Inflation risks hurt mkt sentiment

Clear signs of the government being left with few options other than fiscal consolidation led the Indian markets to shed more gains throughout today's session. The benchmark indices had a rather volatile outing today with every attempt to move closer to the dotted line proving futile. While realty and telecom stocks bore the brunt of investor apathy, those from the banking and energy sectors managed to buck the trend. Reports that the Prime Minister's Economic Advisory Council has indicated inflation to remain a key risk to GDP growth targets further dampened sentiment.

While the BSE Sensex closed lower by around 145 points (down 0.9%), the NSE Nifty lost around 40 points (down 0.9%). The mid and smallcap stocks also lost out and their respective BSE indices ended the session lower by 1.5% and 1.8% respectively. As regards global markets, most Asian indices closed lower today while European indices have opened on a mixed note. The rupee was trading at Rs 46.35 to the dollar at the time of writing.

Dabur India seems to be adopting a cautious approach towards the brands it acquired through the Fem Care Pharma acquisition. Not only has the company decided to put the new product launches under Fem on hold, it is also putting in place a separate distribution strategy for the bleaches, depilatory products and other stock keeping units under Fem. Further, some of Dabur's own SKUs such as Gulabari, Uveda and Vatika Conditioners could also be brought under the new vertical. The company had reported strong sales growth for December quarter on the back of strong volume growth in consumer care, consumer health and international business. Skin care, oral care and foods were amongst the top performers.

Meanwhile, soon after appointing a new CEO for Tata Motors group, the auto major has appointed another gentleman Ralf Speth as the CEO of Jaguar Land Rover with the overall responsibility for the JLR operations. He will report to Carl-Peter Forster, the recently appointed CEO of Tata Motors group. While Forster was earlier heading GM's European operations, Speth has more than 22 years experience in the European auto industry, most of which was at BMW, where his last appointment was as vice-president. This is the fourth time that US$ 71 bn Tata group, equally admired in India and abroad, has appointed an expatriate at the helm of its business unit. We believe this is a real indication of company acquiring a truly global stature.

As per a business daily, auto major Maruti Suzuki is contemplating adding 3,000 employees on its payroll over the next three years. Besides this, plans on the anvil also include investing Rs 2 bn to add showrooms and stockyards. This move could be seen as a strategy to bolster sales of its various models going forward. No doubt Maruti performed very well during the December quarter. Sales and profits grew at a robust pace due to a lower base effect, favourable macroeconomic environment, benefits of economies of scale and lower commodity prices.†

However, the company has been facing increasing competition from other players despite having a strong product portfolio. And for Maruti, as is the case for most auto companies, the threat of higher interest costs and raw material costs also loom large. Hence, the company's ability to stay one step ahead of its peers in terms of a strong product portfolio is what will enhance its performance in the long term. The stock was the lead gainer on the Sensex today.

The dollar leapt to its eight month high today on reports of the Federal Reserve raising the discount rate for banks by 0.25% to 0.75%. The Fed believes that it will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs. There is now a wide consensus amongst bankers and economists that the urgency of monetary tightening will soon dawn upon the Fed. The Fed's move has stoked expectations of it moving towards normalising the monetary policy and added strength to the dollar. Meanwhile gold dropped prices more than 1% today as the rise in dollar dimmed the appeal of bullion as an alternative investment.

Small and midcap stocks fall harder
01:30 pm

Persistent selling activity led the Indian market to move further into the red during the previous two hours of trade. The market sentiment seems very pessimistic currently, as the overall decline to advance ratio is poised at 3.6 to 1 on the BSE. Selling activity is currently being witnessed in stocks across sectors with those from the realty, metal and auto spaces leading the pack of losers. Stocks from the FMCG and IT spaces are amongst the least impacted.

The BSE-Sensex and the NSE-Nifty are trading lower, down by around 230 points (down 1.4%) and 75 points (down 1.6%) respectively. The BSE-Midcap and BSE-Smallcap are also trading in red, lower by around 1.8% each. The rupee is trading weak at 46.5 to the dollar.

