Metals and banks propel indices

Indian markets opened on a strong note today and stayed well above the dotted line on the back of sustained buying activity across index heavyweights. While the BSE Sensex closed higher by around 292 points (up 2%), the NSE Nifty gained around 91 points (up 2%). Midcap and smallcap stocks also did well as the BSE Midcap and BSE Smallcap notched gains of 1% each. Gains were largely seen in metals and banking stocks.

As regards global markets, Asian indices closed firm today while the European indices have also opened on a positive note. The rupee was trading at Rs 45.76 to the dollar at the time of writing.

As per a leading business daily, Marico is looking to establish a strong presence in the foods category. The management opines that foods is a strongly under-penetrated category in India. Further, the company believes that packaged foods will grow with disposable incomes increasing, aspirations rising and organised retail growing. Marico will focus more on Saffola, which it believes is a powerful and reasonably under-leveraged brand. Currently, within the Saffola franchise, 98% comes from oil, and the company is hopeful of getting 20-25% from foods in 3-4 years. The company is also focused on increasing its presence in the rural markets. The rural contribution for Marico is around 25%, which is lower as compared to its peers. The company aims to increase this to 30% plus over the next 3-4 years. The stock closed 3% higher today.

Pharma stocks closed mixed today. While Sun Pharma and Ranbaxy found favour, Lupin and Glenmark closed in the red. As per a leading business daily, Glenmark has recalled specific lots of its 'Oxcarbazepine' tablets in the US. This drug is used for the treatment of child epilepsy. The reason for the same has been attributed to a labeling error. It must be noted that Glenmark had received USFDA approval to sell generic 'Oxcarbazepine' tablets in the US in 2007 in three strengths of 150 mg, 300 mg and 600 mg. 'Oxcarbazepine' is a generic version of Novartis' patented drug 'Trileptal'. The drug is estimated to have sales of over US$ 700 m annually in the US market. Although there will hardly be much of an impact on Glenmark's overall revenues, Indian pharma companies have been facing increasing issues with the US FDA as of late.

China announced that it would effectively de-peg its currency. This thus sets the tone for a fresh appreciation of the Chinese Yuan. It also provides a booster dose the global economy was so badly looking for. A rising Yuan puts more purchasing power in the hands of Chinese consumers and its firms. And this in turn leads to increased demand of goods and services for nations exporting to China. Besides, the appreciation is also positive for other Asian nations competing with China for a share of the exports pie.

The move could present another headache for the Indian central bank (RBI) though. Capital flows into emerging markets could surge yet again, raising fresh concerns about asset bubbles. Clearly, the Chinese de-pegging has the potential to give rise to completely new set of problems and opportunities. We hope Indian authorities are equal to the task.

Largecaps in favour at the moment
01:30 pm

The Indian markets continued to trade well above the dotted line during the previous two hours of trade. Buying activity is being witnessed in stocks across sectors led by those from the metal, realty and banking spaces. Stocks from the IT and oil & gas spaces are amongst the lowest gainers at the moment. The overall advance to decline ratio is poised at 2 to 1 on the BSE.

The BSE-Sensex is trading higher by around 305 points (up 1.7%), while the NSE-Nifty is up by about 90 points (up 1.8%). The BSE-Midcap and BSE-Smallcap indices are trading higher by 1.2% and 1.3% respectively. The rupee is trading at 45.66 to the US dollar.

Telecom stocks are currently trading firm led by Reliance Communications, Idea Cellular and Bharti Airtel. A leading business daily has reported that telecom major Bharti Airtel has written another letter to the Telecom Regulatory Authority of India (TRAI) stating that mobile operators holding excess spectrum should not be charged the one-time fee. The company argued that allocation beyond 6.2 Mhz was as per the government’s policy at various times. It is reported that the Department of Telecommunications (DoT) has always been stating that all existing spectrum allocations have been granted strictly under the applicable laws, license conditions, guidelines or orders.

The TRAI had last month asked operators holding spectrum in excess of 6.2 Mhz (the contractual limit) to shell out a one-time charge. However, price for this spectrum would be on linked to the recently concluded 3G auctions. With telecom operators going all out with the bookings (with some of them admitting to auction pricing being astronomical), the amount they would have had to shell out for the excess 2G spectrum that they hold would be very high as well. In addition, with licenses of select telecom operators expiring in a couple of years, they would need to spend a lot on 2G spectrum licenses. However, it may be noted that the issue of 6.2 Mhz is pending before telecom tribunal TDSAT. It would be interesting to see the outcome of the same.

Auto stocks are trading higher lead by M&M and Maruti Suzuki. As per a leading financial daily, Maruti Suzuki is facing export problems. This is due to the Euro zone financial crisis, a weaker Euro and withdrawal of scraping incentives. In fact due to this the company has lowered its export target by 5% for FY11. However, these targets are the same level as that of FY10. The company believes that it can cover up for the short fall from Euro zone by selling cars in other geographies like South Africa and Algeria. It may be noted that Maruti enjoys better margins domestically. This year as the domestic market is expected to grow by 14 – 15%, the company would see higher margins. The company CFO also started that market share is very important for the company and it and is confident of holding 50% market share this year and it will be able to produce 1.2 m units. In new development the company is planning to launch CNG variants across its portfolio. However, no timeline for the same has been indicated.

