Indian equity mkts buck the trend

The government's decision to pass on the hike in petrol prices seems to have gone well with investors despite lingering concerns over inflation, interest rates and growth. While major markets in Asia closed lower today, equity markets in India managed to buck the trend and closed well above the dotted line. While BSE-Sensex closed higher by around 274 points (1.7%), gains on the NSE-Nifty came in at around 86 points. The BSE Mid cap and BSE Small cap indices too gained around 1% each. Select telecom, energy and banking heavyweights evinced maximum investor interest. The rupee's slide against the US dollar was also partially arrested today.

Most other Asian indices closed lower today with European indices too trading lower currently. The rupee was placed Rs 55.89 to the dollar at the time of writing.

Investors in India seem to be taking comfort from the cool off in oil prices and the arrest of the rupee's decline against the US dollar. Oil prices today lingered near seven-month lows around US$ 90 a barrel in Asia as Europe's debt crisis festers and China's economy continues to slow. Crude prices have plunged about 15% from US$ 106 three weeks ago because economic growth and oil demand in Europe, the US and China are likely to be muted this year. Political turmoil this month in Greece has also spooked global investors, who fear the country may leave the Euro currency, which could spark financial and economic chaos in Europe.

Zee Entertainment has announced the results for the fourth quarter of financial year 2011-12. The company has reported 9.3% YoY growth in sales and 18.6% YoY fall in net profits. Slowdown in advertising which fell by 12% YoY impacted the overall revenue growth. Operating profits were down 28% YoY during the quarter. This was due to a huge jump in other operating expenses of 72% YoY. Other income registered an increase of 78.7% YoY in the March quarter. Lower depreciation and interest charges could not help much and the media company reported a fall of 18.6% YoY in net profits for the March quarter. The profits fell by 1.4% YoY for the full year. Zee Entertainment declared a dividend of Rs 1.5 per share implying a dividend yield of 1.2% at current prices.

Indian markets zoom ahead
01:30 pm

After languishing above the dotted line, the Indian equity markets picked momentum in the last two trading hours. All the sectoral indices, barring pharma are trading positive with oil and gas and banking stocks clocking the biggest gains.

The Sensex today is trading up 198 points and NSE-Nifty is trading up 60 points. Both BSE Mid cap index and BSE Small cap index are trading up 0.5% and 0.6%, respectively. The rupee is trading at 56.1 to the US dollar.

Majority of the energy stocks are trading positive with Oil and Natural Gas Corporation (ONGC) and Petronet LNG being the biggest gainers and Chennai Petroleum and Cairn India being the biggest losers. As per a leading financial daily, Reliance Industries (RIL) and its partners British Petroleum (BP) and Canada-based Niko Resources have relinquished rights to the D4 oil and gas block. The D4 block lies north of the D6 block in the Krishna-Godavari (KG) basin. While RIL is the operator of the block with the largest stake of 55%, BP and Niko hold shares of 35% and 10%, respectively. Niko feels that the oil and gas potential at D4 block is much lower than their estimates and the commercial viability still remains unattractive. This development re-iterates the falling potential of RIL's production and exploration blocks. The company sold off 30% stake in 21 oil & gas blocks to BP last year. Further, RIL has revised down the proven gas reserves of its gas blocks by 7% to 3.7 trillion cubic feet due to low pressure and uneconomic volumes. The stock is up 1.1%.

Bharat Heavy Electricals (BHEL) announced its results for the quarter and year ended March 2012 yesterday. During the quarter, the company's revenues grew by about 8% YoY. Operating profits increased by a fast pace of 21% YoY as the company was able to contain costs and improve margins to 25.6% as against 22.8% during 4QFY11. BHEL's profits increased at a similar pace of 21% YoY as lower interests costs balanced out the rise in depreciation charges. A lower tax outgo also helped the company prop up its profits during the quarter.

As for the full year FY12, the company revenues and profits increased by 14% YoY and 17% YoY. Similar to the performance during the quarter, the company was able to clock marginally higher operating margins. A higher other income also boosted earnings for the company during the year. The order book at the end of the quarter stood at Rs 1.35 tn which is nearly 2.8 times its full year FY12 revenues.

Indian equity markets trade flat
11:30 am

Indian equity markets have been trading flat over last two hours of trade. All sectoral indices are trading weak except oil & gas, PSU and banking stocks.

The BSE-Sensex is trading higher by 19 points and NSE-Nifty is trading up by 8 points. BSE Mid Cap is trading lower by 0.2% and BSE Small Cap is trading higher by 0.2%. The rupee is trading at 56.32 to the US dollar.

Energy stocks are trading strong led by Petronet LNG and Mangalore Refinery and Petrochemicals Limited (MRPL). As per a leading financial daily, petrol prices have been hiked by Rs 7.5 per litre. Earlier, the petroleum minister had indicated such a move stating that import bills of oil are increasing on account of falling rupee. He had however not mentioned any specific timeline. With this announcement, the new prices came into effect from May 24 itself. This is one of the steepest price hikes in India ever. State run oil firms are expected to increase the prices by Rs 6.28 per litre excluding local sales tax or Value added tax (VAT). However, the prices of diesel, kerosene and domestic LPG have not been touched so far. Raising of petrol prices is expected to bring some relief to the oil companies all of which are currently trading significantly higher than their previous day prices.

