Indian mkts stand out sole loser in Asia

The Indian stock markets continued with their losing streak, closing at lower levels backed by profit booking in index heavyweights. After opening on a positive note, the indices could not hold on to the positive momentum for very long, and eventually, ended the day in the red. While the BSE-Sensex lost in the region of around 51 points (down 0.3%), NSE-Nifty ended lower by around 17 points (down 0.3%). The BSE Midcap and BSE Small cap indices however, were worse off, closing lower by around 0.6% and 0.8% respectively.

All Asian indices closed the day in the green, with India the only loser in the region. Europe is also trading in the green currently. The rupee was trading at Rs 45.05 to the dollar at the time of writing.

Bajaj Auto declared its results for the fourth quarter and year ended March 2011 a short while ago. The company reported a healthy 24% YoY and 39% YoY growth in sales for 4QFY11 and FY11 respectively. Strong sales performance was largely led by volume growth as well as higher realisations. The latter was especially strong due to its focus on high end motorcycles. For the quarter, growth in sales volumes stood at 17% YoY, while for the year volumes grew by 34% YoY.

The motorcycles segment, in particular, did well to log in an impressive volume growth of 35% YoY for the year. Sales volume growth of the commercial segment came in slightly lower at 28% YoY. Operating margins for the year, however, declined by 1.3% mainly on account of rise in raw material costs (as a percentage of sales). Net profits rose by a robust 96% YoY during the year as the company received extraordinary income to the tune of Rs 7.2 bn as against an expense of Rs 1.6 bn last year. Excluding this impact from both the periods, growth in net profits came in at a healthy 40% YoY in FY11 and was led by higher other income and reduction in interest costs and depreciation charges. The stock however closed around 2% lower for the day.

ONGC declared that its planned follow on share offering (FPO) in July 2011 would suffer if the government raised its subsidy burden. There were a few news reports that the government could raise upstream oil companies' contribution toward oil marketing firms' (OMCs) subsidy burden to 38.5% from 33% currently. According to news reports, the government could decide that upstream oil exploration companies like ONGC will have to contribute Rs 300 bn to help compensate fuel retailers like HPCL, IOC etc, for their subsidy burden. This amounted to Rs 780 bn in FY10. ONGC's stock price continued its negative run from yesterday, closing over 1% down today as well.

Indian stock markets move into the red
01:30 pm

The Indian stock market indices lost their ground in the last two hours of trade and are now trading in the red. Stocks from the Oil & Gas, PSU and auto sectors are trading weak, while those from the software space are trading firm.

The BSE-Sensex is down 78 points while NSE-Nifty is trading 30 points below the dotted line. Both BSE Midcap and BSE Small cap indices are down 0.7% each. The rupee is trading at 45.07 to the US dollar.

Most of the auto stocks are trading weak with Tata Motors, TVS, Ashok Leyland and Bajaj Auto leading the pack of losers. However, Hero Honda is trading firm. As per a leading financial daily, Tata Motors has five more months to work out a solution to the Singur issue. If it fails to do the needful, the lease agreement with West Bengal Industrial Development Corporation (WBIDC) will be terminated. As per the agreement, the lessor will have the option to terminate the lease if the land remains unused for three years or more, which will be applicable from October 2011. Tata Motors had pulled out of the Nano Project in Singur in October 2008. While the company has paid the rent for the year, no plan for Singur has been communicated yet. At this stage, there is no information if the company will be able to come up with a project by October this year. The Trinamool is not communicating either on the settlement over Singur.

Under the Land Acquisition Act, 1894, land once acquired for a public purpose cannot be returned. However, a new legislation could be passed if Ms Mamta Banerjee sticks to her demand of returning 400 acres, which the erstwhile government pegged at 181 acres. On the other hand, if she climbs down from the earlier demand of returning the land the compensation will need to be increased. This may prove to be very costly as it will have to include 11,000 willing farmers along with 2,000 unwilling farmers.

