Markets get the tech-tonic!

Although Indian markets continued to remain volatile during the closing hours of trade, they did manage to close the day in the positive. The BSE Sensex edged higher by around 50 points (up 0.3%) whereas NSE Nifty closed the day with gains of around 15 points (up 0.3%). BSE Midcap and Small cap indices also closed the day in the positive.

Around 3 stocks gained for every 1 that declined on the Sensex today. By jumping more than 6% in a single day, tech bellwether TCS contributed in good measure to the gains on the Sensex. Infosys, another tech heavyweight also contributed in a positive manner.

While Asian indices closed mixed today, similar trend is being witnessed across Europe as well. The rupee was trading at Rs 46.8 to the dollar at the time of writing.

Markets groped for direction on yet another occasion today. This usually happens when different investors start pulling stocks in different directions. And this trend was in evidence throughout the week. In fact, it will not be out of place to say that this has been the trend for the year so far. Gone are the days when the markets kept moving in just one direction. Like they did in 2009! Back then, not only did more money kept pouring into stocks, fundamentals were also on the upswing. However, both these factors have more or less plateaued now. And hence the sideways movement. Barring a huge correction due to global factors, the indices are destined to remain sideways for quite some time to come.

Mid cap IT stocks traded mixed today with gainers being Geometric and Mastek whereas companies like Mindtree and Polaris ending up amongst the losers. As per a leading business daily, quarterly results for mid cap IT companies are expected to come in rather subdued with there being a good degree of pressure on margins. While there is likely to be growth on the topline front, led by pickup in demand in the US, currency fluctuations and salary hikes are expected to pressurize margins. Not to mention the ever present challenge of higher attrition. On the forex front, with the dollar rising against the euro, companies that have good amount of exposure to Europe may be relatively more affected than the others. As far as salaries are concerned, companies have given an average wage hike of 12-14% offshore and 2-3% onsite in order to be competitive and this may also take toll on profitability. Important to note that the full impact of these things and also the ongoing crisis in Europe will become clear only after another couple of quarters go by.

Heavy users of steel such as automakers and white goods manufacturers may be contemplating another round of price hikes. But the fact remains that the price of their major raw material steel has actually come down in the past quarter or so. As per the steel industry, steel prices have softened from Rs 37,000 per tonne in May to Rs 31,000 in July, a decline of a sizeable 16%.

On account of a demand slowdown in the developed world, more and more steel is finding its way into the Indian market and this is keeping steel prices on the lower side. However, the steel industry feels that prices have now bottomed out and a price rise may be in the offing soon. Whether the auto industry and the consumer durable manufacturers pass it on to the end users remains to be seen. Auto stocks were seen trading mixed today with major gainer being Tata Motors whereas M&M emerged amongst the major losers.

Banks, IT stocks lead gainers
01:30 pm

Indian indices crossed the dotted line as buying interest revived in heavy weights during the last two hours of trade. Stocks from IT and banking space are trading firm while stocks from the oil & gas and power space are trading weak.

The BSE-Sensex is up by 40 points while NSE-Nifty is trading 14 points above the dotted line. BSE-Midcap index is up by 0.5% while BSE-Smallcap index is trading 0.8% above yesterday's closing. The rupee is trading at 46.73to the US dollar.

Auto stocks are trading mixed with Tata Motors and TVS Motors trading firm while M&M and Bajaj Auto are trading weak. Tata Motors announced its sales numbers for June and for 1QFY11 yesterday. The global sales of the company grew by 46% YoY for the month to stand at 91,608 units. This was aided by strong commercial and passenger vehicle demand. For the quarter, the sales increased by 50% YoY to stand at 249,322 units.

Sales of commercial vehicles increased by 38% YoY to 39,975 units during June while for the first quarter of the current fiscal, sales increased by 41% YoY to 111,298 units. Total passenger car sales increased by 53% YoY to stand at 51,633 units for June while it increased by 58% YoY to 138,024 units for the first quarter. Sale of luxury sedan Jaguar increased by 59% YoY in June to stand at 6,776 units while Land Rover sales were almost double that of Jaguar at 13,413 units, an increase of 41% YoY.

Coming off a strong base in FY10 we don't expect to see such strong numbers going forward. We believe that the growth will soon revert back to the long term average of 10 - 12% YoY growth.

Energy stocks are currently trading firm led by BPCL, Castrol and HPCL. The stock of Castrol is trading firm on the back of announcing strong quarterly and half-year (CY ending company) results for the period ending June 2010. During the quarter, the company reported a 17% YoY increase in revenues and profits. The growth in revenues was driven by volumes. It is believed that the volumes were boosted on the back of its investments in marketing and branding. During 1HCY10, the company's marketing program was built around its global FIFA World Cup 2010 sponsorship. Further, Castrol's operating profits increased by 14% YoY, a tad below the revenues increase. This is on the back of a faster increase in operating expenses (which increased by 18% YoY). The key reason for the same was higher raw material costs, which increased by 29% YoY in absolute terms. However, the company did well to control the decline in margins as employee and advertising costs declined on an absolute basis during the quarter. On the back of a reduction in depreciation costs and low tax outgo, Castrol was able to improve the performance at the bottomline level.

As for the company's 1HCY10 performance, revenues and profits increased by 22% and 31% respectively. The higher increase in profitability is mainly on the back of a strong operating performance. During 1HCY10, Castrol recorded an operating margin of 29% as compared to 27.3% during 1HCY09.

Markets trading flat, IT gains
11:30 am

After starting today’s session on a volatile note Indian indices are currently trading flat. Other key Asian markets have also lost some ground and are in the red. Stocks from IT and banking space are trading strong while stocks from oil & gas and power space are being subject to profit booking.

