Reliance drags market lower

With markets making further inroads into the negative territory, the indices closed the day significantly in the red. The BSE Sensex lost in the region of 120 points today (down 0.7%) whereas NSE Nifty shed around 30 points (down 0.6%). BSE Midcap and Small cap indices also ended lower however the selling was not as intense as in their larger counterparts. The advance to decline ratio stood at 2:3 on the overall Sensex as 3 stocks declined for every two that gained. Among heavyweights, Reliance Industries proved to be the wrecker in chief as more than 60% of the decline in Sensex could be attributed to the energy major. While the company did post decent results, perhaps the expectations from the market were quite high given the heavy selling pressure the stock came under.

India was the only major Asian index that closed in the red today as all the others witnessed good amount of buying interest. Europe though is trading largely in the negative currently. The rupee was trading at Rs 46.7 to the dollar at the time of writing.

Newspaper majors like HT Media and Jagran Prakashan closed in the positive today. Buoyancy in the former seemed a result of its strong June quarter performance. The company has managed to grow its profits by a strong 44% on the back of a 20% growth in topline. It is the expansion at the operating margin level that made the biggest contribution to profit growth. Since most of the topline growth was price driven, thanks to the 22% jump in advertisement revenues, costs grew at a much lower pace and this led to 38% growth in operating profits. Furthermore, the company has broken even at the operating level on the radio segment although it still incurs EBITDA level losses in the internet business. Thus, while the performance was indeed heartening, we wonder whether quite a bit of it is already in the price.

Cadila Healthcare was another midcap company that announced its results recently. And even here, the bottomline growth has far exceeded the topline growth. The company has reported a 58% growth in net profits on a YoY basis during the quarter whereas its topline has grown at a lower but nonetheless an impressive rate of 26% YoY. Yet again, it was the robust improvement of 3.7% in operating margins that stole the show for the company. While the same degree of improvement in operating margins would be quite difficult to come by going forward, topline growth should remain healthy. We expect Cadila's growth to be driven by increasing scale of its US and other export formulation businesses. Further, strong performances by the consumer healthcare and custom manufacturing businesses and the JV with Hospira are also expected to contribute to Cadila's overall growth going forward. The stock closed marginally higher today.

Profit booking takes toll
01:30 pm

The Indian indices plunged into the negative zone after remaining flat in the previous session. Profit booking in heavy weights during the last two hours of trade dragged the Sensex lower. Currently, stocks forming part of the auto and power spaces are leading the pack of gainers. Stocks from the oil & gas and realty space are trading weak. The overall market sentiments are still mixed as the decline to advances ratio is poised at 1.0 to 1 on the overall BSE.

The BSE-Sensex is trading lower by around 80 points (down 0.3%), while the NSE-Nifty is down by about 23 points (down 0.3%). Some buying interest is being witnessed amongst the small cap stocks as the BSE-Midcap index is up 0.2%, while the BSE-Midcap index is trading flat with a negative bias. The rupee is trading at 46.61 to the US dollar.

Oil and gas stocks are trading mixed with Aban Offshore and BPCL leading the gains. Reliance Industries and GAIL were the biggest losers. Reliance Industries declared its 1QFY11 results. The company's sales increased 87% YoY during 1QFY11. This was led by a 107% growth in the company's refining business. Revenues from the petrochemical and exploration businesses grew by 19% YoY and 150% YoY respectively. Operating margins declined by 4.5% YoY to 16%. This was largely on account of higher raw material costs (as a percentage of sales. The company's gross refining margins stood at US$ 7.3 per barrel during the quarter, as compared to US$ 6.8 per barrel in 1QFY10. Profits grew by 32% YoY during the quarter on the back of topline growth despite lower margins and higher depreciation and interest cost.

In an interview with a leading business daily, the senior management of biscuit major Britannia Industries shared its views on the many aspects of the industry presently. It also spoke about the challenges the company is facing at the moment and its plans for the future. Over the past few years, Britannia has been able to grow its revenues at a strong pace. However, the same cannot be said about its profits, which have been quite volatile. The key reason for the same is higher raw material costs, which the company has not been able to pass on to its customers on the back of increasing competition. However, this has been the case for the industry as a whole. As per the company, its operating performance is much stronger than its largest competitor (Parle), and it continues to grow not only at a strong pace but also profitably. Another topic of discussion was market share – As per recent Nielson report Parle had become the largest player in the biscuit market. However, Britannia's management does not believe so. As per the management, Parle has taken over Britannia as the largest player, but only in the glucose segment. However the glucose category has shrunk from 34-35% to about 29% of the overall biscuit market. As for the balance 70% of the market, the company believes that it is the largest player.    

Regarding measures to control costs, while much cannot be done by the company to lower raw material costs, it is continuing with reducing inefficiencies. Over the past four years, the company has managed to reduce costs to the tune of Rs 1.8 bn. In addition, the discussion also included the increasing competition with global food major Kraft planning an entry into the Indian markets. The management is in fact, ‘delighted' as they could bring a certain amount of rationality into the market as well as help in expanding the overall market size.

