Volatility impacts Indian indices

In a volatile trading session today, strong selling activity in the final hours caused markets to close deep into the red after trading barely above the dotted line for a larger part of the session. While the BSE Sensex closed lower by around 133 points (down 1%), the NSE Nifty lost around 46 points (down 1%). Midcap and small cap stocks, however, closed higher by 0.3% and 1% respectively. Losses were largely seen in IT, healthcare and banking stocks.

As regards global markets, barring India, most Asian indices closed firm today. European indices have opened on a mixed note. The rupee was trading at Rs 45.07 to the dollar at the time of writing.

Banking stocks ended mixed today. While gains were seen in Corporation Bank and ICICI Bank, SBI and HDFC Bank closed in the red. As per a business daily, non-repayment of loans to small borrowers is being cited as the key reason by banks for their increased slippage rate. Small corporate or agricultural borrowers who are typically eligible for loans of smaller ticket sizes are skipping repayment schedules, citing non-viability of projects, business failure or crop failure. This has resulted in an increase in the volume of gross NPAs in the Indian banking sector (currently nearing 3.5%). While the banks do set aside reasonable provisions against such high risk loans, willful default in large volumes may weigh heavy on banks’ profitability. To add to that the government’s proposal to extend the loan repayment scheme for farmers may also swell the agri NPAs for banks.

Hotel stocks closed firm today and the key gainers here were Taj GVK, Hotel Leela and Indian Hotels. As per a leading business daily, Ginger Hotels, which is part of Indian Hotels Ltd, is looking to expand by setting up properties across major metros, tier II and tier III cities. Ginger, which currently manages 21 properties set up in about three and a half years, is looking to add 9 more during the year. Further, it is aiming to have about 50 within a couple of years. This is a positive for Indian Hotels as the growth potential in the budget hotel space is strong. This is because at present the hospitality sector is heavily skewed in favour of upscale and mid-market properties. While the upscale range accounts for 56%, the mid market contributes about 36%. Thus, hardly 11% of the total rooms fall in the budget category, signifying huge opportunity for Ginger Hotels to grow its revenues.

As per a leading business daily, domestic pharma major Lupin has launched an osteoarthritis drug ‘Hyalgan’ in India. This product is an injectable and will be prescribed for relieving acute pain in patients diagnosed with osteoarthritis. The market for osteoarthritis is currently pegged at Rs 1.5 bn. What is more, India has the second largest osteoarthritis patient base at over 15 m and women form a large chunk of this population. By 2011, India is estimated to have 66 m in the high risk segment for osteoarthritis. Thus, this drug is expected to enhance Lupin’s revenues from the domestic market in the long term. Not just that, this product is in line with Lupin’s strategy of focusing on niche products which have the potential to maximize overall revenues and profits as there is limited competition. The stock, however, closed lower today.

Strong rupee haunts IT stocks
01:30 pm

Profit booking led the Indian markets to drop to the neutral zone during the second of the previous hour of trade. While stocks from the healthcare and IT spaces continue to drag the markets lower, those from the realty and auto spaces are amongst the top gainers. Stocks from the banking and capital goods sectors are amongst the lowest gainers.

BSE-Sensex is trading higher by 5 points while NSE-Nifty is trading lower by 6 points. BSE-Midcap Index is up by 0.6% while the BSE-Smallcap index is trading higher by about 1.2%. The rupee is trading at 45.03 to the US dollar.

Indian IT stocks are at the receiving end on BSE today. IT majors like TCS, Infosys and Wipro are trading lower by 1% to 2% on BSE currently. The Indian IT sector which exports over 55% of its services to the Western clients in the US and Europe, are always prone to foreign exchange currency fluctuations. It is widely believed that a 1% movement in rupee-dollar rate, impacts the operating margins by 0.4%. Rupee which is at around 45 for a dollar has appreciated as much as 4% in the last 2 months, thereby impacting the operating margins of Indian IT majors by around 2%. Though this appears to be a cause of worry for the investors in IT stocks, it might well be noted that this is the normal way of business for the export oriented sector. We believe that all the major Indian IT companies are adequately hedged against such normal currency fluctuations. While forex volatility remains a critical risk one must deal with, in constant currency terms, the prospects for the Indian IT sector remain very bright going forward.

Engineering stocks are currently trading mixed with Crompton Greaves, Suzlon and Elecon Engineering leading the pack of gainers, while Blue Star and L&T are trading in the red. Electrical equipment manufacturer, Crompton Greaves recently announced that it has acquired UK based Power Technology Solutions (PTS) for a consideration of 30 m pounds or about Rs 2 bn. PTS is a high voltage electrical engineering company providing consultancy, technical and engineering support to regional electricity companies. While not many details are given with regards to the financials of PTC, funding this acquisition should not be an issue for the company as company a good amount of cash on its books. This move will help the company to significantly increase its presence in the electrical engineering sector in the United Kingdom.

IT, Telecom weigh heavily on indices
11:30 am

Unabated selling activity in index heavyweights made the benchmark indices pare almost all of the early gains during previous two hours of the trade. Currently, selling activity witnessed among IT, telecom, healthcare, capital goods and FMCG sectors is weighing heavily on the indices. However, buying in realty, auto, metals and energy sectors is keeping the markets in green.

The BSE-Sensex is trading marginally up by around 13 points and 1 point respectively. Currently, the BSE-Midcap and BSE-Smallcap indices are trading is the green, higher by 0.4% and 1% respectively. The Rupee is trading at 44.96 to the Dollar.

According to a leading business daily, India's largest private sector power generator, Tata Power is planning to sell 8-10% stake in its two coal mines in Indonesia for US$ 300 m. It is believed that a private capital firm, Olympus Capital will be buying this stake. However the companies have not confirmed this deal yet.

