Auto, IT stocks save the blushes

Led by buying in stocks from the auto and IT sectors, Indian markets managed to close marginally in the positive today. On the broader BSE, more than one stock gained today for every one that closed in the negative. Among other key Asian markets, China (up 0.3%) and Japan (up 1.8%) led the pack of gainers.

The BSE Sensex and NSE Nifty closed with gains of around 50 points (0.3%) and 10 points (0.2%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed up by around 0.1% each. The rupee was trading at 46.38 against the US dollar at the time of writing this.

Realty stocks closed mixed today. While gains were seen in Ackruti City and DLF, selling pressure marked trading in Peninsula Land and Ansal Properties. Stocks from the real estate sector have been among the most volatile over the past few months. This is given that investors fear interest rates to move up following the rising inflation that has raised worries for the RBI. While the central bank has already tinkered with the rates somewhat, it doesn't seem to be finished as yet. We see higher interest rates as having a negative impact on realty demand given that customers are yet to come out of the slowdown blues. We also see small realty companies as being the worst hit as consolidation intensifies within the sector.

Anyways, in another backlash against India's archaic property rules, HDFC's Chairman Mr. Deepak Parekh has asked policymakers to take bold initiatives for developing urban real estate sector. As he's written in the company's latest annual report, "Urban growth can be driven through radical changes in land acquisition policies, improved governance and inculcating skills and innovative capabilities in people." He has also laid emphasis on the urgent need for India to build at least two dozen satellite cities around Tier-1 and Tier-2 cities, given the growing urbanization.

Power stocks also closed mixed today. Key gainers here included NHPC and GVK Power. NTPC and Tata Power closed in the red. As per a leading business daily, NTPC is looking to buy a controlling stake in a coal field in Australia. While the exact nature and size of the deal is not yet known, the company is looking to bring to India around 10 m tonne per annum (MTPA) of coal.

An acquisition like this talks a lot about the urgency with which Indian power companies like NTPC are eyeing such assets abroad. While some of these companies have also won tenders for mining coal in India, execution here is pretty slow. And the lure of buying an operational coal mine is any day brighter. We see these international coal assets as having big importance for a company like NTPC. Not only is this considering its huge expansion plans, but it also stems from the shortfall in coal supplies it is facing from domestic coal suppliers like Coal India Ltd. Anyways, the company already has plans to set up 4,000 MW of new power plants this year.

In taking the price competition in the telecom sector to another level, Reliance Comm. today announced an aggressive pricing for its mobile internet services. The company will now be offering unlimited internet usage to its mobile subscribers at as low a cost as Rs 99 per month. This offering seems as a precursor to the company launching its 3G services, where it has won licenses to operate in several key areas including Mumbai and Delhi. The company had recently talked about selling a [art stake in its tower business Reliance Infratel to part fund its 3G capex. Some in the industry believe that 3G and BWA auctions that completed recently have led to very aggressive bidding and as such 3G pricing is not expected to be very cheap. Thus it will be interesting to see how players like Reliance Comm. make a profitable business of these new services despite their aggressive pricing tactics!

PSU, FMCG stocks lose favour
01:30 pm

Profit booking led the Indian markets to shed their morning gains and move towards the dotted line during the previous hour of trade. Pressure is currently seen in stocks from the PSU, FMCG and oil & gas spaces. On the other hand, stocks from the IT and auto sectors are amongst the top performers at the moment.

The BSE-Sensex is trading higher by around 10 points, while the NSE-Nifty is trading lower by about 4 points. Buying interest is however being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.3% and 0.5% respectively. The rupee is trading at 46.39 to the US dollar.

Auto stocks are currently trading mixed with Tata Motors, Mahindra and Mahindra (M&M) trading firm, while Hero Honda and TVS Motor are trading weak. A leading business daily has reported that M&M will be in negotiations with its ex-joint venture (JV) partner, Renault for making changes to the specifications of the sedan 'Logan'. M&M and Renault were in a JV to sell the vehicle. However, as things did not go as planned, Renault chose to exit the venture with M&M buying its (Renault's) 49% stake. M&M now plans to reform the vehicle by making certain changes including reducing the size of the car to less than 4 meters. This would allow the vehicle to attract lesser excise duty.

