Weak GDP growth hits Indian indices

Indian stock markets had a rather volatile outing today. The indices began the day's proceedings on a positive note, and managed to hold on to their gains in the morning session. However, weak third quarter GDP numbers released later during the day dampened sentiments on the bourses. As a result, the indices shed gains and hovered around the dotted line during the later hours. The final trading hour saw the indices close barely into the positive. While the BSE-Sensex closed higher by around 22 points, the NSE-Nifty closed higher by around 10 points. The BSE Mid cap and the BSE Small cap notched gains of 1% each. With respect to sectoral indices, gains were largely seen in Oil and gas and metals stocks.

As regards global markets, Asian indices closed in firm today while European indices have also opened in the green. The rupee was trading at Rs 49.00 to the dollar at the time of writing.

Auto ancillaries stocks closed mixed today. While Exide and Amtek Auto found favour, Bharat Forge and Bosch closed into the red. Bosch Limited announced results for the fourth quarter and full year ended December 2011. For the year, the company reported a healthy 20% YoY growth in sales. This was fuelled by improved demand in certain sectors of the automotive industry such as tractors and light commercial vehicles (LCVs) despite rising interest rates and fuel prices. The introduction of new base line alternators enabled the starters and generators division to register a growth of 63.1% YoY in sales. The diesel systems business grew by 19.2% YoY mainly led by strong demand from the LCV and tractor segments despite subdued demand in the later part of 2011. The automotive aftermarket business grew by a solid 15.2% YoY in 2011. Net profit growth was even better at 31% YoY due to improved operating margins and a surge in treasury income. It must be noted that the company has outlined a capex of Rs 7 bn for 2012 and this will be invested across all its business segments.

India's GDP growth for October-December 2011 quarter came in lower at 6.1%, lower than the 6.9% and 7.7% growth reported in the second and first quarter respectively. This is not surprisingly given that industrial production data had also been poor for the past couple of months. One of the reasons for the slowdown in GDP has been attributed to the rise in interest rates as the Reserve Bank Of India (RBI) chose to hike rates with the aim of taming inflation. This coupled with rising fuel prices only served to dampen demand and thereby contributed to the economic slowdown. The government's poor state of finances is also a cause for concern and its inability to reduce fiscal deficit has only piled on the pressure on the central bank to rely on monetary policy to control inflation. While electricity, construction, transport and communications did well during the quarter, agriculture, manufacturing and mining fared poorly.

Indian stock markets shed initial gains
01:30 pm

Indian stock markets continued to shed initial gains over the last two hours but are still trading in the green. Barring capital goods and banking stocks, all sectoral indices are trading strong.

The BSE-Sensex is trading up by 102 points and NSE-Nifty is trading up by 20 points. BSE Mid cap and BSE Small cap indices too are trading up by 0.7% and 0.6% respectively. The rupee is trading at 48.95 to the US dollar.

Engineering stocks have been trading mixed with Opto Circuits and Bharat Electric leading the gainers and Shanthi Gears and Areva T&D trading the weakest. As per a leading financial daily, Siemens is aiming for a double -digit growth in revenues by capitalizing on the exponential growth of urban centers. Currently, the urban segment (infrastructure and cities sectors) contributes to 25% of the total business volumes worth Rs 120 bn and offers integrated mobility solutions, building and security technologies, power distribution, smart grid applications, and low and medium-voltage products. The sector comprises rail systems, mobility and logistics, low and medium voltage, smart grid, building technologies, etc. Taking the step in this direction, the company has recently commenced operations at two Greenfield factories in Goa with an investment of Rs 2 bn.

Stocks in the Indian Pharma sector are trading mixed with Fresenius Kabi Onco and Dishman Pharma leading the gainers and Orchid Chemicals and Strides Arcolab trading the weakest. As per a leading financial daily, the U.S market has seen price erosion of upto 70% in sales of Lipitor over past few months. As a result, Indian pharmaceutical majors such as Dr Reddy's Laboratories (DRL) and Lupin that are set to sell Lipitor in the US market by middle of 2012 are likely to be hit. The drug lost its patent protection in November last year and since then it is being sold by three players in US. Of these, Ranbaxy which is the only Indian company selling the drug currently in US (with 180 day marketing exclusivity ending in May 2012) has indicated price erosion of 60 to 70 % in generic Lipitor, much higher than the typical price erosion of 40 to 50 % in other products within such period. Lipitor's sales that had achieved a level of US$13 billion in 2006 came down to US$ 5.5 billion when it went off-patent on November 30, 2011. Both DRL and Lupin were trading in the red.

Indian stock markets off day's highs
11:30 am

Indian stock markets shed some of their morning gains but still traded in the green over last two hours. Barring capital goods and banking stocks, all sectoral indices traded strong.

The BSE-Sensex is trading up by 114 points and NSE-Nifty is trading up by 26 points. BSE Mid cap and BSE Small cap indices too are trading up by 0.9% and 0.8% respectively. The rupee is trading at 48.99 to the US dollar.

