Volatility plagues Indian bourses

Indian markets had a volatile trading session today. After languishing in the red in the morning session, strong buying activity post noon pushed the indices above the dotted line. However, in the final hours, markets were struggling to stay afloat. While the BSE Sensex closed higher by around 10 points (up 0.1%), the NSE Nifty gained around 7 points (up 0.1%). More interest was seen in midcap and smallcap stocks as the BSE Midcap and BSE Smallcap notched gains of 1% each. While healthcare and FMCG stocks found favour, metals and oil & gas stocks were at the receiving end.

As regards global markets, Asian indices closed mixed today while the European indices have opened in the red. The rupee was trading at Rs 46.20 to the dollar at the time of writing.

As per a leading business daily, Raymond has shut down its premium brand offering 'Be:Home'. This move is part of the company's strategy to rationalize brands and consolidate. The withdrawal of this brand comes within 2 years of its launch. It must be noted that this brand was originally launched as Be: in 2001. It was then discontinued in 2007 with a view to repositioning it. In 2008, it was re-launched as Be:Home with the aim of offering soft furnishings and accessories sourced from across the globe.

It must be noted that several Indian textile companies had in the past few years formed alliances (by way of JVs or stake acquisition) with their global counterparts, particularly those with strong front-end capabilities, in a bid to access global markets, tap technological know-how, design skills and branding and retailing ability. Raymond was the foremost amongst them to harness this opportunity and get a global footprint through these alliances. However, none of these initiatives have been value accretive to Raymond as the business scenario in the global textile industry has been muted. Further, the company has also been facing increasing competition from Bombay Dyeing, Shopper's Stop among others. The stock closed 1% higher.

Most pharma stocks closed firm today with the key gainers being Cadila Healthcare, Dr.Reddy's and Sun Pharma. As per a leading business daily, Piramal Healthcare is mulling the payment of one-time cash bonuses to its employee base of over 8,000. This would be from the proceeds of US$ 3.7 bn that Piramal Healthcare is expected to receive from Abbott Laboratories on sale of the former's domestic formulations business. These cash bonuses are likely to be upto 6 months of the employees' fixed salary.

It must be noted that as part of the deal, Piramal Healthcare is scheduled to receive US$ 2.12 bn by FY11 from Abbott. The balance US$ 1.6 bn will be doled out in equal installments over the next four years beginning 2011. While the proceeds will be utilized to grow Piramal Healthcare's existing businesses, the company is also looking to give a special dividend to its shareholders once the money comes in. Further, Piramal Healthcare had also stated its intention of foraying into areas beyond healthcare although the details of the same have not yet been divulged. The stock closed marginally higher.

Ramping up infrastructure is a key requisite if India wants to grow its economy at a sustainable pace of 9%. As reported in a leading business daily, India requires US$ 1 trillion in the next five years to create infrastructure, which will be the key to a robust growth. The Indian economy is expected to grow by 8.5% this fiscal, up from 6.7% in FY09 after the 2008 global financial crisis. In the three years preceding FY09, India's economy had expanded by over 9%. Even if India receives the funding, execution will remain the key. In this department, the government has been found to be severely lacking. Already there is a big fiscal deficit staring in the face. This means all concerned parties will have to get their act together to bridge the gap.

Healthcare, auto help pare losses
01:30 pm

Buying activity led the Indian indices to pare their losses and move towards the dotted line during the previous two hours of trade. At present, the markets are trading marginally in the red. Stocks from the healthcare, auto and realty spaces are currently leading the pack of gainers, while those from the capital goods and metal spaces are trading weak.

The BSE-Sensex is trading down by around 20 points (down 0.1%), while the NSE-Nifty is trading flat. Mid and small cap stocks continue to be preferred by investors as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.6% each. The rupee is trading at 46.85 to the US dollar.