Castrol announced its quarter and annual results (December ending company) yesterday. The companyís topline grew by about 14% YoY and 5% YoY during the quarter and year respectively. Growth during the quarter is mainly on the back of a 17% YoY rise in lubricant volumes. It is believed that the upturn in economic growth and focus on growing segments, along with the benefit of a low base of 2008, aided the robust volume growth. Castrolís operating profits increased by a strong 72% YoY during the quarter and by 42% YoY during the year. This strong growth in operating profits was on the back of a huge expansion in operating margins during both the periods. While operating margins stood at 20.9% during 4QCY09 (13.8% during 4QCY08), the same stood at 25.1% for the full year (18.5% during CY08). This expansion in operating margins during the quarter was mainly on account of lower raw material prices, which stood at about 48.9% of net sales as against 66% during the corresponding quarter last year. Growth in net profits during 4QCY09 and CY09 stood at 72% YoY and 45% YoY respectively.

Telecom stocks are currently trading weak led by Idea Cellular, Reliance Communications and Bharti Airtel. A leading business daily has reported that the management of Bharti Airtel is mulling over a preferential allotment to Singapore Telecommunications (SingTel), which currently owns about one-third stake in the Indian telco. Funds raised from this will be utilised to partly fund its proposed acquisition of Zain's African assets. The company's management is taking this move as it wishes to avoid taking on too much debt. However, it must be noted that the net debt to equity ratio on Bharti's books currently stands at about 0.1 times, which is quite comfortable.

While there is no confirmation on the financing strategy from the company directly, it is believed that the management does not wish to go through rights issues route on the back on the response the stocks got when it announced its plans of acquiring this Zain's African assets. While this would definitely lead to a dilution in equity for retail investors, one should wait for a official statement from the company directly to jump to conclusions. Both the companies - Zain and Bharti - are currently in an exclusive discussion period till the end of March.

Profit booking takes toll
11:30 am

The Indian markets ventured deep into the negative territory during the previous two hours of trade on account of profit booking activity across heavyweights. Currently, stocks from the realty, metal, banking, capital goods and consumer durables sectors are dragging the indices lower. FMCG stocks are the sole ones managing to stay in the green.

The BSE-Sensex and the NSE-Nifty are trading lower, shedding around 162 points and 52 points respectively. The BSE-Midcap and BSE-Smallcap are also trading deep in red, lower by around 1.12% and 1.06% respectively. The rupee is trading weak at 46.42 to the dollar.

According to a leading business daily, Indian automobile major, M&M has piped US auto major, John Deere in selling largest number of tractors in the world in 2009. The combined volumes of M&M and Swaraj surpassed the volumes sold by John Deere (1.6 lakhs). M&M now plans to sell 1.7 lakh tractors by the end of FY10. It may be noted that the company has managed to increase its lionís share of tractor market from 35% to 42% after turning around Swaraj (erstwhile Punjab Tractors) which it acquired in 2007.

It may also be noted that on account of increased mechanization and disbursal of bank credit, the size of the tractor market has more than doubled in the last decade, making India the largest market in the world. We believe that M&Mís ongoing relationship with the Indian farmers over the last four decades places it in the favorable position of being vendor of choice for the majority of agricultural households in India.

As per a leading business daily, Indiaís largest engineering company L&T is planning a major change in its energy business, particularly betting big on greener sources of energy. It may be noted that L&T which is traditionally identified with large thermal power projects is now evaluating prospects of venturing into wind and hydro power generation. For this purpose, it is planning to invest Rs 80 bn for setting up 700-800 MW hydro power plants in Himachal Pradesh, Uttarakhand and Arunachal Pradesh. These projects are expected to be operational in next four to five years. It is also building wind power projects in Gujarat, Maharashtra and Tamil Nadu for captive use. We believe that these projects will provide the company with some tax reliefs besides earning more carbon credits.

