Mid & small caps buck the trend

After harboring into negative territory during the post noon trading session, the Indian stock markets ended the day on a weak note. The BSE-Sensex closed lower by about 56 points or 0.2%. The NSE-Nifty closed the day on a flat note. Stocks from the capital goods, auto and oil and gas spaces were the biggest losers. However, gains were seen across realty and metal stocks. The BSE Mid Cap and BSE Small Cap indices bucked the trend and ended the day on a positive note, with both the indices closing higher by about 1.1% and 1.2% respectively.

Stock markets in other parts of Asia ended the day on a positive note. The rupee was trading at Rs 59.6 to the dollar at the time of writing.

Engineering stocks closed the day on a mixed note. BGR Energy and Jyothy Structure were the leading gainers. However, Alstom T&D and ABB India Ltd ended the day in the red. The cabinet committee on economic affairs (CCEA) has ratified a decision to sell 5% stake in power equipment maker BHEL. It may be noted that in March the government had divested about 5% in the company to LIC. Following the stake sale in March the government's stake came down to 63%. If the current stake decision also fructifies, government stake would further go down to 58%. A gradual divestment in the PSU will not only help the government fund its fiscal deficit but it shall also increase institutional/individual shareholding and thus increase the float. On this development the stock has rallied quite a bit in the last 2-3 days.

With the new government expected to assume power at the centre, most engineering and infrastructure stocks have rallied in the recent months. However, is it right time to buy them? Share your views on the Equitymaster Club.

Majority of PSU mining stocks have closed the day on a firm note. Leading the pack of gainers were Coal India and National Hydroelectric Power Corp. (NHPC Ltd). As per the financial daily, two major PSUs viz Nalco and Steel authority of India (SAIL) have to agreed to go for an out-of-court settlement on outstanding electricity and water dues with the Odisha government. This step was taken after the issue was raised in the meeting attended by Union steel secretary A K Pujari and various other heads. It was decided to form a committee to resolve the issues. The outstanding electricity dues of Nalco are approx. Rs 10 bn, and pending water dues of Rs 3 bn. The outstanding electricity dues for SAIL's Rourkela plant are Rs 612 m. Both the PSUs had gone to the court contesting the claim. The authorities will be working towards amicable settlement of dispute with both the PSUs. Thus after some agreement with both the PSUs, it will be decided as to how much and in what time frame both will pay towards the outstanding. The mandate by the committee is expected in next two months.

Indian markets slip lower
01:30 pm

Led by selling pressure among the Index heavy weights stocks, the Indian markets slipped in to the negative territory during the previous two trading hours. Selling is led by stocks from energy and engineering sectors, while realty stocks are trading firm.

The BSE-Sensex is trading down by 100 points and the NSE-Nifty is trading down 21 points. The BSE Mid Cap index is trading up 0.8% and the BSE Small Cap index is trading up 0.9% today. The rupee is trading at 59.87 to the US dollar.

Energy stocks are trading mixed today. The stocks of Indraprastha Gas and Chennai Petroleum are leading the gainers, while Reliance Industries is trading weak today. As per a leading business daily, ONGC Videsh (OVL) the overseas arm of state energy major Oil and Natural Gas Corporation Ltd. (ONGC), is planning to raise loans worth Rs 52 bn in order to fund its capital expenditure in FY15. OVL has earmarked the capex of about Rs 148 bn in FY15, out of which Rs 96 bn is expected to be met through internal funds, whereas balance it plans to raise through debt financing. This debt raised will be over and above loans that OVL plans to take to pay off the bridge loan for funding Mozambique assets acquisition. The company has managed to acquire 16% of the gas field giant, Mozambique worth about US$ 4 bn. The acquisition cost has increased the company's previous year capital outlay of Rs 109 bn to Rs 360 bn. ONGC's rich field Mumbai high has been witnessing diminishing resources, so acquiring new fields especially in the overseas will help the company to augment its resources. ONGC is trading down by 1%.

All the public sector bank stocks are trading in the green with Indian Bank and Bank of Baroda being the biggest gainers. As per a leading financial daily, State Bank of India (SBI) has announced plans to set up a holding company for the purpose of raising funds. This development comes after the Finance Ministry asked public sector banks to explore various options such ESOPs, SPV model and holding company model to raise funds from the market for their capital requirements. Under the bank-wise holding company model, the bank will transfer all its subsidiaries to the new company which will then tap the market for funds. While the Reserve Bank of India (RBI) has approved the holding company model, it is still to be approved by SEBI. SBI bank stock is currently trading up marginally

Mid and small caps outperform
11:30 am

After opening weak today, the Indian Indices are trading flat in the morning amid outperformance among mid and small cap stocks. The buying interest is the highest in metal stocks while the selling pressure is the highest in energy stocks.

The BSE-Sensex is trading down 40 points and the NSE-Nifty is trading down 8 points. Similarly, the BSE Mid Cap index is trading up 0.9%, while the BSE Small Cap index is trading up 1.2% today. The rupee is trading at 59.68 to the US dollar.

