No respite from selling pressure

After opening on a strong note in the morning session, the Indian indices thereon were unable to hold on to their gains as selling pressure pushed them into the red. There was no respite in the final trading hour as well and the markets closed well below the dotted line. While the BSE-Sensex closed lower by around 295 points (down 2%), the NSE-Nifty closed lower by around 88 points (down 2%). The BSE Midcap and the BSE Small cap were not spared either as they raked losses of 2% each. Losses were largely seen in auto and oil & gas stocks.

As regards global markets, barring India and China, the Asian indices closed firm today. European indices have opened in the red. The rupee was trading at Rs 45.24 to the dollar at the time of writing.

Aluminium stocks closed weak today and the key losers here were both Hindalco and Nalco. Hindalco recently announced its 3QFY11 results. During 3QFY11 and 9mFY11, the company's consolidated topline registered a rise of 12% YoY and 20% YoY respectively. The growth was mainly driven by a better geographical mix and improved realisations. Higher aluminum LME (London Metal Exchange) and better by-product realisations in the copper business aided the company's sales. However, metal volumes were lower during the quarter. Power outage at the Hirakud smelter and cooling tower outage at the Dahej smelter affected production. The operating margins contracted from 13.6% in 3QFY10 to 11.5% in 3QFY11 due to cost escalations and falling copper treatment charges and refining charges (TC/RC). Consolidated bottomline, however, grew by 8% YoY led by higher other income, lower interest costs and tax expenses.

Titan Industries announced its 3QFY11 results. Net sales grew by 47% YoY during 3QFY11 led by the robust performance of all its businesses. The jewellery segment grew by 50% YoY during the quarter on account of the company's growing focus on stone studded jewellery and luxury segment. The company's second major business segment of watches grew by 34% YoY during the quarter. The management strategy of positioning watches as personal accessories instead of just time pieces seems to have worked in its favour. Operating margins improved to 10% during the quarter, from 8% in 3QFY10. Led by good sales growth, stronger operating margins and higher other income, net profits surged by 82% YoY during the quarter. The stock closed lower today.

As per a leading business daily, India has launched a new consumer price index that combines data from rural and urban areas and includes sectors that were not part of the existing index. The aim is to capture price trends more accurately. The new index will use 2010 as the base year. Basically, the government has taken this move to address inefficient and archaic data-collection processes so that the reading of price trends will be easier now for central bankers, government officials and the like. That said, although consumer price index is the most closely watched indicator globally, in India the wholesale price index (WPI) has so far been more closely watched. Inflation based on WPI in January had touched 8.2% and is still way above the comfort levels of the RBI. This means that the central bank will continue to hike interest rates till such time that inflation reaches acceptable levels.

Selling pressure drags indices
01:30 pm

After opening on a strong note in the morning, Indian indices lost initial ground and are currently trading in the negative territory. While IT stocks are garnering the interest of investors, energy and telecoms tocks are at the receiving end.

Currently, the BSE-Sensex is up by 30 points while NSE-Nifty is trading 3 points below the dotted line. BSE Midcap and BSE Small cap indices are both down by 0.50% and 0.82% respectively. The rupee is trading at 45.20 to the US dollar.

Pratibha Industries is trading higher by 2%. The company has secured a contract of Rs 2,400 m from ONGC for the construction of its corporate office building at BKC, Mumbai. The project is to be executed in 18 months. It also announced a Rs 570 m order from Essel Group company for development of education and research foundation at BKC, Mumbai. This project is to be completed in 21 months. It must be noted that the current order book of the company stands at Rs 36 bn providing revenue visibility for the next 2-3 years. Having said that, execution of these orders will remain the key going forward.

RBI has directed deposit-taking NBFCs to raise their CAR to at least 15% from March 2012. At present the finance companies have to maintain a minimum CAR of 12%. Earlier large financial firms which do not raise public deposits and have an asset base of over Rs 1 bn were asked to step up their CAR to 15% by March 2011. However, the central bank has now decided to align the minimum capital ratio of both the deposit taking as well as large non-deposit taking NBFCs to 15%. This means that the finance companies will now have to bring in more capital to do business. The new rule will apply to NBFCs such as Sundaram Finance, Shriram Transport Finance, Mahindra Finance among others. The financial services stocks were trading mixed with Sundaram Finance and Mahindra Finance trading above the dotted line while Shriram Transport was trading weak.

