Markets snap 6-day losing streak

While the indices came off the day's highs, it did manage to close marginally in the positive in what could be considered as a rather volatile session. The BSE Sensex closed higher by around 20 points today (up 0.1%), NSE Nifty could eke out gains in the region of 15 points (up 0.3%). Mixed trend was observed amongst BSE Midcap and Small cap indices whereby the former ended 0.2% higher while the latter witnessed a decline of 0.2%. The advance to decline ratio on the Sensex was quite evenly split, with there being one advance for every decline.

Amongst Asian indices, while most of them ended the day in the positive, European indices are also trading in the green currently. As for rupee, it was seen trading at Rs 46.27 to the dollar at the time of writing.

Today's gains break the six day losing streak of the Sensex where it lost in the region of 8%. However, the gains were more to do with global factors than local. Some doubts that had began to surface recently were finally put to rest yesterday. Obama's speech alleviated concerns with respect to his strict stance against financial companies while US Fed's comment that the US is in recovery mode also stoked investor enthusiasm. All in all, the general feeling was that it is business as usual and policymakers would continue to act in a synchronous manner to ward off any crisis that stares them in the face. Just the kind of assurances stock markets need in these uncertain times.

Dr.Reddy's led the pack of gainers among pharma stocks notching 4% gains. The company has done well ever since the rally began in March 2009 although its performance in 3QFY10 was lukewarm. During the quarter, sales had dipped 6% YoY due to lower sales in the US and Europe. However, the company did well on the profitability front, with net profits (excluding the extraordinary item related to Betapharm) growing at a robust pace due to significant reduction in interest costs. As far as the overall business is concerned, the key growth drivers will continue to be the US, India, the emerging markets and the custom manufacturing business. In the US especially, its focus on niche products with limited competition will enable it to segment sales from this highly competitive generics market. The future of Betapharm, however, in the medium term looks hazy due to uncertainty with respect to how the dynamics of the German generics market play out and significant price erosion.

Engineering stocks were amongst the worst performers today. Major losers included L&T, Praj, and Alstom Projects. Crompton Greaves, that announced its 3QFY10 results a short while ago, ended as the biggest gainer from the sector. On a consolidated basis, the company has recorded a stupendous 62% YoY growth in net profits during the quarter. This comes largely on the back of a sharp improvement in operating margins, as sales grew by just around 4% YoY during the quarter. What is more, the company has declared a RS 1.4 per share dividend and a 3:4 bonus issue (3 new bonus shares for every 4 shares held).

Capital goods weigh heavy on indices
01:30 pm

The previous two hours of trade saw the Indian markets lose all of their gains from the earlier part of the day. At the forefront of the selling activity are the consumer durable, FMCG and capital goods stocks. However, select stocks from the realty and pharma sectors are leading the gainers currently.

The BSE Sensex and NSE Nifty are trading almost flat currently. The BSE-Midcap and BSE-Smallcap indices are trading up by 0.4% and 0.1% respectively. The rupee is trading at 46.33 to the dollar

Union Bank of India (UBI) announced its results yesterday. The bank’s interest income grew by 13% YoY in 9mFY10 on the back of 15% YoY growth in advances. Its other income grew by 68% YoY on the back of 32% YoY growth in fees. Net interest margin, on the other hand, dropped from 3.3% in 9mFY09 to 2.4% in 9mFY10 due to pricing pressure. It capital adequacy ratio was at 13.5% as per Basel II at the end of 9mFY10. Further its net NPA ratio was higher at 0.6% in 9mFY10 from 0.3% in 9mFY09. Despite sustenance of a healthy current and savings account mix, the deterioration in margins and asset quality, albeit temporary, are our prime concerns about the bank. Going forward, with technological upgradation although the growth prospects of the bank appear enthusing, excessive reliance on treasury income may prove to be risky.

Hotel sector major Indian Hotels also announced its 3QFY10 results. Its net sales for 3QFY10 fell by 4% YoY. However, the fall has been less than that seen in 2QFY10. This arrest in fall has been due to improved occupancy across key markets. Operating profit dropped by 9% YoY during the quarter. This drop is due to higher raw material costs and higher other expenditure both as a percentage of sales. Net profit dropped by 23% YoY during the quarter. The fall in profits is due to lower operating profits, lower other income and higher interest expense during the quarter. The bottom line for 9mFY10 was lower by 52% YoY again due to lower operating income coupled with lower other income.

Persistent buying aids indices
11:30 am

After breaking the streak of losses that it witnessed in the last few days, the Indian markets continued to trade in the positive during the previous two hours of trade. On account of market wide buying activity most of the sectors are trading in the green led by realty, metal, IT and healthcare sectors. However, select stocks from the capital goods sector are failing to garner investors' interest.

The BSE Sensex and NSE Nifty are trading in the green, up by 183 points and 62 points respectively. The BSE-Midcap and BSE-Smallcap are also trading up by 1.4% and 1.7% respectively. The rupee is trading at 46.28 to the dollar.

As per a leading business daily, FMCG major HUL, will continue spending heavily on advertising in order to combat intensifying competition as well as grow in new areas. The company is witnessing cutthroat competition in all of its core segments like soaps, detergents, home and personal care, foods and beverages. This growing competition mandates the company to invest highly in promotional and advertising activity, resulting in very high sales and marketing costs. In 3QFY10, while the sales for the company grew by 4.4%, its margins contracted by 0.2% primarily on account of 66% increase in its ad spending.