However, it should be noted that the company will be spending some amounts on developmental costs for making engineering changes to the vehicle. In addition, it will need to shell out some cash to Renault for making these changes as well. The amount has not been disclosed yet. This is because Renault holds the original rights for the vehicle till the end of the current year. After that, M&M will be allowed to rebrand the vehicle.

IT stocks are trading mixed with Patni Computers and TCS trading firm while Tech Mahindra and HCL Tech are trading weak. As per a leading daily, Infosys is suffering from a shortage of manpower. With the job market picking up and more options being available, employees of the company have been quitting in spite of compensation hikes. In fact the company has also seen job applicantions fall from 1.4 m candidates in FY06 to 0.4 m candidates in FY10. The shortage of manpower is so acute that to meet its target of recruiting 30,000 candidates this year, the company has opened a 'green channel' inviting its ex-employees to return to the fold. In such a scenario, times look challenging for Infosys as it is likely to face higher employee costs to recruit, train and retain its employees.

Tata Motors revamps JLR
11:30 am

After shedding some gains in early trades, the Indian indices are currently trading firm. Key Asian markets are also in the green. Stocks from auto and metals space are witnessing buying interest while stocks from the oil & gas and consumer goods space are trading in the negative territory.

The BSE-Sensex is trading higher by around 63 points, while the NSE-Nifty is up by about 18 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.5% and 0.6% respectively. The rupee is trading at 46.35 to the US dollar.

As per leading business daily, Tata Motors has chalked out various plans for reviving its beleaguered brands Jaguar and Land Rover (JLR). Some of the initiatives include introducing new models, engines and a strategy to move into the electric vehicle and hybrid segments. Apart from this the company also plans to reduce emission with the help of advanced technology to meet the new emission norms. Tata Motors also has the cost management strategy in place for its two brands and has plans for expansion of product development operations in India. The company has ear marked Rs 100-120 bn over the next 2-3 years for capex and research & development for these two brands.

Tata Motors plans to transform the JLR business into a simple, low cost operation - with the ability to generate cash. This should put less pressure on Tata Motors to raise external capital. It should be noted that the two brands posted a net profit of Rs 205 m in FY10 as compared to a net loss in the preceding year. The strategy to streamline the business operations of JLR should improve the bottom line of the company as about half of the Tata Motors consolidated revenue is generated from JLR.

Pharma stocks are trading mixed with Glenmark Pharma, IPCA Labs trading firmly in the green. Sun Pharma and Piramal Healthcare were in the red. Cipla is acquiring minority stakes in two biotech firms in an effort to strengthen its presence in the biotechnology space. The company will invest around US$ 65 m in a phased manner over three years to acquire 40% in Mab Pharm, a biotech company in India, and 25% in BioMabs, a firm in Hong Kong. Both companies are into biosimilars, which are the off-patent versions of biotech medicines. Mab Pharm is setting up a facility for these products in Goa while BioMabs is setting up a biotech plant at China. Cipla will have rights to market these products in India and international markets.

The deal will be completely funded through internal accruals. Cipla currently has a strong presence in the generic space and now wants to foray in to the upcoming biosimilar market. This new market is expected to represent a huge chunk of the overall pharma market by 2015. The combined market for biosimilars is expected to touch US$ 21 bn in the US and Europe by 2015. Other Indian companies such as Ranbaxy, Dr Reddy's, Wockhardt, and Biocon are also developing a large portfolio of biotech drugs. We are positive on Cipla's entry into this new growth segment.

