IT and energy lift markets!

After spending most of the day around the breakeven point, the benchmark indices really took off during the last couple of hours and as a result, have closed the day strongly in the positive. BSE-Sensex has closed with gains of around 230 points whereas NSE-Nifty edged higher by around 60 points (up 1.1%). BSE Midcap and BSE Small cap indices, however, did not participate in the rally and were seen ending mostly flat. On the Sensex, more than two stocks gained for every one that witnessed a decline.

While most Asian indices closed in the red today, Europe too is trading in the red currently. The rupee was trading at Rs 45.1 to the dollar at the time of writing.

The late afternoon surge seemed to be driven mostly by IT and energy stocks as heavyweights like Reliance, Infosys and ONGC did end on quite a strong footing today. There does not seem to be any development of note that would justify the buying in these counters. Thus, the buying perhaps had to do with bargain hunting as most of these counters had lost quite a bit in the recent correction.

IT major Wipro traded strong today and closed the day with gains of around 4%. The buoyancy seemed a result of upgrades by few prominent brokerages of the company’s future earnings. All of these seem to conclude that the worst is priced into the stock and hence, it may surprise the street on the upside. The optimism also seemed to rub on the other IT majors as firms like TCS and Mphasis also managed to log in strong gains. As far as our view is concerned, going forward, we expect IT companies to do well on the back of buoyant growth in volumes. This would be driven by the strong deal pipelines. Pricing may remain stable with an upward bias. However, adverse currency movement may dampen margins to some extent. Most of the companies have been on a major recruiting spree. As a result, personnel related costs for 2011 are expected to trend upwards, which would further impact margins.

CV major Tata Motors closed weak today and lost more than 3% of its value. As per a leading daily, the company’s JLR unit is in talks with top Chinese sport utility vehicle maker about a potential China tie-up. The Chinese company in question is Great Wall Motor Co. As per one of the executives of the Chinese firm, the two companies are exploring opportunities for cooperative effort and talks have already passed the initial stages. If the talks do indeed go through, it will be one more step in the positive direction for JLR, who seemed to turn over a new leaf ever since its acquisition by Tata Motors. JLR, it should be noted, put up a stellar performance in the quarter gone by and helped greatly boost the overall performance of Tata Motors.

IT stocks in favour today
01:30 pm

The Indian markets were trading below the dotted line during the previous two hours of trade. Most of the sectoral indices are trading weak with the BSE-Auto, BSE-Realty and BSE-Bankex indices leading the pack. The BSE-IT and BSE-Oil & Gas indices are, however, trading firm.

The BSE-Sensex is trading lower by about 60 points (down 0.3%), while the NSE-Nifty is trading lower by about 20 points (down 0.4%). Small and midcap stocks have also followed suit as the BSE Midcap and the BSE Small cap indices are trading lower by about 1% and 0.9% respectively.

Auto stocks are currently trading weak led by Tata Motors, Escorts, TVS Motor, and Hero Honda. The stock of Hero Honda is trading weak seemingly on the back of news of Honda Motors recently announcing plans of launching motorcycles in the 100 cc space in the coming months. This will mark Honda Motors’ entry into the largest motorcycle segment, the 100 cc category, in which Hero Honda has the largest market share. There are also reports of Honda opening a new India plant this year, which will further boost capacity. It must be noted that Honda was not allowed to enter this segment on its own as it held 26% stake in Hero Honda earlier. Taking away market share from Hero Honda will not be an easy task considering that the company has strong brand awareness and sales reach. The company is believed to have 4,500 outlets in India, while Honda Motors has about 800 outlets. However, not long ago, the management of Bajaj Auto had stated that it was only worried about what changes Honda Motors can bring in the industry in terms of technology.

Stocks from the oil and gas sector are trading firm with Reliance, Petronet LNG and Cairn India trading higher, while ONGC is trading lower. According to a leading daily, ONGC expects to increase daily gas production by 2 m standard cubic meters and 9,400 barrels of associated oil per day initially from KG-Basin once the two offshore blocks - G1 and GS-15 start production from May this year. As per the plan, nearly 2 m cubic meters oil or gas will be produced from these blocks initially. Based on the sustainable tests the production will be scaled up over a period of time. ONGC expects oil and gas production from these fields for the next 15 years with a peak production of 20 m standard cubic meters per day. The increased production will have a significant positive impact on the topline in the future.

Auto, realty weighs on markets
11:30 am

Indian indices are trading flat with a negative bias as investors traded cautiously over the last two hours of trade. Stocks from the consumer durables and oil & gas space are trading firm, while stocks from the auto and realty space are trading weak.

The BSE-Sensex is down by 25 points while NSE-Nifty is trading 10 points below the dotted line. BSE Midcap index is down by 0.5%, while BSE Small cap index is trading 0.4% below Friday’s closing. The rupee is trading at 45.13 to the US dollar.

