 30 points or 0.5%. Stocks from the mid and small cap spaces are seeing very little interest as the BSE Midcap and BSE Small cap indices are trading marginally higher as compared to yesterday’s closing levels.

Oil & gas stocks are currently trading mixed with Cairn India and Petronet LNG trading firm, while IOC and ONGC are trading weak. State-owned ONGC is expecting the royalty issue on Cairn India’s oil field in Barmer, Rajasthan, to be resolved before the company’s FPO hits the markets. ONGC is currently paying 100% royalty to the government on oil produced from the Cairn India operated block in Rajasthan. It has wanted the government to split the royalty payments with Cairn India. Total royalty payment over the life of the block is likely to be around US$ 2 bn. ONGC chairman said that the company won’t continue to pay a 100% royalty on the Rajasthan oilfields. He also reported that the government had assured the company of a settlement on the issue.

The company is coming up with a follow-on share sale in the range of Rs 125-140 bn. The government will sell off additional 5% of its stake in the company. ONGC has shortlisted six banks for an aggregate fee of one rupee. Investment bankers competing for the fundraising market have chosen to do business for state-owned companies for free, as it involves lesser work than private ones, and gives a lot of publicity.

Stocks of auto ancillary companies are trading weak led by Exide Industries, Amtek Auto and Apollo Tyres. The stock of battery manufacturer Exide Industries is not in favour today as the company’s results for the quarter ended December 2010 did not meet market expectations. While the company reported a 15% YoY increase in revenues, a 28% YoY increase in expenses led to its operating profits for the quarter to fall by 27% YoY. The rise in expenses was largely due to a 33% YoY increase in raw material costs, which formed about 65% of revenues (as compared to 56% last year). The company’s net profits however, declined by 5% YoY only. This was largely due to a more than 50 fold increase in other income (mainly dividends). On excluding the same, the company’s profits would have declined at an even sharper pace as compared to the decrease in operating profits. This is on the back of a 13% increase in depreciation charges.

During the 9mFY11 period, Exide reported a 20% YoY increase in revenues, while profits were up by 25% YoY. On excluding the Rs 470 extraordinary income it earning during this period, profit growth came in at 13% YoY during this period.

Realty & power erase early gains
11:30 am

After starting today’s session on a positive note, Indian indices have relinquished early gains but continue to trade in the green. Other key Asian markets are trading in the positive territory as well. Currently, heavyweights in the Sensex are trading firm with stocks from the IT and consumer durables’ space witnessing strong buying interest. However, realty and power stocks are trading weak.

Currently, the BSE-Sensex is trading up by around 90 points, while the Nse-Nifty is up by about 25 points. There has been some buying interest amongst the mid and small cap stocks as well with the BSE Midcap and BSE Small cap indices registering gains of 0.25% and 0.47% respectively.

Construction stocks are trading flat with Supreme Infrastructure and Madhucon Projects leading the gains. However, HCC and IVRCL Infrastructures are trading weak. The environment ministry has finally submitted its report on Lavasa, a subsidiary of HCC. The report confirms that there have been gross environmental violations at the proposed hill city project. It may be noted that post the show cause notice issued on 25 November 2010 to stop the construction of the township due to environmental concerns, a special committee was formed to assess the on ground situation and submit a final report over it. And now since the report confirms environmental violations on the company’s behalf the future of the project appears to be uncertain. Nonetheless, one has to wait for the final draft report to be published today so as to get a detailed review on the intricacies of violations so as to arrive at a meaningful conclusion regarding future deliveries.

Finance stocks are trading firm led by LIC Housing and Mahindra Finance. Power Finance Corporation (PFC) declared its 9mFY11 and 3QFY11 results. For 9mFY11, the company’s net interest income grew by 26.4% YoY on the back of sharp increase in advances. Bottom line grew by 14.6% YoY as a result of exchange rate loss, lower other income and higher tax outlay. Net interest margin declined marginally from 4.2% in 9mFY10 to 4.1% in 9mFY11.

For 3QFY11, net interest income grew by 26% YoY, while profit after tax increased by 16.9% YoY. The bottom line was negatively affected due to exchange rate loss during the quarter. At the end of 3QFY11, gross NPA to advances remained negligible at 0.01%. Capital adequacy ratio at the end of the quarter stood at 17.3%.

IT stocks lead the surge
09:30 am

Asian markets have opened today on a mixed note. While stocks in Hong Kong (up 0.6%) and Singapore (up 0.2%) are seeing buying interest, those in China (down 0.2%) are facing some selling pressure. As for the Indian markets, these have opened in the positive today. IT and realty stocks are witnessing buying interest currently.

The BSE-Sensex is trading higher by around 180 points (0.9%), while the Nse-Nifty is up about 55 points (0.9%). Mid and small cap stocks are also trading with gains, with the BSE Midcap and BSE Small cap indices up by 0.8% apiece. The rupee is trading at 45.56 to the US dollar.

