A volatile day for the markets

Indian markets closed on a weak note for the second consecutive day. Today's weakness was largely owing to selling in stocks from the energy and realty sectors. FMCG and IT stocks however bucked the trend and closed strong. On the broader BSE, one stock lost for every one that closed in the positive.

The BSE Sensex and NSE Nifty closed with losses of around 30 points (0.2%) and 5 points (0.1%) respectively. However, mid and small cap stocks bucked the trend. Both the BSE Midcap and BSE Smallcap indices closed up by 0.1% each.

Most other key Asian markets also closed weak, led by China (down 1.9%), Hong Kong (1.5%), and Japan (1.1%). European markets have also opened the day in the negative.

Telecom stocks closed mixed today. While gains were seen in Idea Cellular and MTNL, selling pressure marked trading in Reliance Comm and Bharti Airtel. Bharti probably bore the brunt of profit booking after the sharp run it has seen over the past few days. The company's management yesterday organized a conference call to discuss the finalization of the Zain Africa deal. The company plans to launch its brand in Africa in October, and has set some aggressive targets for the next 1-2 years. One of them is to increase the subscriber base to 100 m, from 42 m currently. The management also targets Zain's revenues to touch US$ 5 bn over this period, from around US$ 3.6 bn as of now.

The company is also pushing fast on the regulatory front. It is aiming for infrastructure sharing among telecom operators, which will reduce its cost of roll out and also lead to a faster increase in its volumes (minutes of usage). Overall, Bharti is eyeing an investment of US$ 1.5 bn to expand the African business over the next 2-3 years. The biggest chunk of this will be spent in Nigeria.

Stocks of oil marketing companies (OMCs) closed weak today, led by BPCL, HPCL, and IOC. These companies have been blamed by Reliance Industries for forming a cartel while bidding to supply aviation turbine fuel (ATF) to national carrier Air India. Reliance has in fact filed a case against them with the Competition Commission of India (CCI). The company has blamed that this cartelization restricts entry of private players like itself that are in no position to compete with state-run firms on pricing.

Banking stocks closed mixed today. While gains were seen in Axis Bank and Kotak Bank, others like ICICI Bank and HDFC Bank recorded selling pressure. Gains in Axis bank followed a good set of numbers recorded by the bank for the first quarter ended June 2010. The bank has posted a 31% YoY growth in net profits during the quarter, despite just a 14% YoY growth in interest income. This gain in profits was largely on account of a fall in the bank's interest expenses, which were down 3% YoY during the quarter. The bank's capital adequacy ratio at the end of the quarter stood at 14.5%, lower than 15.8% as at the end of March 2010. Its net NPAs to advances, at 0.35%, stood at the same level as the previous quarter.

Stocks of Indian pharma companies also closed a mixed bag. Gains were seen in Indoco Remedies and Dr. Reddy's. On the other hand, Cadila and Wockhardt closed in the red. As per reports that just came out, Sun Pharma has finally managed to gain the upper edge in its long drawn battle with Taro. It may be recalled that the company had announced its intention to acquire the Israel based Taro Pharmaceuticals in May 2007 for a consideration of US$ 454 m. Not just that, given that Taro was into losses and on the verge of bankruptcy, Sun Pharma had infused US$ 60 m into the company.

Since then, however, the promoters of Taro refused to go ahead with the deal. Also, Taro failed to publish its accounts for a couple of years. Now a US District Court has come out with a verdict in favour of Sun Pharma. The court has rejected Taro's claims based on allegations that Sun Pharma had failed to make adequate disclosures concerning the tender offer. Even if Sun Pharma does manage to acquire this company, it will have a task on its hands trying to turn around its fortunes. This is despite the company having successfully turned around many of the acquisitions that it had made in the past.

Markets in the red on profit booking
01:30 pm

Indian indices languished in the red on the back of profit booking in heavy weights during the last two hours of trade. Stocks from the FMCG and IT space are trading firm while stocks from the realty and PSU space are trading weak.

The BSE-Sensex is down by 44 points while NSE-Nifty is trading 66 points below the dotted line. The BSE-Midcap index is trading flat while BSE-Smallcap index is trading 0.2% above yesterday’s closing. The rupee is trading at 46.74 to the US dollar.

