Weak global cues hurt Indian stocks

Indian stock markets continued with their downward spiral for the third day in a row on the back of a similar trend amongst global equities. The decline came even as Finance Minister assured investors of the health of India's economy. Thus, while BSE-Sensex lost in the region of 214 points (down 1.1%), NSE-Nifty ended 60 points lower. The BSE Mid Cap and BSE Small Cap indices suffered similar fate, down 1.4% and 1.1% respectively. Auto and Realty were the biggest losers.

As regards global markets, Asian stock markets closed the day in the red while European stocks are also trading weak currently. The rupee was trading at Rs 58.2 to the dollar at the time of writing.

BPCL, one of India's largest oil refiners, has stated that it is planning to increase its refining capacity to 40 million tonnes per annum (mtpa). It should be noted that this is a more than 30% jump to its existing capacity of around 30.5 mtpa. Most of the expansion is likely to happen at the company's Kochi refinery as the Mumbai refinery faces space constraints. In FY14, the management expects capex to be higher at around Rs 50 bn with main focus on integrated refinery expansion at Kochi. Besides this expansion, the company has significant assets in the upstream segment that will drive growth in the long term. The stock closed lower by 1% today.

SAIL, another Government owned PSU but in the steel sector and which is also undertaking expansion will build more capacity in the captive sources as it aims to ramp up its steel production capacity to more than 23 m tonnes by 2015-16. With the help of this initiative, it is planning to meet all its iron ore requirements from these sources. The total investment outlay is expected to be in the region of Rs 100 bn which will be spent on enhancing iron ore production capacity to 42.8 m tonnes from 27.9 m tonnes currently. The stock closed lower by more than 2% today.

Auto and PSU stocks lead among losers
01:30 pm

Backed by persistent selling activity Indian equity markets continued to trade in the red during the post noon trading session. Barring stocks from consumer durables, all the sectoral indices are trading in the red with Auto and PSU stocks leading the pack of losers.

BSE-Sensex is down by 180 points and NSE-Nifty is trading down by 49 points. While BSE Mid Cap is trading down by 1.06%, BSE Small Cap index is trading up by 0.82%. The rupee is trading at 58.38 to the US dollar.

Most of the Indian pharma stocks are trading in the red with Aaurobindo Pharma and Dishman being among the major losers. As per a leading financial daily, Sun Pharmaceuticals has sued Novartis in the US court, in order to launch Novartis' brand Gleevec (Imatinib Mesylate active ingredient of Gleevec) before patent expiry. The complaint filed by Sun challenges validity of patent expiring in 2019. Sun Pharma had informed Novartis about its Para IV filed for Gleevec for 2016 patents, at this time 2019 patent was not listed. Reportedly, Novartis did not sue Sun Pharma in the required time frame of 45-days. Sun is believed to be the FTF (first to file) for this drug. Gleevec contributes approximately US$ 4.7 bn to Novartis' revenues. Sun Pharma was trading down by 3%.

Most of the FMCG stocks are trading in the red with Colgate and Godrej Consumer being among the major losers. As per a leading financial daily, Hindustan Unilever (HUL) will enter the hair colour segment through its new brand TIGI. Apart from that, the company will also be launching other TIGI products such as gel, shampoo, wax and mousse under Bead Head and S-Factor brands. Unilever acquired TIGI's professional hair products business in 2009. Reportedly TIGI's products fall in the super premium category which are more expensive than existing premium brands such as Dove, Wella and Scwarzkopf. To begin with, HUL plans to sell TIGI's products through just over 40 salons in the country. HUL stock is trading marginally down.

Indian share markets remain in red
11:30 am

Indian share markets have slipped in red during the previous two hours of trade with only the consumer durables sector trading in green. FMCG and Auto are facing the maximum selling pressures.

The BSE Sensex is down by 232 points and NSE-Nifty is down by 53 points. BSE Mid Cap and BSE Small Cap indicesare both down by 1%. The rupee is trading at 58.45 to the US dollar.

Most of the Power sector shares are trading in red barring few with NHPC Ltd and Tata Power leading the gains while Jaiprakash Power and KSK Energy are facing the maximum selling pressures. According to a leading financial news medium, National Thermal Power Corporation.(NTPC) has strengthened its position vis-a-vis the other major power generating companies with the substantial capacity addition in FY13. The company has added highest capacity of 4170 MW and in turn met the 30% of the target set for the twelfth five-year plan. Ironically, NTPC had reported poor earnings for the last quarter of the financial year gone by, but it seems to be on track for achieving its target and stands strong in terms of operational risk. In the light of power related issues such as fuel supply, outstanding dues from State electricity boards and overleveraged balance sheets confronting many private power companies, NTPC seems to be an attractive bet. NTPC share is trading down by 1.4%.

Retailing shares are trading on a mixed note with Titan Industries and Provogue Ltd leading the gains while Trent Ltd and Future Retail are leading the losses. According to leading financial news daily, Titan Industries, the Tata Group firm suffered a huge setback with respect to downfall in stock price after the Reserve Bank of India (RBI) clarified that all gold imports for domestic consumption can be made only with 100% cash margin. In its statement, the company stated that credit of any kind from suppliers or bullion banks for importing gold for domestic use is prohibited. The company further mentioned that this move also affects import of gold through all non consignment routes like gold on lease/loan. That said, the jewellery business that contributes almost 80% to Titan's revenues grew by close to 15% YoY during FY13. While the news report also speaks about the temporary impact of this new policy on Titan industries, given the focus on maintaining profitability, it remains to be seen how the things shape up from here on.

