FIIs send the markets tumbling

Although the indices came off the day's lows during the closing hours, they still managed to close the day as well as the week, deep in the red. The BSE-Sensex closed lower by around 290 points whereas NSE-Nifty edged lower by around 80 points (down 1.4%). The BSE Midcap and BSE Small cap indices fared even worse, losing 2.7% and 3.6% respectively. More than four stocks declined for every stock that gained on the Sensex today.

While the Asian indices closed mixed today, Europe is also trading a mixed bag currently. The rupee was poised at Rs 45.8 to the dollar at the time of writing.

After accounting for today's decline, the BSE Sensex has shed close to 600 points during the week. Certainly not a number to be ignored. It highlights the growing disillusionment among investors especially the FIIs over the near term India growth story. It isn't that India has become unattractive all of a sudden. It is just that other markets like the US are looking more attractive from a near term perspective and hence, has become more favourable haven for speculation. There is every possibility that the current bout of correction could be overdone and hence, it could present a very good opportunity for long term investors to jump in and lock in the India growth story at a pretty attractive price. Do keep your eyes out for companies with strong fundamentals, which are run by honest and capable management teams.

Bajaj Electricals, the mid cap major was amongst the few stocks that lost less than the 3% decline witnessed in the BSE Midcap index. Infact, the stock closed only marginally down. This relatively better performance could be put down to decent set of numbers announced by the company for the December quarter. It managed to grow its bottomline by 19% YoY on the back of an exactly similar growth in topline. Operating margins though came in slightly lower as it shrunk close to 20 basis points. However, it still is a commendable performance given the cost pressures it faced on account of prices of key raw materials like copper and aluminium. Company's consumer durables segment, which accounted for nearly half of its total revenues grew by a strong 34% and was able to offset the flat growth of its other key division of engineering and projects. However, the company has expressed confidence that even this segment will turn in a good performance in the forthcoming quarters, thus helping boost profitability growth still further.

With a decline of 5%, BSE Realty index was the worst hit amongst all the sectoral indices today. Infact, heavyweights like HDIL and DLF were seen losing anywhere between 7% and 10%. The reasons seem to be obvious. With interest rates on the rise and with realty prices at their peak, one would be termed as too optimistic if one assumes that realty companies would do well in the not too distant future. As a matter of fact, even during much better times for the sector, most of the companies did not succeed in paring down debt to manageable levels and thus, strengthen their balance sheets. Their struggles when the industry would be in a downturn is perhaps, too apparent to be missed. Little wonder, investors seem to be avoiding realty sector stocks like the plague at the moment.

Small, midcaps under more pressure
01:30 pm

Profit booking led the Indian markets to drop further into the red during the previous hour of trade. Currently, stocks from across the board are under pressure with those from the realty, consumer durables and auto sectors leading the pack of losers. IT and FMCG stocks are among the top performers at the moment.

The BSE-Sensex is down by about 300 points (down 1.6%) while NSE-Nifty is trading lower by about 100 points (down 1.7%). Stocks from the mid and small cap spaces are under more pressure as the BSE Midcap and BSE Small cap indices are both down by more than 3% each. The rupee is trading at 45.76 to the US dollar.

Engineering stocks are currently trading weak led by Blue Star, TRF, Voltas, Thermax and BHEL. Emco announced its results for the period ended December 2010 recently. The company’s standalone topline grew by 46% YoY during 3QFY11 the quarter. At the operating level, the company’s profits however dropped by 9% YoY as margins contracted by a sharp 4.8% YoY to 8%. However, good part is that during the quarter the company returned back to profitability after recording operating losses for the first two quarters of FY11. Emco’s net profit declined by 46% YoY during the quarter, led by a poor operating performance coupled with a 48% increase in interest costs.

During the nine month period ended December 2010, the company’s revenues increased by 18% YoY, while it recorded a loss of Rs 491 m during the period. As mentioned above, the poor performance during 1HFY11 was the reason behind the poor performance in 9mFY11. At the end of December 2010, the company had an orderbook of Rs 9.1 bn, which stands at about 0.8 times its trailing twelve month sales. This includes about 32% of transformer orders, 2% of meter orders, and another 66% from the projects business wherein the company executes turnkey substations.

Essel Propack announced its results for the quarter ended December 2010 recently. The company has reported a 19% YoY and 152% YoY growth in sales and profits respectively. Consolidated operating (EBITDA) margins improved by 0.2% to 16.5% on the back of lower staff costs and lower other expenditure (both as a percentage of sales). Operating margin could have been higher but for increase in costs of goods as a percentage of sales. For 9mFY11, on consolidated basis, net profit fell by 33.1% YoY while net profit margins fell by 1.9% to 3.5%. However, when adjusted for extraordinary gain, net profit grew by 50% YoY while net profit margins grew by 0.9%.

Consumer durable stocks drag markets
11:30 am

Indian indices after opening the day in the red slipped further on profit booking in heavy weights over the previous two hours of trade. Stocks from the consumer durable and auto space are trading weak while stocks from the IT space are trading firm.

The BSE-Sensex is down by 209 points while NSE-Nifty is trading 69 points below the dotted line. BSE Midcap and BSE Small cap indices are both down by 2.5%. The rupee is trading at 45.69 to the US dollar.

FMCG stocks are trading weak with Camlin and Dabur leading the pack of losers. However, HUL and Gillette Ltd. are trading strong. Amidst rising input costs, Marico has undertaken several price hikes on its flagship brands Parachute and Saffola. The company has collectively taken a 24% price hike on Parachute over the last two quarters while an additional 8% hike is in the process of being implemented. On Saffola too, the company has hiked the prices by 10-15% over the last two quarters. However, from here on the company has decided to take a hit on margins rather than increasing the product prices and taking a risk of losing market share to rival companies.