Trading in a narrow trajectory
11:30 am

After starting today's session on a positive note Indian indices lost initial ground and are currently trading flat. Stocks from auto and realty space are trading weak while those from FMCG and IT space are trading firm.

Currently, the BSE-Sensex is up by 12 points while NSE-Nifty is trading 11 points below the dotted line. BSE Midcap and BSE Small cap indices are both down by 0.11% and 0.15% respectively. The rupee is trading at 45.24 to the US dollar.

Textile stocks are trading mixed with Raymond and Himatsingka Seide leading the gains. However, Arvind and Welspun India are trading weak. Raymond is planning to sell 12 acres of its factory land outside Mumbai (Thane) for around Rs 2.5bn. It may be noted that in September 2009 the company had announced its maiden venture into the realty space at Thane where it had a defunct factory. But the project could not gather pace due to compensation issue with the factory workers. The company mulled on various options like developing the land on its own or through partnership. However, finally it has decided to unlock some value by undertaking a part sale. If the sale happens at the expected price it would be one of the most expensive deals in the suburbs, at around Rs 200 m an acre. Raymond is likely to command a huge premium as it has an extensive land parcel with a clean title.

Power stocks are trading weak led by Neyveli Lignite and Reliance Power. As per a leading financial daily, NTPC is negotiating a long term LNG purchase agreement with Petronet LNG Limited (PLL). NTPC had recently approached Tamil Nadu, Andhra Pradesh, Kerala and Karnataka for selling power from its 1,030-Mw, Stage II power project in Kayamkulum, Kerala. However, all four states had refused to sign a power purchase agreements (PPAs) as the cost of power is turning out to be quite high. This is due to the high cost of LNG which is pushing power cost to Rs 8 per unit. NTPC has also offered RasGas of Qatar a stake in the power plant with the hope of getting an assured supply of LNG. However, Qatar is hold on, to see that the phase of global over-capacity of LNG was over to ensure a better price. NTPC currently buys around 15.5 million standard cubic metres a day (mscmd) of gas, of which 4-5 mscmd is regasified LNG (RLNG) and the remaining domestic gas. At an average cost of around US$ 7 per mBtu, the power rate works out at Rs 5 a unit. NTPC is currently buying RLNG at US$ 10-16 per mBtu from PLL's Dahej terminal, depending on whether it is spot or long-term LNG.

It may be noted that signing of a gas sales purchase agreement (GSPA) with NTPC is crucial for PLL's Kochi regasification terminal, some 120 km away from NTPC's power plant, since it provides a surety of offtake to the marketers of RLNG. PLL has a long-term supply contract with RasGas for supply of 7.5 m tonnes LNG annually. This gas is currently being received at its Dahej terminal in Gujarat. For Kochi, 1.4 m tonnes LNG supply is expected to start in 2014 from the Gorgon field in Australia. The delivered price of Gorgon LNG would work out to be almost double the current RLNG price.

Indian markets soar on Asian cheer
09:30 am

Asian markets have opened the day on a strong note with most indices trading in the green. The markets in Taiwan (up 1.9%), Indonesia (up 1.4%) and Hong Kong (up 0.9%) are leading the gains. The markets in Japan are trading flat. On the other hand, markets in China (down 0.9%) are witnessing selling pressure. Taking cue from the Asian counterparts, the Indian markets have opened the day in the green as well. Stocks from the capital goods and banking space are currently leading the pack of gainers.

The BSE-Sensex is trading higher by around 125 points (0.7%), while the NSE-Nifty is up by around 36 points (0.7%). Mid and small cap stocks are also trading in the positive with the BSE Midcap and BSE Small cap indices up by about 0.79% and 0.57% respectively. The rupee is trading at 45.22 to the US dollar.