Telecom stocks are currently trading firm led by Reliance Communications (RCom), Bharti Airtel and Idea Cellular. The stock of RCom is amongst the top gainers from the BSE-Sensex at the moment. Gains in the stock are on the back of news that the company is looking to sell nearly 26% stake to French telecom and media major Vivendi. This move is aimed at bringing down the debt levels of the company. Another company that is believed to be in talks with the Indian telecom operator is the UAE based telecom service operator Etisalat. However, since it has an interest in another Indian telecom company, the general consensus is that the Vivendi stake purchase would be less complicated. However, whatever may be the outcome, the acquirer will have to give an open offer to purchase 20% additional stake in RCom, according to SEBI guidelines.

It must be noted that quite a few rumors have been circulating over who will be partnering or buying stake in RCom. Not so long ago, news of a South African major being interested in acquiring RCom was making the rounds. However, all said and done, the outcome of this development will only help RCom make its balance sheet stronger. However, issue remains with respect to equity and earnings dilution for its investors.

Auto stocks are trading mixed with Maruti Suzuki and Hero Honda trading firm while Escorts and Eicher Motors are trading weak. As per a leading financial daily, Tata Motors is planning to assemble a few Land Rover models in India. It is believed, to start off, the company will start the assembly of Land Roverís Freelander by the end of 2010. The locally assembled models will be launched by first half of 2011 and trial production is expected to start by December this year. Tata Motors has drawn up an investment of Rs 1.5 bn to set up the assembly operations for Freelander. However, it is not known whether Tata Motors will be using India as an export hub or it plans to cater to only the domestic demand.

It may be noted that Tata Motors sold 242 units of Freelander in 2009-10 through a single outlet in India. While the Freelander is priced at Rs 3.5 m (on road in Mumbai), local assembly will give Tata Motors cost benefits as the import duty on completely built models is around 110% while that on completely knocked down units is 40%. However, the pricing of the model is not expected to change and it is positioned to compete against BMW India Pvt. Ltd's X3 and Audi India Pvt. Ltdís Q5, among others. Tata Motor's factory located at Pimpri will be used for manufacturing this vehicle. To start off, it will roll out 240 units per annum.

Metal, FMCG stocks pull indices lower
11:30 am

After starting today's session on a negative note, Indian indices are still lingering in the red. Key Asian markets are also in the negative territory. Stocks from healthcare and consumer durables space are witnessing strong buying interest while stocks from the metals and FMCG space are trading in the red.

The BSE-Sensex is trading down by around 60 points, while the NSE-Nifty is down by about 15 points. However, mid and small cap stocks are witnessing buying interest as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.4% and 0.6% respectively. The rupee is trading at 46.28 to the US dollar.

Power stocks are trading flat. Major losers include NTPC, Lanco Infra and Neyveli Lignite. Gainers here include Suzlon Energy and Bhel. As per a leading business daily, Power Grid Corporation (PGCIL) is planning a bond issue next week to raise Rs 10 bn. It will be an issue with tenure of 14-15 years carrying a coupon of 8.7-8.8%. PGCIL is also planning to raise Rs 80 bn through a combination of offer for sale by the government and fresh issue. The proceeds are expected to be split equally between the government and company as both plan to dilute 10% respectively. As of now there has been no indication of how the company proposes to utilize the funds raised via the equity and debt mix. However, it should be noted that PGCIL has planned a capex of Rs 550 bn during the 11th five year plan. It also has plans to spend Rs 1,000 bn over the next 7 years to double its existing network.

Retail stocks are currently trading mixed with Shoppers Stop, Trent and, Bata India seeing most of the gains. Shoppers Stop plans to invest around Rs 3 bn for its expansion plans. It plans to raise this money though a QIP over the next two quarters. It has been seeing a pickup in demand for lifestyle products among Indian consumers and wants to capitalize on the same.

Shoppers Stop plans to invest Rs 1 to 1.2 bn to open 12 new Shoppers Stop and four new Hypercity stores in FY11. The new Hypercity stores will be coming up in Bhopal, Ahmedabad, Ludhiana and Mumbai. Currently the company has seven Hypercity stores. It plans to take the count of these stores to 25 over the next three years and expects it to break even by FY13. Shoppers Stop as of now holds a 19% stake in Hypercity and intends to increase the stake by 32%. After paying a consideration of Rs 1.3 bn it will have a majority stake in the company.