Software stocks are trading mixed today. While Tata Consultancy Services (TCS) and Tech Mahindra are leading the gainers; HCL Tech and Wipro leading the losers. As per news reports, India's second largest software firm Infosys has completed the process (pending shareholder approval) of hiving off its software products business into a separate subsidiary. This subsidiary, named Edgeverve Systems will solely focus on the creation and distribution of software products and platforms. In FY14 this division contributed only 3.6% of revenues and most of that was from the company's flagship banking product, Finacle. However Finacle has been retained by the standalone company and will not be part of Edgeverve. Thus the subsidiary will be starting off on a very low revenue base. It must be pointed out that the products business has a higher margin profile than the services business and Infosys will look to increase the share of revenues from this subsidiary in the coming years. Infosys is trading down 0.3% today.

Engineering stocks are trading mixed today. Elecon Engineering and BGR Energy are leading the gainers; while, Sanghvi Movers and Kalpataru Power and Transmission are leading the losers. As per a press release on BSE, Larsen and Toubro (L&T) has received orders worth Rs 11.4 bn in various business segments during April-May 2014. According to the company, orders bagged by power transmission & distribution (T&D) and building & factories segments are worth Rs 10.7 bn; while additional orders have been received from various ongoing projects. Orders worth Rs 7.5 bn in the power T&D business are from Saudi Arabia and Oman. It has also received an order from Vizag Transmission, a subsidiary of Power Grid Corporation of India (PGCIL), in Andhra Pradesh. Order inflows for the company for 9MFY14 grew by 23% YoY to Rs 674 bn. Despite a good growth; L&T has revised its order inflow guidance from 20% YoY growth to 15-20% YoY growth for FY14 as it expects muted order inflow growth in 4QFY14. The current order book of the company provides revenue visibility of more than 2 years. L&T is trading 1% down today.

Indian share markets open in the red
09:30 am

The major Asian stock markets have opened the day on a mixed note with stock markets in Singapore (up 1.1%) and Indonesia (up 0.9%) leading the gains. However, the stock markets in Japan have opened in the red (down 0.2%). The Indian share markets have opened the day on a weak note. The sectoral indices have opened mixed with stocks in auto and capital goods space leading the losses. However, stocks in realty and metal space were leading the gains.

The Sensex today is down by around 18 points (0.1%), while the NSE-Nifty is down by about 2 points (0.03%). However, the midcap and smallcap stocks have opened in the green with BSE Mid Cap and BSE Small Cap indices up by around 0.6% each. The rupee is currently trading at Rs 59.48 to the US dollar.

Energy stocks have opened on a mixed note with Castrol India Ltd and Indian Oil Corporation Ltd (IOCL) leading the losses. However, Jindal Drill Ltd and Gujarat State Petronet Ltd were leading the gains. Castrol India Ltd has announced results for the quarter ending March 2014. The company's revenues for the quarter registered a growth of 4.1% on a year on year (YoY) basis. The operating profits declined by 14.9% YoY during the quarter (with margins at 17.9% as compared to 21.9% in the 1QCY13). The decline was on account of stagnated volumes, higher base oil prices, rupee depreciation and higher staff and advertising expenses. The net profits for the quarter declined by 19.4% YoY with net profit margins at 12.3% versus a net profit margin of 15.8% in 1QCY13.

Nestle India Ltd has announced results for the quarter ending March 2014. The company reported a net sales growth of 2.9% year on year (YoY) during the quarter. The net sales from the domestic market grew by 3.4% YoY, while net sales from exports declined by 4.4% YoY during the quarter under review. The operating margins were adversely impacted by high price of milk solids. The net profits for the quarter declined 7.1% YoY. As per the management, the tax expenses during the quarter was not fully comparable with the corresponding quarter. The Board of Directors has declared an interim dividend for 2014 of Rs 12.50 per equity share of Rs 10 each.

Will the new govt. be able to tackle El Nino?

Good monsoons are critical for long and stable growth of an agrarian economy like India. This is because in a developing country like India, food production is largely at the mercy of monsoons. Further, food makes up a major component of the price basket and hence an important factor for inflation. As such, monsoon forecasts are a matter of great interest for all.

The India Meteorological Department (IMD) forecasts below normal monsoon for the year. IMD projects that there is a 60% probability of El Nino this year. A strong El Nino can cause drought-like conditions which can dampen the agriculture output in India. It is important to note here that while the share of agriculture has come down in GDP, it still is a key driver in the rural areas where 60% of India's population resides.

This certainly is negative as - if monsoons are below average, the economy will face inflationary pressures and growth will suffer. In such a situation, even the monetary policies will not be able to do much in terms of reversing the trend.

Having said that, one should also note that the historical data has shown mixed results when India has faced draught situation. During the El Nino years viz; 2004, 2006 and 2009; growth in the agricultural GDP has either remained flat or has shown positive trend. This is in contrast with the El Nino years, 1997 and 2002, where this growth was negative.

We are not sure how the year 2014 and the years there after are going to pan out for rains. But from a longer term perspective, the government needs to put in efforts to reduce the dependence on monsoon for bolstering agricultural production. Ramp up in irrigation techniques, water harvesting, and importantly storage facilities are some of the primary issues to look into. The latter point becomes important because adequate storage of foodgrains during bumper years can be used in years plagued by inadequate rainfall. This helps to keep prices of foodgrains in check to a certain extent.

All eyes are now on the new government and the efforts that it makes to tackle the challenge that El Nino is likely to pose this year. But from a longer term perspective, it will be interesting to see whether it will address some of the structural issues in agriculture so that the overall dependence on monsoons is reduced.

Do you believe that the new government will be able to bring about a revolution in agriculture so that dependence on monsoons is reduced? Share your views on the Equitymaster Club