It may be noted that Tata Power acquired 30% stake in these 2 coal mines and a coal mining company in Indonesia for US$ 1.1 bn. The company is believed to use the funds raised by the stake sale for equity infusion in its power projects or buy stakes in more coal mines. Nevertheless, as the coal supply from these mines will continue even after the stake dilution, this move will not impact the supply situations for Tata Power. The company has an installed capacity of around 3,000 MW. It plans to increase it up to 25,000 MW by 2017 at a cost of Rs 293 bn. The company presently imports 1 metric tonne of coal from Indonesia.

Steel stocks are currently trading firm led by SAIL, Tata Steel and JSW Steel. A leading business daily has reported that steel major, SAIL has signed an agreement with Shipping Corporation of India (SCI) to meet its import needs. The two companies will form a joint venture company in which both will have equal stake. It is reported that the JV company will ship nearly 1 m tonnes of raw material used by SAIL for manufacturing steel. These imports are likely to increase going forward. SAIL currently imports nearly 10 m tonnes of coking coal, which is the key raw material for manufacturing steel, per annum.

SAIL's requirements for coking coal are set to increase in the future considering that the company is expanding its steel manufacturing capacity. This venture will enable it to have control over part of its raw material needs as well as in mitigating the risks related to the volatile shipping market. Partnering with a shipping company (SCI in this case) would allow SAIL to use the former's expertise in running operations smoothly. It is believed that SCI is already in the process of acquiring new vessels, and the JV will give its efforts a further boost. It must be noted that SAIL is amongst the largest importers of coking coal in the country. A large portion of its raw materials are sourced from Australia. It also imports coking coal from New Zealand and the US.

Markets up on Asian cues
09:30 am

The Indian markets have started today's session on a strong note. The benchmark indices opened slightly below the breakeven mark but quickly marched into the green and have held on to their gains since then. Other key Asian markets are trading in the green with Hong Kong (up 0.5%) leading the pack of gainers. The US markets closed higher by 0.4% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the green with auto and metal stocks attracting investors' interest. The BSE-Sensex is trading higher by around 43 points, while the NSE-Nifty is up by about 13 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.6% and 0.9% respectively. The rupee is trading at 44.93 to the US dollar.

FMCG stocks have opened the day on a positive note. Gainers here include Camlin and Henkel India. As per a leading business daily, Hindustan Unilever (HUL) has sold its remaining 49% stake in Capgemini Business Services (formerly Unilever India Shared Services). The stake has been picked up by Paris based IT services firm Cap Gemini SA, as per an agreement signed in October 2006. Capgemini Business Services was the in house BPO unit of HUL. Cap Gemini SA now provides the full range of financial and administration services to the Unilever companies that were customers of the in-house BPO. Eight other clients are also being served now. From Cap Gemini's perspective, this deal makes ample sense given that India has become a key centre for the company with over 26,000 employees. From HUL's perspective, this move is part of its strategy to exit non-core operations.

Auto stocks have opened the day on a positive note. Gainers here include TVS Motor and M&M. As per a leading business daily, leading car-makers will increase the prices of their vehicles next month with the implementation of the Euro IV emission norms from April 1. 13 major cities will upgrade to BS IV emission norms from BS III and the rest of India would move up from BS II to BS III as per the recommendations of the Mashelkar Committee to control pollution. As a result, auto majors like Tata Motors, M&M, Fiat, Hyundai, and General Motors will have to upgrade their products, triggering the price hike. It may be noted that car prices had increased after the Union Budget 2010 due to higher excise duties and this would be the second price hike in less than two months.

Rupee at 18-month high. What next?

'Roaring rupee, sulking dollar', reads the headline of one of India's leading business dailies. Indeed, rupee has been in great spirits of late. The partially convertible Indian rupee ended very close to the 45 per dollar mark yesterday. It thus touched an 18 month high. Experts opine that the rally in rupee may not have fizzled out just yet. Rising FII inflows coupled with India's economic resilience could make the rupee rise even further.

It should be noted that the FIIs have ploughed in close to US$ 4 bn so far this month and this makes it the second best monthly net inflow ever. FII appetite though may be far from being satiated. There is a lot of liquidity waiting in the sidelines and given India's economic strength, a good part of it may find its way into the Indian stock markets. This could cause further appreciation in the rupee.

Sudden appreciation in the rupee could be hurting Indian exporters. None more so than the software companies. Little wonder, most of them closed in the red yesterday. However, more damage could well be coming their way. Disruptions in the global economy in the past few months has made life difficult for IT companies. Currency swings have been pretty frequent and pretty volatile and this has caused a fair degree disruption in the earnings profiles of IT majors. Sadly, these companies can do little but wait out this volatile period and hope that some sort of a structural trend in the currency emerges. However, those days do seem some distance away.

US could see a double dip recession

The common man is usually under the impression that well heeled economists have all the answers to problems facing the global economy currently. However, nothing could be further from the truth. Even they could be found groping in the dark and groping massively at that. Take the current recession in the US. It has left the best economists puzzled. The bone of contention seems to be the jobless recovery that is underway in the world's largest economy. And opinion is equally divided over what would happen in the forthcoming employment report. While some economists predict an increase of around 400,000 jobs, others are predicting a small decline! So much for economics being a fairly reliable tool.

A lot of people are arguing that growth in employment usually lags economic growth and hence all is not lost. However, others do not seem all that sanguine. They reckon and perhaps rightly so that the Government spending, which was buoying up the overall employment numbers to some extent, will be fading later this year and this would put further pressure on the employment rate. Unless of course, the Government decides to continue with their stimulus measures. Thus, the US seems to be in with a strong chance of having to endure a double dip recession.