Metal stocks lead markets down
09:30 am

The Indian markets have started today's session on a negative note. The benchmark indices opened at the breakeven mark but soon slipped into the negative territory. However, they have managed to pare their losses since then. Other key Asian markets are in the red with Japan (down 1.7%) leading the pack of losers. The US markets closed lower by 1.4% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with construction and banking majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 40 points, while the NSE-Nifty is down by about 10 points. However, buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.3% and 0.4% respectively. The rupee is trading at 46.03 to the US dollar.

Energy stocks have opened the day on a positive note. Gainers here include HPCL and Indian Oil. As per a leading business daily, Reliance Industries is close to buying a 45% stake in shale gas assets owned by US based Pioneer Natural Resources for US$ 1.35 bn. Pioneer has about 310,000 acres of shale gas plays in the Eagle Ford region of Texas, US. This would be Reliance Industries' second acquisition of shale gas assets in the US. The company had earlier bought 40% interest in Atlas Energy's Marcellus Shale acreage. This development once again highlights the position of shale gas as a promising filed in the energy sector in North America. It is likely to overtake both conventional gas as well as liquid fuels as a source of energy within the next decade. The Indian petrochemical giant aspires to build a significant position in the shale gas business as part of its strategy of having a larger footprint around the world.

Cement stocks have opened the day on a negative note. Losers here include ACC and Ambuja Cement. As per a leading business daily, Shree Cement will invest Rs 4.5 bn this year to set up a 1.5 m tonne clinker plant and a grinding unit in Rajasthan. The company plans to fund the expenditure through internal accruals. It may be noted that the company had cash reserves of Rs 20 bn as on 31st March, 2010. The company already runs the single-largest integrated cement factory in North India. The cement from these two units will cater to the North India market, which has been witnessing a 10% annual growth in consumption. Shree Cement now produces 12 m tonnes a year. Overall, India's cement industry is expanding capacity to meet the increasing demand ahead. In fact, the industry plans to invest around Rs 500 bn over the next two to three years in order to increase production to about 400 m tonnes from 240 m tonnes currently.

A boon in disguise for Indian textile

There was hardly anything that was going right for this sector ever since global economy took a U-turn. Being heavily export dependant sales nearly nosedived. Margins became a fraction of what they were pre-crisis. The volatility in foreign exchange only added to their woes. Even more to those that had forex denominated borrowings. Being heavily leveraged a steep rise in interest rates was nearly the last nail in the coffin. Companies that went overtly ambitious by entering into foreign JVs only repented later. But now it seems that China's decision to revalue the Yuan will be a boon in disguise.

Consider this. China is the largest exporter of textiles and allied products in the world, while India ranks seventh. Export of apparels totaled 28 bn Yuan in 2009. In fact China's stance of not letting the yuan appreciate assisted growth of its exports. High productivity and supportive labour laws also went to a great extent to make China one of the lowest cost producer. But now things are set to change.

Labour unrest in China has already grabbed headlines. With the Yuan revlauation raw material (cotton) cost is also expected to move up. This drives home the point that the oriental economy will no longer remain as cost competitive as before.

For Indian textile companies, China losing competitiveness has come in as a boon in disguise. The former are ideally positioned to capture all the markets that China is looking to exit. Also they are unlikely to face as much pricing pressure as earlier.

Infact the situation currently is similar to what it was before the abolioshment of quota system. At that time, China took over massive orders as it had been building capacities three years in advance. Indian capacities have only been built since then. However, Indian capacities are currently not high enough to compensate the surge in orders. Nonetheless the scope of growth is immense.

Whether or not the global economy benefits with the re-pricing of Chinese goods, India will. It only remains to be seen to what extent China acts on its promises.