Profit booking takes toll

Indian stock markets had a largely volatile session today especially in the morning session as the indices barely managed to keep head above water. However, post noon selling pressure took toll and the indices languished in the red since then. There was no respite in the final trading hour either and the indices closed well below the dotted line. While the BSE-Sensex closed lower by around 66 points (down 0.4%), the NSE-Nifty closed lower by around 25 points (down 0.5%). The BSE Midcap and BSE Small cap were not spared either as they closed lower by 0.4% each. Losses were largely seen in consumer durables, banking and oil & gas stocks.

As regards global markets, Asian indices closed mixed today while European indices have opened in the red. The rupee was trading at Rs 44.48 to the dollar at the time of writing.

Pharma stocks closed mixed today. While Sun Pharma and Dishman Pharma found favour, Lupin and Biocon closed in the red. Biocon declared its results for the quarter ended June 2011 today. The company's total income grew by 11% YoY. This was led by its biopharmaceuticals business (up 8%) and Syngene (up 21% YoY). As far as the biopharma business is concerned, growth was led by the domestic branded formulations business which was up 28% YoY. Growth was also fuelled by insulin and statins. 'Atorvastatin' and 'Fluvastatin' were the two drugs that especially helped the statins business to maintain its momentum. Growth in contract research was largely attributed to the robust growth displayed by Syngene. This was due to a number of drivers notably expansion by existing clients, addition of new clients and evolution of the business mix towards higher value services. While operating profits grew by 12% YoY with margins of 29%, net profit growth was relatively lower at 7% YoY.

Exide Industries also announced results for the first quarter ended June 2011. Results were largely disappointing as sales grew by a mere 8% YoY and were attributed to sluggish demand. The latter was on account of the dual impact of labour problem at Maruti's Manesar plant and steady increase interest cost on auto loans. Operating margins dropped from 22.8% in 1QFY11 to 17.9% in 1QFY12. This was largely due to the surge in raw material costs (as percentage of sales) as lead prices continued to remain firm. Raw material costs increased by 4% to 63.5% of sales in 1QFY12. Other expenditure (as a percentage of sales) also rose leading to the 15% YoY decline in operating profits. However, the drop in net profits at 1% YoY was not as steep on account of a substantially higher other income and lower tax expenses. The stock closed lower by around 9% today.

Indian stock markets again in red
01:30 pm

Indian stock market moved into red on selling pressure in the index heavyweights over the last two hours of trade. Stocks from consumer durables, realty, healthcare and banking space are losing the most while those from FMCG space are trading firm.

The BSE-Sensex is down 43 points while NSE-Nifty is trading 19 points below yesterday's closing. The BSE Midcap and BSE Small cap indices are down by 0.4% and 0.3% respectively. The rupee is trading at 44.43 to the US dollar.

Sofware stocks have been trading mixed with NIIT Ltd, CMC Ltd and Infosys leading the pack of gainers. However, Mahindra Satyam and Mphasis Ltd are trading weak. Mindtree has reported its quarterly results for the first quarter of fiscal year 2011-2012 (1QFY11). The company reported revenues at Rs 4.1 bn, up 5.6% QoQ (quarter-on-quarter). The bottomline grew by a 7.8% on a quarter on quarter basis. Operating margins for the quarter stood at 11.1% as compared to 11.2% seen during the previous quarter (ended March 2011). Despite higher employee costs the company could maintain margins due to higher revenue growth as well as better operational efficiency. Attrition rates for the company stood at 25.6% which is slightly higher as compared to that seen in the previous quarter (4QFY11). The stock of the company is trading in the green.

Energy stocks have been trading mixed as well in the last two hours of the trade led by Petronet LNG, Indraprastha Gas and Gujarat State Petronet. However, IOCL(Indian Oil Corp), HPCL (Hindustan Petroleum Corpn Ltd) and BPCL (Bharat Petroleum Corpn Ltd) are trading weak. As per a leading financial daily, ONGC (Oil & Natural Gas Corpn) has withheld consent for internal restructuring of Cairn India Ltd for the past one year. The restructuring is separate from Vedanta Resources' US$ 9 bn buyout of Cairn India. Cairn India wants the stakes that its different subsidiaries hold in various oil and gas properties to be transferred into one India-based company. Since ONGC is partner holding up to 90% stake in six of the properties, Cairn India has sought a no-objection from ONGC. However, ONGC has not agreed to the proposal.

Indian stock markets bounce back
11:30 am

Indian stock market indices have been trading firm over the last two hours of trade after opening the day's proceedings on a weak note. FMCG and IT stocks are trading firm, while realty and consumer durables stocks are among the top losers.

The BSE-Sensex is up by 28 points while NSE-Nifty is trading flat at the moment. BSE-Midcap and BSE-Small cap indices are also trading flat. The rupee is trading at 44.44 to the US dollar.

