Earnings, global cues affect sentiment

After starting off with reasonable gains in the early session, the benchmark Indian indices kept oscillating to either side of yesterday's close post noon. As the earnings reports of heavyweights in India Inc kept trickling in, selling activity intensified in the later hours. It finally caused the indices to close in the red. While the BSE Sensex closed lower by around 128 points (down 0.2%), the NSE Nifty lost around 4 points (down 0.1%). Midcap stocks were also at the receiving end, losing 0.4% while smallcaps ended flat. Losses were largely seen in IT, realty and energy stocks.

As regards global markets, while most Asian markets closed lower today, the European markets have also opened in the red. The rupee was trading at Rs 45.87 to the dollar at the time of writing.

The largest mortgage financer in the country, HDFC, announced its third quarter and nine month ended December 2009 results today. The institution grew its advances by 18% YoY during 9mFY10. These were on the back of 22% YoY growth in approvals and 23% YoY growth in disbursements. The gross and net NPAs remained at 0.6% and 0.2% respectively. The provision coverage ratio was 75%. Profits grew by 23% for both the quarter and the full year periods.

In what came as a relief to power equipment manufacturers in the country, the government has ensured that all the orders for future power projects comes to them, instead of going to foreign vendors. The government has approved a provision requiring such plants that will be awarded in the future to use local power generation equipment. The move, which is expected to provide a fillip to domestic manufacturing, comes after some serious lobbying by local power equipment makers. The decision on the ultra mega power plants or UMPPs will benefit domestic power generation equipment manufacturers such BHEL and L&T. Indian power equipment manufacturers had complained to the government against imports of power equipment from China, where manufacturers benefit from low interest rates and an undervalued currency which makes exports competitive.

Dr. Reddy's announced its 3QFY10 results a short while ago. Revenues during the quarter declined by 6% YoY largely due to 55% fall in revenues from North America. This was largely due to the absence of any 180-day exclusivity during the quarter, while the company had received the exclusivity window for the blockbuster drug 'Imitrex' in 3QFY09. A sharp fall in raw material costs and other expenses (as percentage of sales) led to the 3.3% improvement in operating margins during the quarter. Profit before tax grew by an impressive 33% YoY due to a considerable reduction in interest costs. There was a loss at the net level to the tune of Rs 2.3 bn on account of impairment of intangible assets and goodwill related to Betapharm. On excluding the same, net profits grew by 42% YoY. The stock closed higher by 3% on the bourses today.

ITC eyes another buyout
01:30 pm

Indian markets continue to remain choppy during the last two hours of trade. The markets were trading marginally in the positive aided by buying in the media and auto space. Heavy selling was, however, witnessed in the realty and oil and gas space.

The BSE-Sensex and the NSE-Nifty have lost most of the opening gains. While trading above the dotted line, the BSE-Sensex is up by 31 points while the NSE-Nifty is up by 3 points. BSE-Midcap Index is trading lower by 3 points while the BSE-Smallcap index is up by 39 points. The rupee is trading at 45.95 to the US dollar.

Yes Bank declared its 3QFY10 results with strong growth across metrics. Advances grew by 71% YoY during the quarter while deposits grew by 63% YoY. This growth comes in spite of muted credit growth in the industry. Net interest margin (NIM) improved by 0.3% to stand at 3.1% in 3QFY10. Current and Savings account (CASA) deposits grew by 79.4% YoY while term deposits grew by 61%. NII grew by 69.5% in Q3FY10 due to improvement in advances and higher NIM. The banks also managed to curtail its gross NPA to advance ratio at 0.3% during the quarter.

ITC which is well known for buying up competition has been eyeing a stake in Hotel Leela Venture. The company had started acquiring shares in the hotel company when the price of the stock was Rs 20. While the Nairs, promoters of Hotel Leela Ventures, have not clearly said anything about the deal, it is believed that ITC is in talks with them. While the Nairs hold 52.5% of the stake currently, there is Euro 46 m of FCCB coming up for conversion in October 2010. These are priced at approximately Rs 59.4. In the case of conversion the stake of the promoters will fall to 42-43% levels. However, if the FCCBs are not converted the company will have to pay for the bonds from its cash flow or by raising more debt. The debt to equity ratio of Hotel Leela in FY09 was 1.26 times. ITC currently has 7.9% stake in the hotel company.

Wipro registers a muted growth
11:30 am

After witnessing a strong start today, the Indian stock markets remained somewhat choppy during the previous two hours of trade. However they managed to trade above the dotted line on account of buying activity in the index heavyweights lead by power, healthcare, telecom and metal sectors. However select stocks from IT and oil & gas sectors have failed to garner investors' interest.

The BSE Sensex and NSE Nifty traded in the green, up by 55 point and 14 points respectively. The BSE-Midcap and BSE-Smallcap are trading up by 0.6% and 1% respectively. The rupee is trading at 45.92 to the dollar.

Wipro declared its 3QFY10 results today. The company's topline registered a marginal increase of 0.3% QoQ, primarily on account of muted performance from its IT services and IT product segments. Its consumer and lighting business registered a growth of 3% QoQ during the quarter. The operating margins expanded by 0.6% QoQ on the back of cost containment measures and improved volumes. Wipro's net profits grew by 5% QoQ during the quarter on the back of lower interest and depreciation charges, coupled with higher share of gains from associates. The company's IT services segment added 31 new clients during the quarter. The appreciation in the rupee during the quarter affected its margins and realisations for IT business. Though the company reported a decent performance during the quarter, it is a tad lower than what its IT peers like TCS and Infosys have reported. We believe that the next few quarters will be very crucial for the IT companies as the clients will finalise their annual IT budgets and plenty of deals will come to table. The stock with other peers in the IT space is trading in the red.