India reflects weak Asia
09:30 am

The Indian markets have started today's session on an extremely negative note. The benchmark indices opened way below the breakeven mark and have not shown any signs of an upward move since then. Other key Asian markets are trading in the red with Hong Kong (down 2.2%) leading the pack of losers. The US markets closed higher by 0.8% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with construction and metal stocks bearing the brunt of selling activity. The BSE-Sensex is trading lower by around 125 points, while the NSE-Nifty is down by about 40 points. Selling interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.4% and 0.5% respectively. The rupee is trading at 46.40 to the US dollar.

Pharma stocks have opened the day on a weak note. Losers here include Wockhardt and Ranbaxy. As per a leading business daily, Dr. Reddy's is planning to shift about 25% of production of drugs from its German subsidiary Betapharm to India over the next six months. Most of contracts the group had bagged in Germany were being sourced from India. It may be noted that Dr. Reddy's had already shifted about 35% of the production to India. In our view, the move to shift more production to a low cost manufacturing destination like India will help the company remain competitive. Betapharm's intangible assets and goodwill have been written down due to the difficult economic prospects. Bulk of Betapharm's business comes from tenders floated by German insurance companies. However, this move will also entail trimming down the workforce in Germany.

Steel stocks have opened the day on a negative note. Losers here include JSW Steel and SAIL. As per a leading business daily, Tata Steel's Teesside plant is likely to be bought by a consortium. Tata Steel Europe was about to mothball the cast products plant in North East England. The company has been incurring huge losses as it has no buyers of its production. In April 2009, a 10-year purchase agreement was prematurely terminated by the buyers. In a recent analyst meet, Tata Steel mentioned that were mothballing the plant instead of shutting it down. However, Tata Steel Europe will continue to employ almost 2,500 people in the region. Given the tough economic conditions in the area, the loss of jobs has become a politically sensitive issue for the local government.

India's own bailout package

It is not the business of the government to be in business. A few years ago, staunch capitalists would have agreed with the statement. But such a stance would now be difficult to take. After all it was the government that bailed out the collapsing financial sector in the strongest bastion of capitalism - the US.

India didn't walk down a completely capitalist path after independence. It chose a more balanced approach where Five Year Plans co-existed with private enterprise. The Indian government has a large presence in business. Many times with unfortunate consequences. Corporate decisions are overridden by political objectives. Perhaps the best example is the fate of oil marketing companies - Indian Oil, BPCL, HPCL- in India. Their products, i.e. fuels, have few viable substitutes. The companies have highly valuable assets in place. Their distribution network reaches far and wide. Yet, they incur heavy losses. Due to the simple fact that market determined fuel price is a bitter political pill to swallow.

The oil marketing companies have company in their misery. The aviation sector. State owned carrier National Aviation Company of India Limited (NACIL), runs India's national carrier Air India. Not very profitably though. The airline had posted a loss of Rs 72 bn in the last two financial years. The reason is not government interference. It has more to do with the lack of focus on efficiency which comes naturally to private sector companies. Things are so bad that now the government has approved a bailout package for Air India. It will get Rs 8 bn in fresh equity from the government. It will go towards tiding over the carriers' cash flow problems and fleet acquisition.

Interestingly, the government has asked NACIL to take several steps. Rationalise manpower and link incentives to productivity. Integrate the erstwhile Indian Airlines with Air India. Review all agreements on operational matters. Return all leased aircraft. Cut down on wasteful expenditure. Close all overseas offices which are not required. Basically, cut costs. Become more efficient.

So then, is it really the business of the government to be in business? Government's presence often defeats genuine commercial interests. Quite often it leads to an easy going attitude and inefficiencies. Hence there is definitely a case of lesser involvement of the government in business. But before we go overboard with the idea, we must remember the dangers of unbridled private enterprise. After all, unchecked and poorly regulated free market mechanism was at the heart of global financial meltdown. In our view, the government should get involved only when it absolutely must. That role should usually be that of a helpful but alert regulator.