The BSE-Sensex is trading up by around 3 points, while the NSE-Nifty is up 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 0.4% and 0.7% respectively. The rupee is trading at 46.75 to the US dollar.

FMCG stocks are trading mixed with Tata Tea and United Spirits leading the gains. Godrej Consumer is trading negative. Colgate-Palmolive (India) announced its 1QFY11 results. The company reported a 13.3% YoY growth in sales. Operating margins for the quarter grew by almost 4% to 29%. This was on the back of fall in raw material prices. However, higher advertisement spending, increase in staff costs and other expenditure prevented operating margin from increasing further. Net profits jumped by 18.7% YoY during the quarter. This increase was aided by higher operating income. But an increase in the effective tax rate capped net profit growth.

As per leading news daily, Pantaloon Retail (Pantaloon) is planning to speed up its expansion plans owing to the improvement in consumer sentiment. The company plans to add around 2.5-3.5 m sq ft of retail space per year. The expansion will be across both the value and lifestyle formats. It should be noted that the company added 1.7m sq ft and 1.5 m sq ft of space in FY09 and FY10, respectively. At the end of FY10, the company had total retail space of 13.5 m sq ft. Meanwhile, in the move to become a pure retail player the company has transferred its value formats to wholly owned subsidiary, Future Value retail. It has also decided to merge the sports, home and electronics retail business with itself. We believe the strategy to expand the retail space at this point of the real estate cycle will enable the company to better negotiate on rental deals.

Markets open on a volatile note
09:30 am

Indian markets have started today's session on a volatile note. The benchmark indices opened above the breakeven mark, but soon slipped into the negative territory. Since then, these have not been able to stay in the green for long, despite repeated attempts. Other key Asian markets are in the red with Japan (down 1.6%) leading the pack of losers. The US markets closed lower by 0.1% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with telecom and banking majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 5 points, while the NSE-Nifty is down 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 46.63 to the US dollar.

Software stocks have opened the day on a positive note. Gainers here include TCS and Wipro. TCS announced its 1QFY11 results yesterday. The company reported a net sales growth of 6% QoQ during the quarter. This was largely driven by 8% growth in business from North America. Sales from Europe declined 6% QoQ. Operating margins declined by 0.9% QoQ, largely owing to higher employee costs. The company added a net of 3,270 employees during the quarter. Attrition rate rose to 13.1% at the end of the quarter. At the net profit level, TCS reported a decline of 5% QoQ. This was due to weaker operating margins and lower other income. The company suffered on account of adverse currency movements as well. The fall in margins would have been higher but for gains from higher offshoring revenues and disciplined pricing.

Energy stocks have opened the day on a negative note. Losers here include GAIL and BPCL. As per a leading business daily, Indian Oil is set to enter the gas pipeline business. The industry has so far been dominated by GAIL and Reliance Industries. Indian Oil will enter the space by putting in a bid for the Mallavaram (Andhra Pradesh) to Vijaipur (Madhya Pradesh) pipeline which will evacuate gas from Gujarat State Petroleum Corporation's gas discovery in Krishna-Godavari basin. In fact, it is planning to bid for all three trunk pipelines for which bids are being invited. The other two pipelines are Mehsana (Gujarat) to Bhatinda (Punjab) and Bhatinda to Jammu & Kashmir. It may be noted that Indian Oil has a crude and product pipeline network of 10,000 km. With the oil marketing business saddled with losses, the public sector fuel retailers are looking at newer ways of generating revenues.

Not enough sound investment options!

One would think that in a vast country like India, one could possibly never run out of investment options. But private equity (PE) firms in India just did. As per a Mint report, at least US$ 17 bn of PE money is 'waiting' to be deployed in India. And why is it waiting? There just aren't enough sound investment options!

Private equity firms are nothing but investment funds who invest in unlisted companies. Among other things, there are a few big factors that differentiate PE firms from investors who invest in listed companies. PE firms are forced to think of themselves as business partners of the promoters. Due to the lack of liquidity of their investment, they are also forced to take a very long term view of their investments. Further, they also do not have any public market which gives them the value of their investment on a daily basis.

That may not look like a very comfortable situation to the average stock investor. But for those that look at stocks as pieces of businesses, it's the perfect environment. It lets you focus your energy looking at business performance. And it would also force you to give a long hard look at the value you are receiving in return for the price you pay. This is in stark contrast to the perspective that most stock investors seem to have. They just look at stocks ticker symbols wanting its price to go up the next day, the next week or the next month.

So what are these 'business perspective investors' saying these days? As mentioned above, many of them are having a lot of difficulty finding good investments at the right valuations these days. And many PE firms seem to be chasing every opportunity, causing valuations to go skyward.

The Mint report cites the example of one of the firms that is looking to exit its investment. It has already received 22 offers from potential investors. The fund's management has been quoted as saying, “We haven't seen something like this in our 10 years of investing in India.” This tells the whole story!

Due to such a scenario, many investment committees have become extra cautious to ensure that their funds are not investing at high prices. This is one of the reasons why the actual investment deals that have been clinched by PE firms have been very few off late. And their kitty of un-invested money is piling up.

Undeniably, India is booming, led by domestic consumption. But the sad part for these PE investors is that the valuations of target firms are increasing along with the rising consumer demand in the country. And good companies bought at high valuations do not always make good investments.

Investors in the stock market would do well to take a leaf out of the book of these PE firms. That's because as valuations head higher, investors investing with a business perspective should find themselves in a similar dilemma. If you don't, it is quite likely that you are focusing on only 'price' and not 'value'.