It may be noted that the consumer purchases have already been impacted by rising food inflation and if the company decides to further increase prices from current levels, customers may resort to down trading thereby impacting the market share of the company. Hence, it has decided to take a temporary hit on margins in order to keep its market share intact as regaining lost customer is a difficult task than regaining lost margin.

Auto stocks are trading weak led by M&M and Tata Motors. As per a leading financial news company, Tata Motors may expand sales of Nano to Thailand, Sri Lanka and Bangladesh this year. The company is expected to enter these markets one after another. Nano sales are expected to climb to 8,000 to 10,000 units a month soon. It may be noted that the current rate is 6,000 to 7,000 cars a month, up from 509 units sold in November. Sales dipped in November due to increase in price of the unit, long waiting period and concerns regarding fire safety. However, Tata Motors took several measures to boosts sales which have shown positive results. These measures include offering 100% financing to customers who can't afford down payment, doubling of warranty to four years or 60,000 kilometers, running advertisement campaigns and adding sale points. The company also addressed the fire safety concern of the car by offering additional protection in exhaust and electrical systems.

Markets open on a depressed note
09:30 am

Asian markets have opened the day on a subdued note. Benchmark indices in Indonesia (down 1.1%), Korea (down 0.9%) and Hong Kong (down 0.4%) are the biggest losers. Indian markets have followed cues from their Asian peers and have opened on a weak note as well. Stocks in the realty and capital goods spaces are the key losers currently.

The BSE-Sensex is trading lower by around 115 points (0.6%), while the NSE-Nifty is down by around 40 points (0.7%). Mid and small cap stocks are trading in the negative as well, with the BSE Midcap and BSE Small cap indices down by about 1.5% and 1.1% respectively. The rupee is trading at 45.77 to the US dollar.

Media stocks have opened the day on a mixed note. Zee Entertainment, Balaji Telefilms and Cinemax India are trading in the red. On the other hand, NDTV and HT Media are trading in the green. Balaji Telefilms declared their third quarter results recently. The company witnessed a muted growth of 0.6% YoY in its topline. This was led by the 8% YoY improvement in net realizations. However, growth was offset by 11% YoY decline in the number of hours. The commissioned programming segment witnessed a marginal decline of 0.4% YoY while the sponsored programming segment witnessed a growth of 4% YoY during the quarter. The company continues to be in losses on the operating level. Operating loss margin stood at 1.1% during the quarter as compared to the 0.6% loss in the same period last year. This was mainly on account of higher staff costs as a percentage of sales. The company's bottom line was positive due to the positive effect of other income and deferred tax gains. However, net profits declined by 33% YoY during the quarter. The company's strong hold in the soap opera space has been eroded in recent times due to the successful entry of other content providers.

Stocks from the engineering space have opened the day in the negative. BHEL, Crompton Greaves and Siemens are leading the losers pack. Conglomerate L&T is looking to sell-off its stake in the IT business. The subsidiary - L&T Infotech - could not be the bigger business that the management had envisioned it to be. The plan was to grow the business and eventually list the subsidiary in the stock markets. In lines with this, the company had made a bid for the then ailing Satyam in 2009. However, it lost the bid to Tech Mahindra. L&T's plans to list the subsidiary also suffered a setback due to the poor stock market conditions. The company is now in talks with different bankers to set up a deal to sell some of the stake that it has in the infotech business. The infotech business offers solutions to banking and financial services, energy, manufacturing, product engineering and healthcare segments. It has a steady list of clients that includes Citibank, Chevron and Travellers Insurance. L&T had earlier announced its plans to restructure its business into nine standalone subsidiaries.

India's $ 1.5 trillion problem

The Indian growth story has been the centre of attraction for people around the globe. While the entire world has been burdened with one of the worst known recessions, India's GDP has grown at spectacular rates. But will this continue?

It certainly can but the hurdles to this are many. One of the biggest hurdles that India faces is its poor state of infrastructure. Even if our policy administrators wake up and start working towards it, the task is still difficult to achieve. The reason for this is lack of finances.

As pointed out by a leading daily India would need to invest around US$ 1.5 trillion towards infrastructure if it wants to achieve a growth rate of 10%. The bigger worry is how India would get the funding for this huge investment.

The government has planned to invest around US$ 500 bn towards infrastructure in its ongoing five year plan. However, with the burgeoning fiscal deficit, it is doubtful that the country would be able to spend the budgeted amount. Moreover, with its debt levels touching 60% of total GDP, it is doubtful that the government would turn to the debt markets to find an answer. The Foreign Direct Investment (FDI) which is another good source of funds has also been slowing down in the recent past.

The next possible source of funding would be the country's banks. But herein lies another problem. The country's banks are financially constrained. They would need to raise huge amounts of capital to meet the regulatory requirements, if they were to fund the infrastructure investments. This would mean that they would have to access the equity markets and raise cash through public offerings. But this would lead to a dilution of the promoter's stake. But most of the banks in India are owned by the government, who is perpetually reluctant about diluting its stake in its golden hen - the banks. The regulatory requirements for foreign banks are so strict that they are hesitant about raising their stake in the Indian markets.

So, the puzzle deepens for the Indian government. The investment towards infrastructure is essential. Poor logistics and infrastructure causes waste that result in losses for the Indian economy. Unless these holes are plugged, India's dreams of attaining the magical 10% growth number, seems to be a distant dream.