According to leading business daily, Indian power equipment major, BHEL is scouting acquisition or joint venture (JV) opportunities with the companies from the US and Europe. With the aim of competing more efficiently with the Chinese companies and upcoming JVs formed among Indian manufacturers, the company plans to partner with companies engaged in new transmission as well as ultra super critical technologies. Such deals are also expected to aid BHEL is gaining access to foreign markets. However, the actual investment planned for this purpose is yet to be finalised.

With BHEL's networth of around Rs 120 bn, it is well placed in funding and absorbing such acquisitions. It may be noted that BHEL which is an integrated equipment manufacturing company has a manufacturing capacity of 15,000 MW. It is expected to grow at 20-25% annually in the next five years with a manufacturing capacity expansion to 20,000 Mw by 2012. It has entered into partnerships with companies like NTPC and Nuclear Power Corporation among others to strengthen execution capabilities through effective sharing and sourcing critical inputs. We believe that such strategic alliances will go a long way in enabling the company to remain market leader in the power equipment segment in the domestic market. BHEL is currently trading in the negative.

India reflects strong Asia
09:30 am

The Indian markets have started today's session on a strong note. The benchmark indices opened above the breakeven mark and have managed to hold on to their gains since then. Other key Asian markets are also trading in the positive with Japan (up 0.5%) leading the pack of gainers. However, China is currently in the red. The US markets closed 1% higher yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the green with power and software stocks witnessing buyers' interest. The BSE-Sensex is trading higher by around 75 points, while the NSE-Nifty is up by about 30 points. Buying interest is also being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.9% and 1.1% respectively. The rupee is trading at 45.91 to the US dollar.

Media stocks have opened the day on a strong note. Gainers here include Entertainment Network and TV Today. Zee Entertainment declared its 3QFY10 results yesterday. The company's topline declined by 3% YoY during the quarter. Advertising revenue grew by 1% YoY, while subscription revenue grew by 9% YoY. However, revenue from syndication, film distribution and education sales declined by 73% YoY. Operating margins improved to 29.6% in 3QFY10, up from 22% in 3QFY09 due to lower programming and operating cost. Other income declined by 20% YoY during the quarter. Excluding exceptional items, bottomline grew by 42% YoY during the quarter. This was on the back of higher operating margins and lower interest costs.

Energy stocks have opened the day on a strong note. Gainers here include MRPL and Gujarat Gas. As per a leading business daily, the government has agreed to provide Rs 120 bn as cash subsidy to compensate the public sector oil marketing companies (OMCs) for selling cooking fuels at regulated prices. Indian Oil will get Rs 70 bn while BPCL and HPCL will get Rs 25 bn each. It may be noted that the practice so far was to issue oil bonds as compensation. While the cash subsidy will help the OMCs reduce their under recoveries, it still falls short of their estimated losses of around Rs 300 bn for FY10. The government has the difficult task of containing the fiscal deficit, which goes up due to subsidies, as well as keeping fuel prices low. In our view, the only long-term solution is a gradual deregulation of fuel prices.

A 'power'ful billion dollar opportunity

The grass just got greener for one of the most promising sectors of India Inc. Slated to benefit from one of the highest allocation during the eleventh and the twelfth 5 - year plans, the power sector has more coming its way. Infact billions of dollars to be precise.

The Central Electricity Regulatory Commission has enacted policies that will enable trading of instruments for energy credits. Meant to encourage power generation from clean energy, this move will also bring in additional revenues to the more efficient players.

The power sector is the largest contributor to carbon emissions in India. It is the fourth-largest emitter of greenhouse gases in the world. This is because a majority of the electricity is generated from fossil fuels such as coal. However, with the new policies in place, the sector may get greener and wealthier.

A utility or power producer that exceeds its renewable energy targets will be able to sell surplus credits to ones that fail to meet their goals. The value of a credit will be equal to one megawatt of electricity injected into the grid from renewable sources. More importantly, these will not rely on the carbon credits, which are subject to a lot of international protocols and timelines. On the contrary, the new policy will make renewable energy projects within the country self funded. India, which currently has an installed generation capacity of about 156 gigawatts, plans to add another 13 gigawatts every year. Such additions over the next few years are set to bring in the demand for greener energy.

Further, renewable energy sources are not evenly spread across different parts of the country. The energy credits are therefore expected to address this mismatch. For the players that are not energy efficient it may also mean some penalties coming their way.

Currently central institutions like NTPC and the State Electricity Boards (SEBs) dominate the power scene in India. India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of electricity. Thermal plants at present account for 65% of the total power generation. Hydro-electricity plants contribute 25%. And the rest comes from nuclear, solar and wind. With the new guidelines we may see a major overhaul in this revenue sharing.

Another question that begs itself here is - which renewable source will be most favoured? What cannot be forgotten while implementing the green energy resources is the associated cost and affordability. With costs of more traditional sources of energy fast rising, solar power is once again coming into prominence. As per Mckinsey, if harnessed properly, the technology could add as much as 206 giga-watts of power generating capacity by 2020 globally. To put things in perspective, this is a little more than 1.5 times India’s total power generation capacity as it stands now. Currently though, the industry is still in its infancy with a lot of players competing to win accolades on the cost front.

The cost structure assumes importance, as the main reason the technology got into the backburner was its high cost. Mckinsey believes that costs have come down by as much as 20% in the last few years. However, it still has a long way to go before it can deliver energy at the same cost as the other contemporary sources. We are indeed waiting with bated breath as this will not only reduce dependence on fossil fuels but will also make the world greener.

For investors in the power sector, the guideline means opportunity to invest in players that have more sustainable and profitable business models. Moreover, as the sector matures in terms of efficient power distribution and lower T&D losses, investor can also hope for higher returns.