Indian share markets open weak
09:30 am

All Asian stock markets have opened the day on a weak note with Japan (down 5.3%) and China (down 3.0%) leading the losses. The Indian share markets indices have also opened the day on a weak note. Barring consumer durables, all sectoral indices have opened in the red with stocks in the auto and healthcare space witnessing maximum losses.

The Sensex today is down by around 187 points (1.0%), while the NSE-Nifty is down by around 47 points (0.8%). Mid and small cap stocks have also opened in the red with the BSE Mid Cap and BSE Small Cap indices down by around 0.9% and 0.7% respectively. The rupee is trading at Rs 58.22 to the US dollar.

Barring Pfizer and Fulford India Ltd, MNC Pharma stocks have opened the day on a weak note with Abott India and Sanofi India Ltd leading the losses. As per a leading financial daily, Pfizer Inc has reached a US$2.15 bn settlement with Israel based Teva Pharmaceuticals Industries and Sun Pharmaceutical Industries related to patent infringement on its acid-reflux drug Protonix. As per the terms of settlement, Teva and Sun Pharma will compensate Pfizer's subsidiary Wyeth and Takeda for the losses incurred when two companies launched 'at-risk' generic versions of Protonix prior to the January 2011 expiration of the patent for pantoprazole (the drug's active ingredient). The drug acts to reduce the secretion of stomach acids and is used to treat the effects of gastroesophageal reflux disease. As per the settlement terms, Teva will pay US$ 800 m in 2013 and the remaining US$ 800 m by October 2014, while Sun Pharma will make a full payment of IS$ 550 m in 2013. Of the total, Pfizer will receive 64% of the settlement and its partner Japan's Takeda Pharmaceutical Co, will receive 36% or about US$774 m from the settlement.

Oil and gas stocks have opened the day on a mainly in the red with mixed note with Essar Oil and Castrol leading the losses. As per a leading financial daily, the Gujarat High Court (HC) has quashed a decision of GAIL (India) Ltd to terminate its contract to provide natural gas to Gujarat State Petroleum Corporation (GSPC). The court has further directed GAIL to fix the price for providing the gas from January 1, 2014. It is important to note here that GAIL and GSPC had signed a contract to provide natural gas for the period between 2004 and 2019. As per the contract, the prices for the gas to be provided from January 1, 2014, onwards were to be fixed by the two parties by December 31, 2011. However, the prices could not be fixed by December 31, 2011 because of the uncertainty shown by GAIL in fixing the price by the deadline. Post the deadline GAIL terminated the contract to supply the gas, a decision which was challenged by GSPC at the HC.

Will FIIs pull out of the bond market?

With Fed signaling that it might end its stimulus program emerging market equities have been getting hammered. Plans to withdraw stimulus indicates that growth prospects in US have improved and the economy no longer requires external support. This led Foreign Institutional Investors (FIIs) to sell their emerging market high risk holdings and move towards domestic equities.

However, it may be noted that this exercise was not just limited to equities. FIIs were also seen selling their Indian bond holdings. In addition, the huge appreciation of dollar in the past week meant that their dollar return on rupee denominated bonds was negatively impacted. This further triggered selling of their rupee bond portfolios.

In fact, as per an article in First Post, FIIs have sold US$2 bn worth of bonds in the last fortnight alone. This has led to rising bond yields. Selling pressure reduces bond prices and thus increases yields. Basket selling has also led to further depreciation in the rupee.

But now the question is will this exercise continue or end?

For that first let us understand why FIIs invest in Indian bond markets. The reason is simple. They can exploit interest arbitrage by investing in Indian bond markets. The bond yields in India are in the region of 7-8%. The same in developed world is in the region of 2-3%. Hence, by investing in India they can get a yield advantage of 4-5%. However, this arbitrage does not take into account the currency risks. Nonetheless, if currency risks are hedged the advantage may go down but it will still remain and not go away completely..

The second reason why foreign institutions get attracted to Indian bond markets is they need to hedge their fixed income liabilities. For instance, let us assume a pension fund in US needs to fund its pension liabilities of the future. If the fund invests in US markets it will get only 2-3% yield on its invested assets. However, investing the same money in Indian bonds will yield the fund 7-8%. Thus, investing in Indian bonds would mean that the fund is better placed to meet its liability payments. It may be noted that pension fund will prefer to invest into safe assets like government bonds so that it does not risk liability payments into the future. Thus, bond investments are more likely for such funds rather than stock investments. And with bond yields in India being higher they will continue to attract foreign funds.

Thus, we feel that the current outflow of foreign funds from the Indian bond markets is temporary in nature. It has got more to do with the dollar appreciation which is hurting the rupee investments of FIIs. For instance, the dollar has appreciated by 7-8% over the last fortnight or so. This effectively means that the entire yield advantage of 4-5% has been wiped off. In addition, to that foreign investors have effectively incurred exchange loss on their investments. Fearing further currency losses they might have exited from the market. But once the currency volatility dies down they are bound to return to the Indian market.