Construction stocks are trading mixed with BL Kashyap & Sons, Simplex Infrastructures and Pratibha Industries leading the pack of gainers. However, PVP Ventures and NCC Limited are trading weak. As per a leading financial daily, if Lavasa, the hill city project of Hindustan Construction (HCC), withdraws its petition against the environment ministry and applies fresh, its project may get an out-of-turn consideration for approval by the Expert Appraisal Committee (EAC). Among others, the project may benefit from environment ministry's decision to give priority to construction projects with green building ratings. The purpose of the decision is to incentivise companies to integrate green norms into their building plans. The ministry has suggested that the guideline does not intend to serve any specific project and the projects will be considered in the order of applications made. However, the projects may be considered out of turn in case of court directions or if it is in the national interest. The Lavasa project has been under the scanner of the environment ministry for violation of green norms. The ministry had sent a show cause notice to the corporation last year. As many as 257 residential units on 681.3 hectares were under construction when environment minister Jairam Ramesh imposed a stop work order earlier this year.

Indian stock markets under pressure
11:30 am

Over the last two hours of trade Indian stock markets pared their opening gains and are currently trading flat backed by selling activity in heavyweights. Stocks from the IT and capital goods space are trading firm while stocks from the PSU and oil & gas space are trading weak.

The BSE-Sensex is trading flat while NSE-Nifty is trading 5 points below the dotted line. BSE Midcap index is down by 0.3% while BSE Small cap index is trading 0.1% below yesterday's closing. The rupee is trading at 45.06 to the US dollar.

Consumer product stocks are trading mixed with Marico and Gillette India trading firm while Camlin and Paper Products are trading weak. As per a leading financial daily, Dabur India is planning to set up two more factories and introduce more products in Africa. This is because the company believes that Africa will be the epicenter for Dabur's future growth. The new factories are being set up in Johannesburg and Nairobi and will start production by June 2012. To cash in on the opportunities in Africa, Dabur has already built two factories in Egypt and one in Nigeria. Products like hair oil and toothpaste are manufactured here.

Dabur had also acquired Namaste Laboratories LLC recently which derives as much as a third of its sales from Africa. Dabur sells bath gels, shampoos and skin creams in Africa under the Hobby brand. Hobby brand came with the company's purchase of Hobi Kozmetik last year. Dabur plans to decrease its reliance on India due to heavy competition and inflation worries and increase the share of overseas sales from the current 22% to 28% in three years. Africa forms an important part of this strategy.

Auto stocks are trading weak led by Tata Motors and Maruti Suzuki. As per a leading financial daily, M&M is all set to launch a mini version of Xylo. The trial production has already begun for the smaller version of the popular Mahindra SUV (Sport Utility Vehicle) car. The car will be rolled out of Mahindra's Chakan plant and is expected to hit the roads in the next two months. Mahindra has decided to price the diesel version of mini Xylo at Rs 0.5 m putting it in the same range as Maruti Suzuki Swift, Hyundai's i20 and Tata Motor's Indigo. In times of rising petrol prices, diesel cars are expected to be in demand.

It may be noted that at present, most 5-seater SUVs are priced above Rs 1.8 m thus making it unaffordable for many people. Xlylo too is priced at Rs 0.8 m but the new mini Xylo may drive volumes for Mahindra. Toyota Innova is another player in the same segment. As per management, it makes sense for M&M to launch a mini SUV to leverage its position in the utility vehicle market. The automaker is expected to soon launch cars from Ssang Yong brand like Korando and Rexton in India.

Asian stock markets open firm
09:30 am

Most Asian stock markets have opened the day on a firm note. Stock markets in South Korea (up 1.3%), Japan (up 0.9%), Indonesia (up 0.7%), China (up 0.6%) and Hong Kong (up 0.6%) are trading firmly in the green. The Indian stock markets have opened the day on a firm note. Stocks in the capital goods and FMCG space are leading the gains. However, auto and banking stocks are facing selling pressure.

