Sensex ends the week 2% lower

Indian stock market opened on a strong positive note today, on the back of better than expected results by software major, TCS. However, soon after the opening bell, things took a turn for the worse, and the markets traded below the dotted line. The Indices could not recover much after that and ended the day, and consequently the week on a negative note. The BSE-Sensex closed 2% lower this week.

The BSE-Sensex closed lower by around 56 points (down 0.3%), the NSE-Nifty closed lower by around 19 points. The BSE-Midcap and BSE-Small cap, fared slightly better, and were mostly trading flat for the day. While gains were seen in IT and power stocks, metal and auto stocks were at the receiving end.

As regards global markets, Asian indices closed on a mixed note today while European indices have also opened in the negative. The rupee was trading at Rs 44.53 to the dollar at the time of writing.

India's biggest bank, State Bank of India's (SBI) Chairman stated that the bank may look at a combination of ways in order to raise capital. The bank is looking at a combination of various instruments such as follow on public offer (FPO) and a private placement with institutional investors. It will do so in case the government does not fully subscribe to its right issue. If the government maintains its 59% stake in the behemoth, only then would a rights issue be an option. However if it is open to reducing its stake, to 51-55% then a combination of instruments would be used to raise capital.

According to the Chairman, the bank would require capital of about Rs 470 bn over the next three years. Out of this, Rs 200 bn would come from primarily from its rights issue. The balance Rs 270 bn would come in from annual profits at Rs 90 bn per year. The bank needs to raise capital soon, as its capital adequacy ratio has fallen below the 8% mark, on account of a pension charge which was taken to its reserves in the final quarter of the financial year 2010-11 (FY11). The bank is hopeful of receiving government's consent for its rights issue by the second or third quarter of FY12.

Wind turbine manufacturer Suzlon Energy announced that it has bagged a Rs 6.5 bn order from Orient Green Power Company to supply turbines for projects with a cumulative capacity of over 100 MW (mega watt). Orient Green Power is the first renewable-energy company to list in India. India is strongly seeking investment in renewable sources of energy in order to counter the rising costs of oil imports. This will also help to improve the budget deficit situation. India is the world's third-largest market for wind parks just after China and the United States. This order involves the supply of 48 Suzlon wind turbine units. The first project which is in Gujarat will have a capacity of 50.4 MW and will be commissioned by May, 2012. The second 50.4 MW project in Karnataka will be implemented a month later, by June 2012.

Realty, metal stocks weigh on markets
01:30 pm

Indian stock market indices continued to trade in the red over the last two hours of trade. Stocks from realty , metal and auto space are losing the most while those from software and oil and gas space are trading firm.

The BSE-Sensex is down by 65 points while NSE-Nifty is trading 24 points below yesterday's closing. The BSE-Midcap index is down by 0.1% while the BSE-Small cap index is trading up by 0.1%. The rupee is trading at 44.54 to the US dollar.

Power stocks have been trading mixed with GVK Power and Power Grid Corporation leading the pack of gainers. However, Reliance Power and Coal India are trading weak. As per a leading financial daily, NTPC has dropped or frozen its plan to set up a 1,320 MW power plant at Santaldih. The investment related to the project is estimated at Rs 80 bn. Earlier, the company had issues regarding land acquisition for Rs 96 bn project for a 1,600-MW unit in Katwa. However, land is not an issue this time as West Bengal Power Development Corporation (WBPDCL) already has 980 MW capacity at Santaldih, one of the oldest power projects in the state. There are four units of 120 MW and two units of 250 MW each. As per NTPC's top official, the company is still considering the project but wants to take one at a time. It expects the new government to settle the problems with the Katwa project first. If the project is withdrawn, it will be a huge set back to West Bengal's industrial sector. The stock of the company is trading in the red.

Telecom stocks have been trading mixed as well in the last two hours of the trade led by ADC India Communications and AGC Networks. However, Reliance Communications and Tata Teleservices (Maharashtra) are trading weak. As per a leading financial daily, Vodafone, Idea Cellular and Bharti Airtel have decided to complement their nationwide presence by using each other's networks. The networks will be used through inter and intra circle roaming agreements to provide for seamless low cost pan India 3G services to their customers. The deal will allow 3G users of any of these three companies to connect to the others' 3G network in areas where the user's mobile operator doesn't provide those services. As per the reported sharing agreement, Idea has entered an agreement with Vodafone to introduce 3G services in Delhi and Kolkata circles and it will also collaborate with Airtel to provide 3G services in Karnataka. Vodafone has partnered with Idea to provide 3G services in Kerala and Andhra Pradesh and it plans to introduce these services in UP (West) through Airtel's network. Airtel has partnered up with Idea to share the latter's 3G network in Gujarat. As of now, the details on revenue sharing mechanism among these operators have not been provided. The stocks of Idea Cellular as well as Bharti Airtel are trading weak.

Smallcap stocks in the limelight
11:30 am

Indian stock markets slipped into the red on profit booking in heavy weights over the last two hours of trade. Stocks from the auto and metals space are trading weak, while stocks from the IT and power space are trading firm.

The BSE-Sensex is trading down by 37 points while NSE-Nifty is trading 17 points below the dotted line. BSE Midcap index is trading flat while BSE Small cap index is trading 0.2% above yesterday's closing. The rupee is trading at 44.48 to the US dollar.