Energy stocks are trading firm led by Petronet LNG and Gujarat Gas. Petronet LNG declared results for the first quarter of FY12. The company witnessed an impressive 83% YoY growth in the topline on account of increase in volumes and higher capacity utilization. The company has done volumes of 133 trillion BTUs (British Thermal Units) this quarter, up 6% with respect to the previous quarter. Out of the total, 64% cargoes were long term contracts. The regasification charges also registered an increase of 5% as compared to the previous year. The operating profits for the quarter registered a growth of 77% YoY. The bottomline also registered an impressive growth of 131% YoY. As per the company management, the company has received approval for its capacity expansion plans. It is targeting expansion to 15 million tonne (MT) versus a current capacity of 10 MT.

Auto stocks are trading mixed with Tube Investments and Tata Motors trading firm while Hero Honda and TVS Motors are trading weak. As per a leading financial daily, Tata Motors is planning to set up manufacturing facilities across the world. This is part of Tata Motor's strategy to expand its global presence. As per a company spokesperson, Tata Motors is evaluating options across the world, starting with which product would be relevant for which market. Once the evaluation is done, the company will decided whether the product will be exported or manufactured locally. It may be noted that Tata Motors had announced earlier this month that it will start operations of an assembly plant for commercial vehicles in South Africa. As of now, Tata Motors has truck assembly units in Thailand and Bangladesh. It also produces pick-up Xenon in Thailand.

Indian markets open in the red
09:30 am

Asian stock markets have opened the day on a weak note. Benchmark indices in Korea (down 0.7%), China (down 0.6%) and Hong Kong (down 0.2%) are the biggest losers. However, markets in Indonesia (up 0.2%) are witnessing buying interest. The Indian stock markets have opened the day on a weak note as well. Stocks in the realty and auto sectors are weighing down the markets. However, stocks in the consumer goods space are seeing some gains.

The BSE-Sensex is down by around 61 points (0.3%), while the NSE-Nifty is down by around 25 points (0.5%). Midcap and small cap stocks are trading in the negative zone as well, with the BSE Midcap and the BSE Small cap indices down by about 0.1% each. The rupee is trading at 44.47 to the US dollar.

Power stocks have opened the day on a negative note with NTPC and Torrent Power leading the losses. The country's largest coal producer, Coal India (CIL), has stated that it will most likely miss its output target for the June quarter. The company has blamed the weather for this. As per the company's management, they would miss the target of 98.7 m tones (MT) by 2.4 MT. The company's Chairman said that the production was in-line with the target during the months of April and May. However, the early onset of monsoons wrecked the production during the month of June. The monsoons have affected production as well as transportation of the company's coal fields in the eastern belt. The rainfall recorded at the Eastern Coalfields Ltd, Bharat Coking Coal and Central Coalfields was almost double as compared to that seen last year. Due to this disruption, CIL would be able to achieve a production of 96.3 MT for the quarter ended June 2011.

Pharma stocks have opened the day in the red as well with Lupin Ltd, Orchid Chemicals and Ranbaxy Labs leading the losers' pack. Dr Reddy's has announced its first quarter results for financial year 2011-2012 (1QFY12). Sales stood at Rs 19.8 bn and were up almost 18% YoY. The strong sales number was driven by growth in North America, Russia & CIS countries. New launches from the Bristol facility helped in the strong performance in North America. However, the India business grew at a mere 6% YoY which is low as compared to the overall industry rate of around 14% YoY. In the domestic markets 12 new products were launched during the quarter. The Research & Development expenditure stood at Rs 1.2 bn which is a growth of 21% YoY. Net profits stood at Rs 2.6 bn and were up by around 25% YoY. %.

Are the TBTF entities getting risk averse?

Goldman Sachs, once renowned for placing winning bets, has taken a significant hit in its trading revenues. The firm has cut down its risk exposure to lowest since the third quarter of 2006. To those with a myopic perspective, it may seem to be a bad decision to take too little risk. However, we believe that risk averseness has helped the firm to contain the potential losses. Even with less capital at stake, the firm has ended up either making losses on bets or taking up expensive hedges that eroded the profits. Imagine the extent of damage had it subjected more capital to the same losing bets in the wake of rising Europe debt crisis and U.S fiscal deficit

The recent disclosure marks a significant turning point in firm's strategy in response to regulatory, political and economic uncertainties. And the trend seems to be making its way across other Wall Street offices as well. The focus is shifting away from trading operations to regulation and risk management. And firms are really justified in doing so. While it may be hard to resist the temptation of earning revenues based on speculative bets, this greed is no good. Such a trend will only lead to an asset bubble that will ultimately burst leading to another round of other bank failures. And considering the futility of previous round of bail outs, there may be none this time.

Seems like the firms such as Goldman Sachs have retained the lessons learnt from the previous financial crisis. The 'too big to fail' (TBTF) logic might not come to rescue them this time should they goof up once again. The stability of nation can't be left to the mercy of reckless decisions of selected people at these firms where the ability of financial regulators to oversee their operations is limited. Any sort of government guarantee against failure can only lead to market distortions. It will only incentivize executives to take more risks to realize maximum short term gains and ignore the risks that tag along. Even if the government manages to control fiscal defict, a lack of control on speculative trades could lead to a bank failure and the resulting bail out will bring the situation back to square one.