Pharma stocks are trading mixed with Dr Reddy’s Laboratories and Sun Pharma trading firm while Cadila Healthcare and Lupin are trading weak. As per a leading financial daily, the Union ministry of chemicals and fertilizers plans to bring all essential medicines sold in the country under a price cap. The ministry plans to carry this out by invoking the "public interest" clause under the Drug Price Control Order (DPCO) to take charge of the pricing. If the plans go through then the National Pharmaceutical Pricing Authority (NPPA) will have the final say on the pricing of 354 drugs named in the National List of Essential Medicines (NLEM). The market size of these drugs is Rs 700 bn.

In 2003, the Supreme Court had in a directive had set aside a national pharma policy. Under this, the court had directed the government to formulate appropriate criteria to bring all essential and life-saving medicines under price control. About 6 years ago, NPPA had invoked the public interest provision under DPCO to bring intravenous fluids under price control. By invoking the public interest provision again, the ministry is trying to fix the prices of NLEM drugs in a similar way. However, this may not be easy to implement as the government is trying to bring the medicines under price control without a supportive policy and NPPA will find it difficult to follow a price control criteria not mentioned in the DPCO.

Telecom stocks are currently trading weak led by Reliance Communications (Rcom) and Bharti Airtel. The stock of RCOM is trading weak on the back of news of it possibly having to lower the value of its tower business. Not very long ago, RCOM had announced that it plans to sell the business to GTL Infrastructure and form a combined entity with it. In exchange it would receive some cash and a share in the combined entity. At the time of announcement, the deal between GTL and RCOM was valued at about Rs 325 bn. A leading business daily has reported that since Etisalat is planning to purchase 26% stake in RCom it will have to sell its stake in Swan Telecom, which is yet to begin operations. The catch here is that earlier, Swan Telecom and RCom had signed a 10-year deal which was valued at Rs 100 bn. As part of the deal Swan Telecom would lease towers from RCOM to run its operations. Now, since Etisalat plans to exit that venture (as per TRAI, one company cannot own more than 10% in two telecom operators), the chances of the firm dissolving are there (unless another company takes up Etisalat’s spot). However, with all this happening, it is reported that the valuations of RCOM’s tower business could decrease by about Rs 25 to Rs 40 bn. It may be noted that all these figures are as per various sources and are not disclosed by the company itself. An unnamed official of RCOM has stated that this development would not have a big impact on the deal.

Energy stocks drag indices lower
11:30 am

After starting today's session on a volatile note Indian indices are currently trading flat. However, other key Asian markets have lost some ground and are marginally in the red. Stocks from FMCG and metal space are trading strong while stocks from energy and telecom space are bearing the brunt of profit booking.

The BSE-Sensex is trading up by around 5 points, while the NSE-Nifty is up by about 1 point. However, buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.4% and 0.6% respectively. The rupee is trading at 46.71 to the US dollar

Auto stocks are trading mixed with Bharat Forge and Tata Motors leading the gains. Maruti and M&M are trading in the red. As per a leading news daily, Maruti plans to regain its lost market share by pushing rural sales. The company plans to increase its share of rural sales to 20% from current 17%. It should be noted that Maruti's market share has dipped below 50% against newer rivals since the start of 2010. Strategy to push sales in the rural market is expected to fill the gap and help the company regain its lost market share. The company also has tailor made products for the rural markets to serve the purpose namely Alto, Omni and Maruti 800. It has appointed rural executives to target the remote areas. We believe the strategy to focus on rural markets is a step in the right direction in light of ever increasing competition in the auto space.

<>Exide Industries announced that it is increasing its capex plans to Rs 4 bn for FY11. It plans to increase capacities across its six existing plants and the new one at Ahmednagar. This investment will be funded through its qip-in-stock-market?utm_campaign=SEO-K'>QIP proceeds. The company had raised Rs 5.3 bn in March 2010 through a QIP. Exide typically invests around Rs 1.5 - Rs 2 bn on capital expenditure. However, now due to a shortfall in supply it has to invest more in increasing capacities. Post recession, when the auto sector bounced back the company found it difficult to cater to the increased demand from original equipment manufacturers (OEMs) due to a supply crunch. It lost market share because of this. The company is planning to increase capacities by 28% on SLI (four-wheeler batteries) and by 60% on motorcycle batteries.

Exide, used to import around 70% of its chief raw material, lead. However, it now sources 42% from two captive smelters it acquired two years ago. With lead prices still being volatile, the company plans to source 70% of its lead requirements from captive smelters in phases over three years. This will help reduce input costs. The company is open to both organic and inorganic growth for the same. The company's board also recently approved acquiring the entire holding in its Bangalore smelting unit Leadage Alloys India.