The BSE-Sensex is trading higher by around 48 points (0.3%), while the NSE-Nifty is up by around 13 points (0.2%). While BSE Midcap index has opened flat, the BSE Small cap cap is up by about 0.2%. The rupee is trading at 45.03 to the US dollar.

Media stocks have opened the day on a weak note with UTV Software, IBN18 Broadcast and Dish TV trading in the red. HT Media has announced its results for the quarter and full year ended March 2011. The company's net sales for the quarter grew by 25% YoY. Higher volumes and better advertisement yields led advertising revenues to grow by 20% YoY. Also, there was a 9% increase in circulation revenues. High operating expenses caused the company's operating margins to decline from 25% in 4QFY10 to 21% in 4QFY11. At the bottomline level, lower effective tax rate led the company's profits to grow by 12% YoY. Net profit margins declined from 12% in 4QFY10 to 11% in 4QFY11. For the full year ended March 2011 (FY11), the company's net sales and profits grew by 25% YoY and 33% YoY respectively. The company's board has recommended a dividend of 18% (Rs 0.36 per share) for the financial year ended March 2011. Currently, the stock of HT Media is trading higher by 2.2%.

Engineering stocks have opened the day on a firm note with L&T and BHEL trading firm. Opto Circuits has declared its fourth quarter (4QFY11) as well as full year (FY11) results for financial year 2010-2011. The company saw its net sales increase by a whopping 63% YoY during the quarter. For the full year, net sales increased by 47% YoY. Operating margins declined to 22% during the quarter as compared to 33% during the same period last year. This was on account of higher operating expenses (as a percentage of sales) particularly, employee costs which more than doubled as a percentage of sales. For FY11, operating margins declined to 28% as compared to 34% in FY10. This was due to higher employee costs as well as higher other expenses (as a percentage of sales). Net profits during the quarter grew by 68% YoY. For FY11, net profits increased by 41% YoY. The company has also recommended a dividend of Rs 4.50 per share.

Should banks risk safety for profits?

The balancing act between growth and profitability does not come easy to most businesses. Those that manage to do so for a temporary period often get copied by peers and competitors. In the bargain, the fragmented market leaves little room for supernormal profits. This holds very true for the financial sector where any hint of callous growth can take a toll on profitability. At times there are players lending at very thin margins. This helps them grab market share from the larger players. But their own profitability takes a dip as margins fail to accommodate rising operational costs. In addition if the quality of assets proves dismal, there are additional losses to be written off. Hence the banking regulators keep a watchful eye on the capital base. The capital adequacy ratio (CAR) has come to be a yardstick for both growth and cushion against losses.

To further differentiate bank's capital from shareholders from that borrowed from long term lenders, it is bifurcated into Tier I and Tier II capital. Each economy has rules in place for its banks to sustain Tier I capital above a certain limit. Cases of banks with Tier I capital as low as 2% or 3% seeking bailouts have taught regulators how to be firm on this count. Hence banks in Europe and the US have had to raise capital and dilute near term returns for shareholders so as to strengthen their balance sheets. It is further estimated that banks in Europe and US will need Euro 1.1 trillion and US$ 850 bn respectively to keep themselves healthy over the next decade.

In India there are banks currently that can be called 'over-capitalised'. These hold Tier 1 capital well above the RBI stipulated 8%. Given the slower pace of growth in their asset books these entities have seen their capital shrink at a slower pace. But there are concerns whether holding too much capital is against the interests of their shareholders.

Important to note that however safe Indian banks may be, they were not isolated when it came to holding high capital base at the end of March 2011. In fact even banks in the US and Greece held Tier I capital close to 8% at the end of this period. Also there were hardly any nations in the US or Europe with Tier I capital less than 6%.

Thus even if shareholders in some Indian banks may be disappointed to see the current return ratios lower than expected, they need to look at the big picture. Equity dilution in PSUs for government funding or lower growth rate in some private sector banks need not be a signal for poor returns. In fact these may just be cases of the entities getting stronger or taking a conservative approach to growth. It would be best to not force them to sacrifice safety for profits. For only if they remain safe, will they deliver the long term returns.