Auto stocks are trading in the red led by Maruti Suzuki and Escorts. As per a leading daily, Mahindra & Mahindra (M&M) is looking at SsangYong , its South Korean arm to push its brand in the Chinese market. M&M started importing SsangYong cars into China last year. SsangYong is far behind its competitors in China including Hyundai Motors and Kia Motors. SsangYong which is considered as a premium brand in China has not been able to do well so far in the Asian country. We may note here that SsangYong was close to bankruptcy under its Chinese owner SAIC Motor Corp when M&M decided to buy a 70% stake in it. The Indian automaker is also going to sell its sports utility vehicles (SUVs) to emerging markets of Brazil and South Africa.

Indian market indices open in green
09:30 am

Asian stock markets have opened the day on a mixed note with stock markets in Hong Kong (down 0.6%), Taiwan (down 0.5%) and China (down 0.3%) leading the losses in the region. However, markets in Malaysia (up 0.2%) and Indonesia (up 0.2%) are trading in the green. The Indian equity market indices have opened the day on a positive note. Stocks in the oil and gas space are leading the pack of gainers owing to the steep Rs 7.5 per litre hike announced for petrol prices. However, IT and auto stocks are trading in the red.

The Sensex today is up by around 32 points (0.2%), while the NSE-Nifty is up by around 10 points (0.2%). The mid and small cap stocks are trading in the green as well with the BSE Mid cap and BSE Small cap indices up by around 0.05% and 0.2% respectively. The rupee is trading at Rs 56.08 to the US dollar.

Auto stocks have opened the day on a mixed note with Maruti Suzuki, Hero MotoCorp and Ashok Leyland leading the losses. Factors such depreciating rupee, high interest rates and increasing fuel prices have adversely affected the growth prospects of the auto industry. As per data from Society of Indian Automotive Manufacturers, in the financial year 2011-12 while passenger vehicle segment grew by just 4.66% year-on-year (YoY), the passenger car segment grew at a paltry rate of just 2.19% YoY. So the latest hike in petrol prices to the tune of Rs 7.5 per litre is likely to hurt the demand further. Moreover, given the Rs 34 per litre differential between diesel and petrol prices, the demand is expected to skew further towards diesel variants. According to industry estimates, presently the demand splits 20:80 in favour of diesel vehicles.

Indian pharma stocks have opened the day on a mixed note with Natco Pharma and Aurobindo Pharma trading firm. However, Indoco Remedies and J B Chemicals are facing selling pressure. As per a leading financial daily, Indian drug manufacturer Lupin Ltd is voluntarily recalling 10,800 pouches of a contraceptive drug in the US. This was after revelations of impurities during a stability test. As per the US Food and Drug Administration (FDA), the recall of the drug is ongoing. The drugs were manufactured at the company's Indore facility in Madhya Pradesh. It is reported that the recall is not likely to cause any material financial impact on the company. Moreover, the recall falls under the FDA's Class III category. This means that the use of the drug is unlikely to have any adverse impact on the health of consumers. It must be noted that such recalls are common in the US. They do not necessarily indicate a problem in the quality of the drug.

Is LIC part of the government's arm?

With a 71% market share at the end of FY12, Life Insurance Corp of India (LIC) is the ubiquitous protector of life in the country. However, with the government increasingly looking towards the insurer to bail out its offerings and recapitalize banks, the institution's ability to make prudent investments may be compromised.

Global rating company Moody's downgraded recently downgraded LIC's foreign currency insurance financial strength rating. The rating was lowered from Baa2 to Baa3 with a stable outlook. The company's growing exposure to the government securities was a cause of concern. Reportedly, under the government behest, LIC picked over 90% of the 5% auction of a stake in Oil and Natural Gas Corporation (ONGC) for a premium. This investment is currently under water. Plus during 4QFY12, LIC was again forced to increase stakes in state run banks such as Syndicate Bank, Bank of Maharashtra, Bank of Baroda, IDBI Bank etc, as the cash strapped government could not spare a penny. Post these moves, LIC's stake in many banks is above the Insurance Regulatory and Development Authority (IRDA) mandated 10%. It now stands closer to 15%. These investments are also in the red currently.

A senior LIC executive however defended these moves saying that the insurer invests in PSUs because it believes that these stocks will do well over the long term. But, since the insurer hasn't had a permanent chief for a full year now, it is not surprising that instructions may be coming from the Center. LIC manages assets worth Rs 13 trillion, equal to 15% of India's GDP of Rs 85 trillion. Its investment in government-owned companies as on May 18, 2012, is Rs 1.1 trillion. Policyholders are now becoming increasingly concerned as to whether their hard earned money is safe. The memory of the failed US-64 scheme is still fresh in the minds of investors.

A valid question that the Economic Times recently put out there is whether this age old institution is 'too big to fail (TBTF)' akin to General Motors, AIG or Citigroup in the United States. When TBTF entities reached the brink of collapse, the US government had to step in to bail them out. LIC is 100% owned by the Indian government. But, with finances in a dismal state, depending on the Center for a bailout may be foolhardy. One major positive on LIC's side is that the institution invests in plain vanilla products such as debt and equity. It is not allowed to invest in structured products which spelled doom for many financial institutions in 2008. And with Indian equity markets usually dancing to the tune of foreign institutional investors (FIIs), LIC may actually be the only big long term player in the markets. LIC provides necessary domestic support to Indian equities, but, the government should not abuse its majority ownership of the insurer.