Markets open on a volatile note
09:30 am

The Indian markets have started today's session on a volatile note. The benchmark indices below the breakeven mark, but soon moved into the positive territory. However, they have not been able to hold on to their gains since then. Other key Asian markets are in the red with Japan (down 1%) leading the pack of losers. The US markets closed marginally higher yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading a mixed bag with power and FMCG majors finding buying interest. However, software and auto stocks are trading weak. The BSE-Sensex is trading lower by around 5 points, while the NSE-Nifty is down by about 2 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 0.1% and 0.3% respectively. The rupee is trading at 46.75 to the US dollar.

Engineering stocks have opened the day on a positive note. Gainers here include Engineers India and Suzlon. As per a leading business daily, L&T has bagged the Rs 121 bn Hyderabad Metro Rail Project. The project is expected to achieve financial closure in six months and thereafter take about four years for completion. Apparently, the company had asked for Rs 14.6 bn viability gap fund, or government grant, which was much lower than other bidders. Apart from the ticket fares, the company will get real estate construction rights over 18.5 m square feet. Moreover, the concession period could be extended by 25 years after the first lease period of 25 years, excluding construction period. It may be noted that the project was initially bagged by Maytas Infra. But it ran into trouble after the Satyam scandal broke out and could not achieve financial closure.

Steel stocks have opened the day on a positive note. Gainers here include Tata Steel and SAIL. As per a leading business daily, Tata Steel plans to raise Rs 16 bn in a preferential allotment of shares and warrants to its promoter, Tata Sons. The preferential allotment will take place at Rs 594 per share. In all, the company will issue 15 m shares and 12 m warrants to Tata Sons. The warrants can be converted within 18 months of the allotment. It may be noted that Tata Sons holds a 29% stake in the company. This would rise to 31% after the allotment of shares and conversion of warrants. Given Tata Steel's financial leverage and backward integration plans, the additional equity will come in handy. The company had a net debt of US$ 9.8 bn on its books as on 31st March, 2010. It is also looking at backward integration of Corus and developing mines in Mozambique and Canada.

Investors can't get enough of this asset

Gold demand for jewelry may have slowed down in India. But the investment demand is very much alive and kicking. As per The Economic Times, India's gold collection under exchange traded funds is up a whopping 76% in June from a year ago. This, even as the metal hit its all time high. Indeed, no other asset has captured as much public imagination as the yellow metal in recent times. And why not. Gold is having a fantastic run as it has increased in price every year for the last 10 years. Moreover, if things go as per plan, it might easily add the 11th year to its kitty.

But the question that begs itself is, 'Will gold continue to go higher, especially in light of the fact that it recently crossed its all time high?' Our answer is indeed in the affirmative. We believe Gold will continue to go higher for quite some time to come. Our belief stems from the rather dilapidated state of the world's fiat money system. This system has now become a victim of its own success. After tackling a few crises successfully in the past, Governments had come to believe that they have developed a panacea for all of the world's economic problems. That was not to be. Whenever a crisis occurred, all that they managed to do was postpone the problem. Eventually it became so big that it has brought the global economy on the brink of a collapse.

Amidst such a gloomy scenario, gold is the only asset that stands tall. Its supply cannot be increased indefinitely and hence, is the best protection against a runaway inflation that we believe will engulf the world sooner or later. Moreover, the yellow metal has yet to hit its all time highs on an inflation adjusted basis. All of this leads us to believe that the Gold is in the initial stages of its long bull run. And it will pay handsomely to have a small percentage of your net worth invested in the yellow metal. But please bear in mind that you should not go overboard with it.

A new committee to oversee regulators miffs RBI

The RBI's discreet nature in tackling regulatory issues has been complimented time and again. But this time the central bank governor himself has been outspoken in his dissatisfaction with the government. Readers may recall that the government recently proposed a committee to oversee regulators. This was after the fallout between the insurance and mutual fund regulators over governing ULIPs.

The RBI's perceived autonomy was exposed to risk if the proposed law was to be passed. And that is something the central bank would least appreciate. In fact, the RBI's proposals have been ignored quite a few times by the government. These include withdrawing subsidies and imposing tax on capital inflows. But this time the governor seems to be in no mood to be a mute spectator.