Software major TCS announced its 3QFY11 results late yesterday. To say the least, the performance has been very good. This is especially in light of the lacklustre performance reported by its closest peer Infosys just five days ago. TCS has recorded a 4% QoQ growth in net sales during the quarter (as compared to Infosys 2% growth). This has been led by a near 6% QoQ growth in volumes. Its net profits have surged by over 9% QoQ (Infosys' grew by less than 3%). The company added a gross of around 12,500 employees during the quarter suggesting that it is seeing a good visibility of order flows in the future. The company maintained its utilisation (excluding trainees) at 83.8%. Its overall attrition rate however increased marginally to 14.4%, including attrition in the IT services business of 13.2%. The company is seeing a strong growth momentum from the UK and Asia-Pacific markets. Deal flows from the US markets are also picking up pace after last two years of slowdown. Interestingly, TCS management sounded positive on the growth momentum in its conference call yesterday. This is unlike Infosys' management that wore a cautious look last week. The markets have welcomed TCS performance. This is seen from the gains that the stock is trading at currently. Other key gainers from the sector include Oracle Financial Services and Tech Mahindra.

Engineering stocks have also opened in the positive today. Key gainers here include Punj Lloyd and Crompton Greaves. Engineering behemoth L&T also announced its 3QFY11 results yesterday. The company has recorded a strong 40% YoY growth in sales during the quarter. This has largely been a result of a 42% YoY growth in sales from its engineering and construction business. However its operating margin has dropped to 10.1% (from 11.6% during 3QFY10) owing to higher commodity prices. Subsequently its net profits (excluding extraordinary items) have grown by just around 16% during the quarter. As for the 9mFY11 performance, while sales have grown by 22% YoY, net profits (excluding extraordinary items) are up 18% YoY. The company is facing delays in new order inflows. This is seen by a 25% YoY drop in its order inflows during the quarter. Its order backlog now stands at Rs 1.1 trillion. The management has attributed this decline in new order inflows to delays in decision making from the clients' end. It has indicated that client companies from both the public and the private sectors have delayed finalising orders due to several reasons. Some of these include unavailability of land, lack of finances for projects, or a cut in capex due to low demand. The management is however confident of achieving its sales growth guidance of 20% for the current year (ends in March 2011). It also hopes to maintain its operating margin at FY10 levels of around 11.5%.

Decoding the telecom scam

Much hullabaloo has been created about the infamous telecom scam. Fingers are being pointed. No one is being spared. The hitherto ethical elite are being dragged down. A war of words has broken out with politicians and industrialists accusing each other. Even the elite journalists have been dragged down.

But what exactly is this scam?

Let's try and understand the background of spectrum to understand the scam better.

In simple terms, spectrum refers to a range of radio frequencies. It is a medium through which voice or data signals can be transmitted. In a country, spectrum is required for wireless communications, defense, radio transmission, etc. The quantity of spectrum available for mobile communication in India is limited and the number of people vying for it is numerous. Therefore, the government has to adopt a judicious process to allocate this available spectrum.

In 2001, the government set an amount of Rs 16.5 bn as a fee for obtaining pan India telecom spectrum. At that time, this amount was considered to be sufficient considering that there were just 4 m telecom subscribers in the country at that time.

Fast forward to 2008. New licenses were to be issued. These licenses were bundled with pan India spectrum. But the circumstances had changed when compared to 2001. The number of subscribers now stood at 350 m. Everyone wanted to participate in the 'spectacular' growth of the telecom industry.

At this juncture, the then telecom minister, decided to take matters in his own hands. He ignored the advice of the telecom regulator, TRAI, as well as that of the Prime Minister. He decided to allocate the precious spectrum at the same price as that of 2001. Reason for this - only Mr. Raja and God would know why he did this. But it caused the government an opportunity loss. The Comptroller and Auditor General has valued this loss at a whopping Rs 1.76 trln.

Furthermore, a 'careful selection process' was chosen to establish the beneficiaries of this spectrum. It was handed out to companies that didn't even qualify for the spectrum. Most of the companies did not even have the balance sheet strength to be able to carry out a nationwide network rollout. Some of them had no prior telecom experience. But these things became irrelevant. Mr. Raja decided to play Santa Claus and literally 'gifted' spectrum to these companies at throwaway prices.

The most interesting aspect of the scam was that the cut-off date for the application for the license was suddenly advanced by a week. And despite the advancement, some companies were ready with the demand drafts for the fees the moment their names were announced as the beneficiaries. In a country where a demand draft for a paltry Rs 100 takes at least an hour, it is interesting that the companies could get drafts for Rs 16.5 bn so quickly. Maybe the banks work at a different time zone for them. Or maybe they knew they would be the beneficiaries even before their names were announced. Only Mr. Raja and the company heads would know the answer to this. But at the moment they all deny of any misgivings.