Food stocks are trading mixed with Nestle India and Wadala Commodities trading firm, while United Spirits and Ruchi Soya are trading weak. Nestle India released its 4QFY10 results last week. The company’s top line grew by a strong 23.4% YoY. This performance comes on the back of strong domestic performance. While the domestic sales increased by 22.9% on the back of strong volume growth and increase in realization, exports grew by 7.6% YoY. Operating margins of the company increased by a spectacular 5.3% on the back of fall in all operating expenses as a percentage of sales. While raw material costs grew by 22% YoY, staff costs fell by 14.3% YoY. Other expenditure grew by 16.1% YoY. Net profit of Nestle increased by an impressive 80% YoY. This was faster than operating profit growth and was a result of higher other income. Net profit growth could have been higher but for increase in effective tax rate. Effective tax rate increased from 28.1% YoY in 4QCY09 to 29.7% YoY in 4QCY10.

Steel stocks are trading weak with Adhunik Metaliks and Sesa Goa leading the pack of losers. However, Jindal Steel & Power is trading strong. In a bid to expand its international operations, SAIL plans to set up three steel plants in Oman, Indonesia and Mongolia with assured raw material linkages. The three plants will produce 3 mt of steel each with total investment requirement of Rs 450 bn. It may be noted that a 1 mt capacity requires an investment of Rs 50 bn. While the Indonesian and Mongolian facilities will use coal as fuel, the plant at Oman will use gas.

It may be noted that energy accounts for one fifth of the total cost of producing steel. While the Indian government has allocated gas to priority sectors including steel, India is facing acute shortage as the demand in a growing economy exceeds supply. In such a scenario, steel companies are evaluating opportunities to set up plants abroad which have assured coal/gas supply and also offer labor-cost arbitrage.

Indices open with marginal losses
09:30 am

Asian stocks have opened the week on a weak note. Markets in Singapore (down 0.6%), Hong Kong (down 0.5%) and Japan (down 0.4%) are the biggest losers. However, markets in China (up 0.1%) are seeing buyers' interest. The Indian markets have opened the day on a negative note. Stocks from the auto and realty space are leading the losers' pack.

The BSE-Sensex is trading lower by around 50 points (0.3%), while the NSE-Nifty is down by around 6 points (0.1%). Mid and small cap stocks are trading in the negative as well with the BSE Midcap and BSE Small cap indices down by about 0.58% and 0.04% respectively. The rupee is trading at 45.16 to the US dollar.

Auto stocks have opened the day on a weak note. Leading utility vehicle maker, Mahindra & Mahindra (M&M) has received the approval from its creditors for the takeover of Ssangyong Motors. The company is now focused on integrating the Korean vehicle maker and launching its products in India. In lines with this, the company has announced the top management personnel who would be heading the Korean operations. Interestingly, the top personnel are all from India. The company has chosen Mr. Sundaram to head the finance at South Korea. Mr. Sundaram was earlier the CFO of M&M. However, as stated by the management, the CEO would be a Korean. The formal announcements for this are still pending. The senior officials from India would be relocating to South Korea to take up their new responsibilities.

M&M plans to boost its research and development facilities to create a strong pipeline of products. It plans to launch two high end sedan models of Ssangyong within the year. And launch two of its SUVs next year.

L&T and other equipment makers, who rival BHEL in India's power equipment market, fear that they would lose out heavily to Chinese rivals. This is because private power firms are willing to place orders only with tough conditions that add costs to their supplies. Private power firms such as Tata Power, Reliance Power, Patel Engineering, Visa Power and Moser Baer Projects are asking equipment suppliers to give an undertaking that their foreign technology suppliers will ensure proper functioning of the equipment after delivery. Technology providers, mostly in Europe, US and Japan, would give such assurances only if they get royalty payment. Also, the power equipment market in India is at a nascent stage. On the other hand, the energy-efficient, supercritical technology is a forte of players in China, Korea and Russia. This would make domestic players uncompetitive against these foreign equipment suppliers.

The crude oil shocker!

Crude oil may not be close to its all time highs reached in 2008. But it is flirting with the US$ 100 per barrel mark on a regular basis now and this too is no ordinary level. Already, countries like India which is heavily dependent on imports to meet their needs, have started feeling the heat from higher prices. Other oil dependent countries are grappling with the same problem as well. It certainly doesn't help that energy, which along with food form the two most important requirements of a common man, is getting expensive by the day.

Thus, in view of the pain being inflicted, it becomes very important to know whether crude prices will take a breather some time soon or we are in for a period of sustained price rise from here on.

Well, it all depends on how seriously one considers a comment from a former exploration chief of a company that has the largest crude oil reserves in the world.

As per some confidential cables made public by website Wikileaks, the former exploration chief of Saudi Aramco, the Saudi Arabian crude oil reserves may well have been overstated by as much as 300 billion barrels!

The cables further disclose that Saudi Arabia might reach an output of 12 m barrels per day in 10 years but before then, possibly as early as 2012, global oil production would have hit the highest point.

Coming back to reserves, the executive has pointed out that Aramco's reserves are overstated by as much as 300 billion barrels. Thus, once 50% of original proven reserves is reached, there will be a steady decline in output that no amount of effort will be able to stop.

Coming from an old hand, this comment can certainly not be dismissed outright. It should be noted that Saudi Arabia possesses 20 per cent of the world's proven petroleum reserves and ranks as the largest exporter of petroleum. In view of this, any news of overestimation of crude oil reserves to the tune of 40% is sure to send shockwaves across the globe with respect to expectations of future crude prices.