Investors remain edgy

Although the markets came off the day's lows during the closing hours, they still managed to end the day significantly in the red. Thus, while the BSE Sensex closed lower by around 100 points (0.6%), NSE Nifty lost to the tune of around 35 points (down 0.7%). Also, while BSE Midcap suffered similar declines, the fall in the case of BSE Small cap was only marginal. Advance to decline ratio came in at 1:2 on the Sensex.

While other Asian markets closed in the red, Europe is witnessing buoyancy at the moment. The rupee was trading at Rs 45.2 to the dollar at the time of writing.

There seems to be no end in sight for the debt contagion that has gripped the Euro region and this seems to be keeping investors on tenterhooks. We believe that the markets are poised quite delicately at the current levels and the risk reward ratio of investing in Indian stocks from a near term perspective seems to be skewed significantly in favour of the former. First of all, valuations aren't all that cheap and secondly, with threats of sovereign defaults looming large, investors could abandon risk assets like emerging market stocks in a jiffy and move to safer havens. Thus, extreme caution is the need of the hour and investment needs to be made with a strictly long-term approach.

Auto stocks traded rather mixed today with Ashok Leyland and Escorts ending on the positive side of things. The sector stocks have had an excellent run so far and not without reason. Everything that had to go right with the sector has gone right in the past 12 months or so and hence, most companies were able to post record profitability. But not anymore. Quite a few headwinds have started emerging. Notable ones being the possibility of further rise in interest rates and hardening of raw material prices. These are likely to cast a negative spell on the profitability of the sector companies and hence, we could be in for a tough FY11 for these companies. For the long term though, some pockets like the two-wheeler space still looks very attractive. Although growth is likely to happen in the realm of passenger cars as well, intensifying competition has made picking up winners a difficult proposition.

It was not until long back that the mood in the divestment ministry was rather somber. Public issues put out by the PSUs were not meeting with the desired response and the divestment program was at risk of not being able to meet its target. However, the success of SJVNL seems to have changed all that. The offer from the company saw a strong participation from the retail investors with the issue getting subscribed more than 3 times. This has now put the spotlight firmly back on the future divestment candidates. Engineers India, which is likely to be divested in June, is scorching the charts on the bourses and the prospects are also looking upbeat for companies like Coal India and Hindustan Copper. Looks like the Government will finally be able to come somewhere close to the divestment target of Rs 400 bn.

Markets bounce back from day's low
01:30 pm

The benchmark indices continued to languish in the red during the last two hours of trade as the Greece crisis continues to keep investors edgy. However, the indices did manage to recover some of the early losses. Strong selling was, however, seen in stocks from the power, capital goods and metals space, while some buying interest was seen in stocks from healthcare and PSU sectors.

BSE-Sensex is trading lower by 106 points while NSE-Nifty is trading 40 points below the dotted line. BSE-Midcap and BSE-Smallcap indices are trading lower by 0.6% and 0.3% respectively. The rupee is trading at 45.34 to the US dollar.

Cement stocks are under pressure following the cement dispatch numbers for the month of April that were announced recently. While on a year on year basis, cement manufacturers have recorded a volume growth, the same cannot be said about the sequential figures. Recording the highest growth on a year on year basis is Jaiprakash Associates with a 57% YoY increase in dispatches. Ambuja Cement and JK Lakshmi Cement followed suit with a volumes increase of 15% YoY and 12% YoY respectively. ACC on the other hand recorded a 1% YoY decline in dispatches. In addition to the increase in infrastructure activity, a key reason for this is increase in installed cement capacities.

The figures of the month on month change in cement dispatches have another story to say. All the cement majors reported a decline in sequential dispatches i.e. in comparison to the March 2010 figures. Cement majors such as the Aditya Birla Group, Ambuja Cement and ACC reported volumes declines to the extent of 9%, 2% and 8% respectively. This drop in cement dispatches has been attributed to the delay in large infra projects. In addition, it is also believed that cement manufacturers have been facing logistics issues, especially to carry cement to the rural markets. Logistic issues in this case are the shortage of railway wagons.

Auto stocks are currently trading mixed with Tata Motors and Bajaj Auto trading weak, while Ashok Leyland and Hero Honda are trading firm. At present, the stock of Ashok Leyland is amongst the top gainers from stocks forming part of the BSE-100 Index. It must be noted that the stock has moved up by about 15% over the past two weeks. It touched its 52-week high today as well. In fact, over the last year or so, the stock has moved up by about 220%. A strong turnaround in volumes on the back of the bounce back in economy is the key factor for this performance. Investors may do well to recollect that the commercial vehicle segment was in trouble as sales slumped on the back of the slowdown. In recent times, the stock has moved up sharply as the sales numbers have remained impressive. During April, for example, sales volumes grew at a strong 270% YoY.

In a recent interview with a leading business daily, the management has cited a positive outlook for the domestic commercial vehicle segment. It expects the industry to clock a 15% to 18% growth in volumes during FY11. The company also plans to double its capacity. At present Ashok Leyland can manufacture about 100,000 units a year. This new capacity is likely to come in over the next three years. All said and done, with the stocks running up sharply, investors would do well to take under consideration the stock’s valuations. At current levels, it trades at a price to earnings ratio of about 20 times (on a trailing twelve month basis). While the prospects of the commercial vehicle segment may seem strong, one should refrain from overpaying for a stock.

Tough summer for tech firms
11:30 am

The benchmark indices languished in the red during the last two hours of trade as debt fears in Europe mount. Strong selling is seen in stocks in the capital goods, auto and metals space. On the other hand, stocks from the healthcare and PSU space are trading firm. Stocks from the small cap space are also seeing some buying interest.