It may be noted that HUL lost some market share in its key segments in the last few quarters and had to take price cuts and relaunch products with variants in order to garner consumers' attention. As a result of a weak market segment and decrease in disposable income, consumers downtraded during the recession, which resulted in companies like Dabur and Godrej Consumer gaining more. Lately HUL is also moving to mass and discount end. Though the price cuts eroded some value growth, they did result in pushing the volumes higher. The company is also planning to foray into newer areas like water and out-of-home consumption in an attempt to derive future growth. The company will ramp up the number of its Swirls ice-cream parlours as well as Lipton Cafes in some quarters. While it will take some time for these ventures to come to fruition, the company's margins will definitely remain under pressure for some time to come.

State-owned infrastructure financing company, IDFC (Infrastructure Development Finance Company) declared its 3QFY10 and 9mFY10 results yesterday. The company's consolidated income from operations grew 13% YoY in 9mFY10, primarily on the back of 14% YoY growth in advances. While its disbursements grew by 44% YoY, approvals grew by 91% YoY in the nine month period. The company also saw an increase in asset management fees which grew by 67% YoY. Its total asset under management (AUM) stood at Rs 359 bn at the end of December 2009. While its net interest margins (NIM) improved from 2.9% in 9mFY09 to 3.5% in 9mFY10 due to lower funding costs, its non-interest income grew by 44% in 9mFY10 due to drop in income from treasury operations. Despite higher provisioning, the company managed to grow its bottomline by 31% YoY in 9mFY10. With one of the highest capital adequacy ratios, highest operating efficiency and one of the best return ratios, the company appears to be all set for reaping the benefits of the infrastructure thrust that India is witnessing.

Indian markets break the chain of red
09:30 am

The Indian markets have started today's session on a strong note. The benchmark indices opened way above the breakeven mark and have managed to hold on to their gains since then. Other key Asian markets are trading in the green with Hong Kong (up 1.7%) leading the pack of gainers. The US markets closed higher by 0.4% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the green with metal, auto and software stocks attracting buyers' interest. The BSE-Sensex is trading higher by around 141 points, while the NSE-Nifty is up by about 43 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 1.6% each. The rupee is trading at 46.36 to the US dollar.

Steel stocks have opened the day on a positive note. Gainers here include SAIL and Tata Steel. Steel maker SAIL announced its 3QFY10 results yesterday. The company reported a topline growth of 12% YoY during the quarter on account of higher volumes and sales mix. Its operating margin expanded to 26% during 3QFY10 from 13% in 3QFY09 as raw material and staff cost decline by 8% and 4% respectively as a percentage of sales. Other income declined by 27% during the period. The company registered a bottomline growth of 99% YoY during 3QFY10 on account of topline growth and higher operating margins.

FMCG stocks have opened the day on a mixed note. Gainers here include GSK Consumer and Tata Tea. Nestle India is in the red. As per a leading business daily, FMCG majors are changing their strategy for rural markets. Earlier, they used to introduce smaller packs of their flagship brands at lower price points. Now, they are increasingly launching products specifically for rural markets. GSK Consumer has introduced Asha, a 40% cheaper variant of Horlicks, for rural markets only. It also has a slightly different taste. Nestle has also recently launched Maggi Masala-ae-Magic and Maggi Rasile Chow at the price point of Rs 2 and Rs 4. In our view, these moves indicate that FMCG majors are now looking at rural markets as target markets and not as adjuncts of lucrative urban markets. As a result, we see them positioning their brands appropriately. In fact, the purchasing power of rural markets is growing at 3% to 4% per annum. Rural markets now account for half the volume consumption for FMCG companies.

Will the RBI soften its stance?

India's central bank, the RBI, will review its monetary policy tomorrow. And till until a week back, there would have been no prizes in guessing the outcome. Asset prices were soaring and inflation was inching towards levels beyond which the RBI gets a little uncomfortable. Hence, it was quite obvious that the RBI would undertake a small CRR hike.

However, things are somewhat different right now. The stock markets have undergone a violent correction of the magnitude of 8% in a matter of few days. While the correction may not be that significant, investor sentiment is definitely on the edge. And any strict measure by the RBI is likely to weaken it further. In fact, we won't be surprised if markets crack by a similar magnitude on any negative announcement by the central bank.

Aside of investors and the central bank, there is one more entity who is keenly watching the development. And that entity is the Government of India. As we are all aware, the Government is in the midst of a divestment exercise. And every rupee coming out of the divestment proceeds is important as it helps further bridge the fiscal deficit. Hence, it could ill afford any significant correction in the markets right now since it could lead to the government having to offer a discount to the issue price in order to lure the investors.

While this is none of RBI's business, it could be well aware that the implications of a higher than expected fiscal deficit will have to be borne by the RBI also at a later date. The RBI will certainly have this math worked out when it announces the monetary policy tomorrow. We await it with bated breadth.

Dr Doom predicts more gloom ahead
Dr Doom, Nouriel Roubini who had earlier stated that stocks have run up too much and too soon would indeed be feeling vindicated after the recent correction. So, does he see more pain ahead? Certainly. In a recent interview with Bloomberg, Roubini has opined that stock market rallies are likely to fizzle during the second half of the year in developed economies. And he attributes the correction to the fact that valuations have run far ahead of fundamentals.

Thus, when the economic reality will start dawning upon investors in the second half, there could be a significant correction in the developed markets in the second half of the year, asserted Roubini. He also sees some pain ahead for emerging markets as well as inflation returns to positive levels and central banks start taking liquidity tightening measures.

Roubini is not alone in his prognosis. Even Mark Mobius, the emerging markets guru holds a similar view. “We continue to see upside, but with substantial corrections along the way, which could be as much as 20 percent”, Mobius is believed to have said in a recent interview.