Food and tobacco stocks are trading mixed with VST Industries and Agro Tech Foods trading firm, while Tata Global Beverages and GSK Consumers are trading weak. VST Industries declared its 1QFY12 results. The company's top line grew by 16% YoY on robust demand for cigarettes while its operating income shot up by 143.7% YoY. Operating income growth was a result of fall in raw material costs by 2.3% YoY and in other expenditure by 29.3% YoY. Staff costs grew slower than sales at 7.2% YoY helping operating income growth. Net profit grew by 90% YoY. This was slower than operating income and is a result of fall of 30.3% YoY in other income and increase of 9.7% in effective tax rate. Effective tax rate stood at 31.2% for the quarter.

Auto stocks are trading mixed with Tube Investment and Ashok Leyland leading the pack of the gainers. However, Tata Motors and Hero Honda are trading weak. As per the leading financial daily, India's No.2 two-wheeler maker Bajaj Auto Ltd has abandoned the idea of developing low-cost minicar in India for Renault SA and Nissan Motor company. Last year the company had signed a memorandum of understanding (MOU) with the Renault-Nissan alliance to develop an ultra low-cost car for India. The company finds this project as commercially unviable. As per Rajiv Bajaj, managing director of the company, the company does not want to go into the low-margin passenger car business. Instead, the management is planning to launch a low-cost commercial vehicle in the month of January next year. The stock of the company is trading in the red.

Markets open trade in the green
09:30 am

Asian stock markets have opened the day on a mixed note. Stock markets in Indonesia (up 0.5%), Japan (up 0.1%) and South Korea (up 0.3%) and Taiwan (up 1%) are trading in the green, while those in Hong Kong (down 0.3%) and Malaysia (down 0.3%) and are the maximum losers. The Indian stock markets have opened the day in the green. All sectoral indices are trading in the positive except for the automobile stocks.

The BSE-Sensex is up by 100 points while NSE-Nifty is trading 24 points above yesterday's closing. BSE Midcap and BSE Small cap indices are up by 0.5% each. The rupee is trading at 44.49 to the US dollar.

Auto stocks are trading weak led by Hero Honda and Bajaj Auto. As per a leading financial daily, the automobile companies like Maruti Suzuki, Honda and Hyundai are lining up discount offers to augment sales of cars. Honda started with the limited period waiver for its hatchback Honda Jazz. The other car makers followed suit. Maruti offers rebates of more than Rs 50,000 on Alto, WagonR and Estilo. Honda Siel is also offering Rs 50,000 discount on its top-selling City sedan on top of last month's Rs 66,000 price cut. Hyundai Motor India offers up to Rs 45,000 discount on its popular i10 and Santro compact cars.

This follows a drastic fall in sales growth in the month of June, 2011. It was merely 1.6%. It may be recollected that the automobile industry had grown at an astounding rate of 30% last fiscal but higher interest rates and costlier fuel slashed sales and have dented margins this year. The companies are also trying to structure deals to bring down the total cost for the customers through direct rebates to reduce inventory.

IT stocks are trading firm led by TCS (Tata Consultancy Services) and HCL Technologies. The Software major TCS posted better than expected results for the first quarter of the year. The revenues grew by 6% QoQ helped by 7.5% growth in volumes. Other income clocked a growth of 21% QoQ over the previous quarter (ending March 2011). The IT company has been able to contain the depreciation costs which have fallen by almost 2.5% QoQ. The interest charges have been high and grew by nearly 57% QoQ. As a result of higher expenditure and interest charges, net profit declined by 7.9% QoQ. Attrition rate increased marginally to 14.8% as compared to 14.4% seen during the previous quarter (ending March 2011)

A big problem for Indian PSUs

As India Inc starts the June quarter reporting season, several companies have claimed that their margins are lower as compared to the previous quarters. The reason for this is salary hikes. Most companies have offered or plan to offer attractive salary increases and bonus packages to their employees. One reason for this is to arrest employee attrition. Another reason is to reward the employees as times have improved since the crisis of 2009. But at such a time one wonders as to what would happen to the compensation of the PSU (public sector undertaking) employees..

There have been several instances wherein employees of Indian PSUs have expressed their woes. At times with regard to lower compensation and at others with regard to threat of job losses. Wide gap in PSU- private sector pay scales, threat of job losses due to privatization and fewer incentives has ailed Indian public sector units for long. Indian banks in particular have been a victim of this. The fact that markets value them at least at 40% discount to private sector peers is reflective of the sentiment.

This is not to suggest that efficiency levels of public sector companies are low. Even if so, they have improved dramatically over the years. Companies like NTPC and SAIL are producing power and steel at cheaper costs than private sector behemoths. The likes of Bank of Baroda and Punjab National Bank have one of the best interest margins amongst Indian banks. The government banks' revenue per employee doubled in the past three years. Of course this is because their manpower grew by 2% while balance sheets grew in excess of 20% over this period. In fact these companies have been the poaching ground of talent for their private sector competitors. That said the low compensation levels in PSUs remains an issue when it comes to retaining the best talent and improving profitability.

Here again PSU banks are set to be the biggest victim. Nearly 80% of middle management and 50% of junior officers in these entities will retire over the next 10 years. The vacancies will require immediate replacement of skilled staff. And attracting that in competition with the private sector will be a heady task for the sector.

Performance linked employee compensation has been a bane of contention in the West. Particularly, after bankers mis-sold risky derivative products to hike profits and pocket dollops of bonuses. Hence short term performance has come to be considered as a bad metric for pay rises. Ironically, even after such learning, the conservative RBI governor has advocated improved pay scales for PSU executives. He believes that will help PSU banks in India remain more profitable.

We agree that competitive pay scales are necessary to sustain efficiency and talent in Indian PSUs. However, arm-twisting the government with strikes and an attempt to match the private sector may not be the best way out.