Food stocks are trading firm led by Wadala Commodities and Tata Global Beverages. As per a leading daily, the wholesale tea prices are likely to rise by about 10-15%. This would be on account of falling supply of the same. The prices of good premium teas may go up by Rs 20 per kg. These would now be Rs 210-1,220 per kg. Low end teas would be priced at Rs 100 which is up Rs 15 from their previous prices. The companies that are expected to benefit are Tata Global Beverages, Bombay Burmah Trading Corporation, Jay Shree Tea and Industries, Goodricke Group, Mcleod Russel India and Warren Tea. All of these stocks are currently trading higher by 3-8%.

Telecom stocks are trading in the green led by Bharti Airtel and Mahanagar Telephone Nigam Limited (MTNL). According to a leading financial daily, Bharti Airtel has suggested the Telecom Regulatory Authority of India (TRAI) to deregulate mobile tariffs or continue with its policy to allow telecom operators to fix calling rates. The company has written this letter to the telecom regulator because the latter had sought responses from the industry on reviewing the policy of forbearance in telecom tariffs earlier this month. TRAI had issued a consultation paper after the recent 20% increase in call rates by various operators. The company has also warned against any kind of regulatory intervention as it may prove to be catastrophic for the very sustenance of the industry.

Realty boosts Indian stock markets
09:30 am

Barring China (down 0.6%), all the other major Asian stock markets have opened the day on a positive note. Markets in Taiwan (up 1.7%), Korea (up 1.3%) and Indonesia (up 1.3%) are leading the gains in the region. The Indian stock markets have opened the day on a high note as well. Stocks in the realty and capital goods space are the major gainers.

The BSE-Sensex is up by around 253 points (1.4%), while the NSE-Nifty is up by around 83 points (1.1%). Mid cap and small cap stocks are trading in the positive zone as well, with the BSE Mid cap and the BSE Small cap indices up by about 1.5% and 1.3% respectively. The rupee is trading at Rs 48.88 to the US dollar.

Engineering stocks have opened the day on a positive note with Sanghvi Movers, Havells India and Bharat Heavy Electricals (BHEL) leading the gains. As per a leading financial daily, the Tamil Nadu Electricity Board (TNEB) has decided to cancel the Udangudi Power Project (1600 (2x800) mega watt Super Critical Thermal Power Project) in Tamil Nadu that was awarded to BHEL. The project was worth Rs 80 bn and was cancelled on account of a delay for four years. As per the State Government, the project was delayed to Union Environment Ministry not granting permission due to non availability of long term coal linkage for the project and BHEL not showing much cooperation either. As per the Memorandum of Understanding (MoU), TNEB and BHEL were to hold 26 % each in the company while the remaining was to be held by the private partner and a financial institution which were supporting the project. However, no stake was picked by private players till May 11. Now, TNEB has decided to take care of the project on its own. Because of this, the project will get mega power status and will be given tax incentives, thus bringing down the project cost. The coal requirements will be met through imports.

Energy stocks have opened the day on a positive note as well with Oil and Natural Gas Corporation Ltd. (ONGC), Reliance Industries Limited (RIL) and Gujarat State Petroleum Corporation leading the pack of gainers. As per a leading financial daily, state run oil refiners are expected to cut down crude oil imports from Iran as it is facing US sanctions. However, the refineries are citing diversification as the official reason for the move to avoid offending significant oil supplier such as Iran. The shift is now suggested to relatively cheaper new grade of crude oil from Africa and Latin America which can improve gross refining margins for the complex refineries. The sourcing from Iran has already declined significantly from 22 million tonnes in 2008-09 to 13.1 million tonnes in the current fiscal and is expected to see further decline. In India,Mangalore Refineries and Petrochemicals Ltd. (MRPL) is the biggest buyer of Iranian crude but is now eyeing supplies from in Africa and Latin America on a long term basis.

Is 8% GDP growth elusive to India?

In order to curb the inflation monster Reserve Bank Of India (RBI) adopted a hawkish monetary policy since the last two years. Tight monetary policy hurt the industrial capex cycle of corporates which in turn impacted the overall economic output. Rate sensitive's like construction, engineering and auto were so badly affected by rising interest rates that the growth figure of 8% seemed elusive. In fact, if the poll of 26 economists materializes (growth expectation of 6.4% in quarter ending December 2011) than this would be the fourth straight quarter below 8%. Thus, interest rates have been effectively labeled as the main culprit for slowdown in overall growth.

However, apart from interest rates confidence crisis resulting from policy bottlenecks is also hurting growth equally. Although there are indications that the rate cycle has peaked out the kind of macro-headwinds India is facing it would take a while before we scale/surpass historical growth figures.

Exports are under significant pressure due to the ongoing trouble in the developed markets. Government expenditure (important component of GDP growth) too is likely to be curtailed as revenues (tax receipts) are dwindling due to the impending slowdown. Although borrowing is an available option to the fund the required expenditure it may crowd out private investments. So, government needs to be careful in that regards. Another factor impacting growth is investment which as mentioned previously is suffering due to the rising rates. However, consumption (typically the largest component) continues to remain the key growth driver.

Nonetheless, right now the other factors (exports, government spending and investments) are weighing down the consumption component. This in turn has impacted the GDP growth figures. We believe that policy issues and interest rates will play a key role if India aims to surpass the 8% figure and achieve double digit growth in future. And for that RBI and Government will have to work in conjunction. RBI will have to balance growth and inflation aspirations prudently. On the other hand government will have to take steps in ironing out bureaucratic bottlenecks thereby creating a healthy investment climate.