Auto stocks have opened the day on a firm note with Ashok Leyland, Escorts and Hero Honda witnessing significant buying interest. However, Tata Motors and M&M are trading marginally weak. The rise in commodity prices has crushed the margins of most of the companies. The car and bike companies are no exception to this. Despite the recent increase in prices, companies like Maruti Suzuki and Hero Honda, have seen their margins come under pressure in recent times. The main reason behind this is higher input costs. Maruti has seen a drop in net profits by almost 20% YoY. As a result, Maruti as well as Hero Honda have embarked on several cost saving schemes. Maruti is currently pursuing programmes with its 250 plus suppliers as well as at its own plants to reduce wastage thereby helping to bring down costs. Hero Honda is also reviewing the situation. Its management has stated that they may resort to a price hike soon if raw material costs do not come down. The company had announced a price hike in December last year. But even with these measures, both companies expect margins to remain under pressure over the short term horizon.

Energy stocks have opened on a mixed note with Reliance Ind and Guj State Petronet trading firm, while HPCL and BPCL are trading in the red. State-owned Indian Oil Corp (IOC) is losing a record Rs 2,370 mn per day on selling auto and cooking fuel below cost. The oil marketing firm is losing Rs 1,360 mn per day on diesel sales, Rs 470 mn on kerosene and Rs 540 mn a day on LPG sales. This means a loss of Rs 10.74 per litre on diesel, Rs 21.60 on every litre of kerosene and Rs 356.07 per 14.2 kg on LPG cylinder. Along with IOC, the other two public sector retailers HPCL and BPCL are also making similar kind of losses. The industry as a whole is losing about Rs 4.3 bn per day. This is because the government continues to bar them from raising rates in line with the surge in raw material cost. In addition, they suffer a loss of about Rs 2.50 per litre on petrol sales, even though prices were freed from the government control in June last year. The spike in global prices has widened the gap between the retail selling price and their cost.

The Oil Minister had recently ruled out any increase in fuel prices despite crude oil prices touching a two-year high. The Oil Ministry wants the Finance Ministry to compensate the oil companies in cash for at least half of their under-recoveries by making adequate provisions in the Budget. Upstream oil firms like ONGC will shoulder one-third of the burden. For the first nine months, the Finance Ministry has approved the release of a cash compensation of Rs 210 bn to the three state-run fuel retailers.

'Green' signals to lure more FDI?

Environmental clearances. After scams, this is the next big thing that has caught the fancy of Indian media over past few months. The former infact seems to have done more economic damage to the country's future in many respects than the latter. Especially if one considers the value of FDIs stalled due to delays in project clearances. In addition, the fact that unlike the telecom revenues, the projects have immense potential to multiply India's GDP growth. But as the scam ridden government gets ready for the Budget session, India Inc may see more green signals coming its way. Accused of turning a blind eye to economic reforms, the Prime Minister has assured of steps to get projects rolling. The first weapon in his armory seems to be the Environment Ministry.

At last count, the print media put the value of 582 projects that were stalled due to want of environmental clearances at Rs 920 bn. Several high profile projects have been at the Ministry's mercy for several months. This included the Navi Mumbai airport, the Lavasa hill-city project and the Posco Steel project. But the pace at which conditional and non conditional approvals have been awarded of late seem surreal. Almost appearing to be a damage control measure to make up for the loss of time for the projects.

Given that the government's ambitious trillion dollar Eleventh Plan infrastructure investments are way off target, it has little option. The private sector is seen as the only resource to help bridge the funding gap. So much so that its contribution is seen going up from 30% in the Eleventh 5-Year Plan to 50% in the Twelfth Plan. Thus speedy approvals for the private sector and FDI funded projects are in order.

At the same time, the government would not want only cheap hot money from abroad to flood Indian markets. While the FII funds may help India's current account balance, they are best kept away from the country's long term investments. Hence in order to balance out the steady FII inflows with FDI, more projects may be seen getting the environmental go ahead.

But will FDI at the cost of environment serve India' long term needs? We believe that allocation of critical resources like mining rights need to have much more than economic goals in mind. Protecting the country's green zones and ensuring a reasonable quality of ecological balance is paramount to an economy's prosperity. A softer stand on environmental issues may be seen as a near term positive. But we fear that such myopic visions tend to ignore more critical concerns about sustainability.