BSE-Sensex is trading lower by 104 points while NSE-Nifty is trading 35 points below the dotted line. BSE-Midcap Index is trading lower by 0.4%. BSE-Smallcap index is trading 0.3% above yesterday's closing. The rupee is trading at 45.16 to the US dollar.

As per a leading financial daily, India's top tech firms including Tata Consultancy Services (TCS), Infosys and Wipro are facing their toughest summer yet. As per reports, around 500 outsourcing contracts worth nearly US$ 37.5 m are set to expire by September this year. Each of these contracts are estimated to be worth anywhere between US$ 1 m to US$ 1 bn. The challenge lies in that these deals are smaller, competition tougher and cost cutting the primarily requirement of the client. As per reports, the biggest battles are likely to be for high value, multiyear contracts. These have till now been dominated by multinationals like IBM and HP. The reason for this is that that they are able to bundle services along with hardware products. They are even able to offer finance and credit options to customers. It may be noted that companies outsource the management of their desktops, computer servers, storage and communication infrastructure. This helps companies to reduce their operational expenses and focus better on their core businesses. All eyes are now on these deals as they will be an indication of revenue visibility in the coming few years.

Aventis announced its 1QFY10 results. The company's sales grew by 6.7% YoY during the quarter. This growth was aided by a 22% YoY growth in the company's core pharmaceutical business. However, the company's topline was impacted as exports fell by 6% YoY and no sales were recorded from the vaccine ‘Rabipur' during this quarter. Operating margins fell by 4.6% as raw material and staff costs increased as a percentage of sales. Net profits for the quarter fell by 11% YoY as a result of lower operating income and lower other income. The fall could have been steeper if not for lower tax expense for the quarter. We believe going forward, Aventis' presence in fast growing lifestyle segment and the focus on strategic brands would be the key growth drivers for the company.

Markets begin on a negative note
09:30 am

The Indian markets have started today's session on a negative note. The benchmark indices opened below the breakeven mark and soon moved further into the red. They have not managed to pare their losses since then. Other key Asian markets are in the red with Japan (down 3.2%) leading the pack of losers. The US markets closed lower by 0.5% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with metal and auto majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 81 points, while the NSE-Nifty is down by about 27 points. However, buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.1% and 0.5% respectively. The rupee is trading at 45.15 to the US dollar.

Newspaper stocks have opened the day on a positive note. Gainers here include Jagran Prakashan and Mid-Day Multimedia. As per a leading business daily, Jagran Prakashan has bought the print business of Mid-Day Multimedia (MML). MML's print business was operated through a wholly owned subsidiary Mid-Day Infomedia. It consists of newspapers like Mid-Day, Sunday Mid-Day, Gujarati Mid-Day and Inquilab. Jagran Prakashan publishes the Hindi language Dainik Jagran, India's most read newspaper. MML will retain its seven radio stations. As per the deal, shareholders of MML will get 2 shares of Jagran for every 7 shares held in MML. As a result, the deal will result in about 5% dilution in Jagran. Although the deal is more favorable for the shareholders of MML, in our view it will help diversify Jagran's offerings and cater to a wider newspaper readership. It may be noted that the company had been keen on the English language market and currently publishes I-Next, a bilingual compact newspaper, and City Plus, a weekly English tabloid.

Financial stocks have also opened the day on a positive note. Gainers here include Shriram Transport and Mahindra Finance. Shriram Transport Finance declared its FY10 results. The company posted a 20% YoY growth in interest income, despite negligible growth in assets under management. The same is due to sale of assets on securitization. Net interest margins improved to 7.3%, from 7.2% in FY09, with lesser pressure on loan yields. Incremental lending was skewed towards used vehicles. Other income grew by 35% due to higher proportion of income from securitisation. The company posted a growth of 43% YoY in net profits during FY10, aided by lower operating costs. Net NPA ratio declined from 0.8% in FY09 to 0.7% during the year.

Inflation fears dying down?

This is the reason investing based on macroeconomic trends is such a dangerous proposition. It was only recently that most macroeconomic experts around the world were warning us about an impending inflationary spiral. They scared us to death on how inflation will damage one's purchasing power and how it would be wiser if one flocked to the relative safety of commodities like gold and silver. But not anymore. Events that have unfolded in the past few days have made quite a few of these so called experts change their mind.

With asset classes across the world coming in for some sharp correction, the theory of deflation is slowly gaining ground and is replacing the one based on inflation. These so called experts now argue that with the memories of the previous financial crisis still fresh, most people would do whatever it takes to avoid another crash and hence, would go slow on their spending and investments. This in turn could lead to surplus capacity and thus falling prices, which in turn could lead to deflation.

As far as we are concerned, we believe that trying to predict whether there will be inflation or deflation is a fool's game and instead, focus should be on companies whose products enjoy significant pricing power in the markets. Such companies are capable of passing on the rise in costs during times of inflation and are also capable of not lowering the same during the times of deflation, thus ensuring good returns during all times.

Bajaj Auto to push envelope further in small cars

Looks like Tata Nano will have competition soon. And not just in terms of size and pricing but also in terms of mileage. Yes, that's right. The car that has set new benchmarks in terms of mileage is likely to be beaten and that too by a handsome margin. As per a leading daily, Bajaj Auto, the company that is developing an ultra low-cost car in partnership with Renault-Nissan, is looking for a fuel efficiency of an impressive 30 kms per liter. This is a good 27% more than the one on offer by the Tata Nano currently.

If Bajaj Auto does indeed manage to achieve the same then it will further bring down the cost of ownership of small cars and help open up a whole new market. It should be noted that Indian two-wheelers, mostly bikes, are amongst the greenest in the world and with the advent of the small car by Bajaj, the country aims to become greenest in passenger cars as well. However, it remains to be seen whether the dream gets fulfilled or not.