Markets start on a positive note
09:30 am

The Indian markets have started today's session on a positive note. The benchmark indices opened at the breakeven mark but soon surged into the positive territory. They have managed to hold on to their gains since then. Other key Asian markets are in the green with Japan (up 1.6%) leading the pack of gainers. The US markets closed higher by 2.1% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with banking, software and auto majors attracting investors' interest. The BSE-Sensex is trading higher by around 105 points, while the NSE-Nifty is up by about 27 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.6% and 0.7% respectively. The rupee is trading at 46.41 to the US dollar.

Energy stocks have opened the day on a positive note. Gainers here include Cairn India and Gujarat Gas. As per a leading business daily, the Petroleum and Natural Gas Regulatory Board (PNGRB) has approved the tariff that GAIL will charge consumers for moving natural gas through its two main trunk pipelines. The company will charge four different distance-based tariffs on its Hazira-Vijaipur-Jagdishpur (HVJ) and Dahej Vijaipur pipelines. It will charge between Rs 20 to Rs 28 per m British thermal unit (mBtu) on the HVJ line, depending on the distance. Similarly, it will charge between Rs 42 to Rs 59 per mBtu on the other pipeline. PNGRB has also approved the tariff for Reliance Industries' East-West pipeline from Kakinada to Bharuch. It will charge between Rs 15 to Rs 61 per mBtu, depending on the distance. It may be noted that tariff rates take into account the capital expenditure incurred for laying down the pipelines. There were apprehensions that the board will have to check tariffs under pressure from end users like the fertiliser and power industries. That has not happened. In fact, the upward revision will encourage natural gas carriers to further enhance their transportation capacity.

Auto stocks have opened the day on a positive note. Gainers here include Tata Motors and M&M. As per a leading business daily, car companies are preparing to raise prices for the fourth time this year in July. In fact, companies like M&M, Maruti Suzuki, General Motors, Ford and Toyota are already negotiating the extent of the hike with their vendors. The car makers are forced to hike prices as raw material costs have gone through the roof. Prices of commodities like steel and rubber have risen sharply in the last few quarters. It may be noted that passenger vehicle sales have risen 35% YoY in April-May this year. Hence, the auto companies are banking on the strong demand to prevent sales from falling.

US and India: Property woes

The mortgage crisis in the US has been the worst ever. Not only did it balloon into a financial crisis in the US, but its ripples were felt across the globe. Not only the developed world, but even the emerging markets suffered as a result of the crisis, though not on the same scale as the rich world. The property market in the US is still struggling to take off. Unemployment is raging high in the US. Many people have put on hold their plans of purchasing new homes.

So, a housing shortage in the US in the future would right now seem pretty unbelievable. But as reported on CNN, this could actually turn out to be the case. Because of the abysmal demand for homes, not many are being built. And so there is a concern that when the economy recovers and job prospects improve, a new wave of demand for homes will be unleashed. And the supply of homes then will not be able to satisfy this growth in demand.

The other problem that builders in the US are facing is availability of loans. Ideally a rise in demand would mean a scramble on part of the builders to meet the same. But difficulty in obtaining loans would mean that builders will not be as nimble as they would like to be when it comes to building more homes. When this scenario will unfold though is anybody’s guess. For the time being, it appears that the recovery in the US property market will be slow and steady at best.

Infact, an eminent IMF economist has been recently reported to have said that the US housing market is not getting any better. And is in fact getting worse. That is because in past housing slumps, downturns lasted 18 quarters, with prices falling 22% from peak to trough. However, the current housing slump has lasted only 14 quarters, while prices have dropped only 15% yet. Thus, going by this metric, there may very well still be some pain left in the US housing market.

The property market in India though is a different ballgame altogether. Ajit Dayal, founder of Equitymaster, has quoted that the direction of real estate prices will in large part depend upon the close connection between politicians and real estate companies . Unless and until that gets broken, the chances of prices heading significantly lower appear remote. In India, the demand for real estate is palpable as many people do not still have their first home. But the problem is also on the supply side. While there has been no shortage of land per se, only limited land is being sold because of zoning rules.