Broad-based buying aids indices
11:30 am

After starting today's session on a positive note in the morning Indian indices have gained further grounds. Key Asian markets are also witnessing strong buying interest. Stocks from metals and realty space are witnessing strong buying interest while stocks from the IT and Oil & gas space are trading flat.

The BSE-Sensex is trading higher by around 320 points, while the NSE-Nifty is up by about 73 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 1.1% and 1.3% respectively. The rupee is trading at 45.55 to the US dollar.

Engineering stocks are trading well in the green with L&T, Punj  Lloyd, and Thermax leading the gains. L&T's electrical and electronics business division (EBG) expects to double sales by 2015 to Rs 80 bn. Increased activity in India's power sector is one of the major reasons for this push. India plans to add over 200,000 MW of installed capacity by the end of the 12th five-year plan.

The EBG division offers solutions for the power sector in low and medium voltage categories. This business currently contributes around 10% of L&T's total sales. In order to achieve a push forward in turnover, the company plans to invest over Rs 10 bn in new manufacturing facilities and upgrading existing ones. This division plans to grow by around 15% YoY till it reaches its target revenues. 25% of sales are expected from overseas operations. L&T's board is also considering a proposal to integrate the EBG division with its subsidiary, L&T Power. This will bring more synergy and leverage internal strengths in power and related sectors.

Pharma stocks are marginally in the green. Gainers here include Cadila Healthcare and Glaxosmithline Pharma. As per a leading business daily, the consortium of Indian Banks have given in-principal commitment for a loan to Fortis Healthcare (Fortis) in a takeover battle for Singapore's Parkway Holdings (Parkway). It should be noted that Singapore's securities regulator has given Fortis a final deadline until July 30 to make a full offer for Parkway – which is also a subject to takeover bid by Malaysian sovereign fund Khazanah. Fortis Healthcare currently owns about 25% in Parkway and will need additional funds to the tune of US$2.3 bn to complete the buyout. The consortium of Indian banks have expressed willingness to disburse US$ 2 bn. It should be noted that Fortis wanted to gain a controlling stake in Parkway before the Malaysian fund made a surprise entry last month leading to a takeover battle between the two.

Sensex zooms on metal, realty stocks
09:30 am

The Indian markets have started today's session on a positive note, led by strong gains in stocks from the metal and realty sectors. 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 Hong Kong (up 2.7%) leading the pack of gainers. The US markets closed higher by 0.2% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with metal, banking and auto majors finding investors' favour. The BSE-Sensex is trading higher by around 220 points, while the NSE-Nifty is up by about 60 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 1.1% and 1.2% respectively. The rupee is trading at 46.03 to the US dollar.

Aluminium stocks have opened the day on a positive note. Gainers here include Hindalco and Nalco. As per a leading business daily, Hindalco's international subsidiary Novelis could bid for the rolled products division of global metals major Rio Tinto Alcan. The division is valued at roughly US$ 3 bn as per estimates. Rio Tinto has been selling assets to repay debt raised to acquire Canada's Alcan for US$ 38 bn in 2007. It sold its packaging business for US$ 1.2 bn earlier this year.

In our view, the bid is part of the Aditya Birla Group's plans to buy high value manufacturing products in Europe and the US. There are definite advantages of owning upstream assets such as bauxite mines and alumina refineries in Asia and Africa as well as acquiring downstream assets such as smelter technology from the West. It would insulate Hindalco from strong price fluctuations in bauxite and aluminium products.

Power stocks have opened the day on a positive note. Gainers here include Tata Power and NHPC. As per a leading business daily, the government is considering allowing public sector hydro electricity power companies such as NHPC and SJVNL to sell up to 50% electricity generated from their plants to the states where the projects are located. The actual percentage will be determined on the basis of state's electricity demand projections, paying capacity of its utility, and willingness of the state to enter into long term power purchase agreement. It may be noted that under the present regulations, such companies can only allocate a maximum of 30% of power from single project to the home state. This move aims at providing a level playing field to public sector hydro electric companies so that they are able to compete with their private counterparts who bag projects from state governments offering higher allocations to the home state.

The biggest risk for markets

The global economic picture remains hazy as of now. Every good news is followed by a bad news and vice versa. The concerns especially lie in the way the European crisis is evolving. Governments are trying to print their way out of this crisis. But economists see this as laying the seeds of high inflation in the future.

CLSA's Christopher Wood is certainly one of the best big picture guys in the world today. Thus, we were all ears when he spoke to a leading business channel on the crisis recently. Wood is of the opinion that the Euro situation remains the biggest risk for world markets this year. And it is not Greece that will be the problem child. He believes that Spain is the real big banana as it is a much bigger economy. Hence, the Spain situation will determine whether the Euro currency remains intact throughout the adjustment process.

He also had a word or two on the US economy. Contrary to other experts, Wood has argued that the US economy is indeed recovering. But he also believes that the recovery is not strong and is in fact quite weak. He thinks that the sole reason the emerging markets are much healthier than the developed ones is that there is strong income growth expected in emerging markets. On the other hand, real income growth in developed world will remain pretty lackluster and thus, also hurt overall economic growth in developed nations.

Wood also had interesting things to say about Indian central bank, believed to be his favourite in the world. He is of the humble opinion that the current RBI Governor seems to be the opposite of his predecessor. As per him, while the former had a consensus driven approach, the latter came with a more devil may care attitude. He nevertheless sees no big risks for the Indian economy in the short run and favors infrastructure and finance sectors.