Markets continue to trade flat
11:30 am

The Indian indices continued to trade flat on profit booking in heavy weights during the last two hours of trade. Stocks from the auto and consumer durables space are trading firm, while stocks from the oil & gas and banking space are trading weak.

The BSE-Sensex is trading up by 10 points while NSE-Nifty is trading 4 points above the dotted line. BSE-Midcap index is trading up by 0.4% while and BSE-Smallcap index is trading 0.7% above yesterday's closing. The rupee is trading at 46.66 to the US dollar.

Hotel stocks are trading mixed with Hotel Leelaventure and Oriental Hotels trading firm while EIH Limited and Taj GVK are trading weak. Oriental Hotels declared its 1QFY11 results. The company's topline including contribution from its new Trivandrum property grew by 31% YoY. On a like-to-like basis the company's topline increased by 19% YoY. This was due to higher demand seen during the quarter. Operating profit margin remained flat during the quarter at 16.3%. The company's bottomline however increased by 186% YoY. This was due to higher other exceptional income registered during the quarter. The exceptional income consisted of compensation received by the company in connection with the surrender of lease on a plot of land. Excluding all onetime items, the company's bottomline grew by 18% YoY.

Engineering stocks are trading mixed with Cummins India and Welspun Corporation trading firm while Everest Kanto and Jain Irrigation are trading weak. As per a leading news daily, Praj Industries plans to set up three manufacturing plants this fiscal for its existing and new businesses. The company has plans to enter new verticals such as waste water treatment, customized equipment and heat exchanges for fertilizers, chemical, pharma and food & beverage industries. It plans to spend Rs 500 m on two plants for customized equipments which will be commissioned in this fiscal. With the commissioning of the first plant Praj's capacity will increase from 12,000 tpa to 15,000 tpa. The capacity expansion is likely to be funded internally as the company is sitting on a huge cash pile. As far as plans on waste water treatment are concerned the company is awaiting the results of a study by a global consulting agency. Right now Praj's order book is comfortably placed at Rs 7,000 m with 45% of the orders coming from the overseas market.

Markets open on a volatile note
09:30 am

The Indian markets have started today's session on a volatile note. The benchmark indices opened above the breakeven mark, but soon moved into the negative territory. However, these have managed to return to the green since then. Other key Asian markets are in the green with Japan (up 1.9%) leading the pack of gainers. The US markets closed higher by .1% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with auto and energy majors attracting investors' interest. The BSE-Sensex is trading higher by around 15 points, while the NSE-Nifty is up by about 5 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.4% and 0.5% respectively. The rupee is trading at 46.75 to the US dollar.

Banking stocks have opened the day on a positive note. Gainers here include Canara Bank and Bank of India. Union Bank has announced its 1QFY11 results. The bank has reported a 16% YoY growth in interest income in 1QFY11 on the back of 30% YoY growth in advances. The bank tapped SME clients during the quarter in order to hedge the slowdown in the growth of retail and agriculture segments. The higher proportion of CASA enabled the banks to get back to its long term average net interest margins (NIMs) that were impacted by the bulk deposit rates in FY10. Its NIMs improved from 2.3% in 1QFY10 to 3% in 1QFY11 due to re-pricing of assets. Other income fell by 15% YoY due to lower treasury income. The bank's capital adequacy ratio stood at 12.6% as per Basel-II at the end of 1QFY11. Its net NPA ratio inched to 0.9% in 1QFY11 from 0.7% in 1QFY10.

Auto stocks have opened the day on a positive note. Gainers here include Escorts and Ashok Leyland. M&M plans to expand its presence into the compact tractors category that is currently dominated by local unorganised players. It has launched Yuvraj 215, the country's first 15 horse-power (hp) tractor targeting the small and marginal farmer with an average landholding of two to five acres of land. It has initially been introduced in Gujarat at Rs 175,000. With nearly 82% of the farmer population in Indian being small and marginal farmers, there is ample opportunity to grow. In fact, the company plans to launch the Yuvraj in other major markets like Maharashtra, Uttar Pradesh, Bihar, Tamil Nadu and Madhya Pradesh within this year. It may be noted that M&M is the market leader in the tractor segment for the last 27 years and sold 166,000 units in FY10.

Housing bubble in Indian metros?

India needs new cities. This is the key thought that Deepak Parekh has put in his letter to the shareholders of HDFC. The latest annual report of India's largest housing finance company is proof of the veteran's concerns over Indian metros becoming unaffordable. But now there is more evidence to support that. Statistics that come straight from the banking regulator's desk.

The RBI sends out its key observations on the macro economy before its Monetary Policy review. This observation ranges from topics like inflation to capital markets to GDP growth. This quarter's issue has an interesting note on the central bank' view on housing in metros. It was accompanied by statistics on how the 4 metros in India have witnessed an inexplicable rise in housing prices since the last 4 quarters. Taking 4QFY09 as the base the RBI has shown the rise in housing prices in each of these cities. And Delhi tops the 'house inflation index' (if you will). The union territory has seen 27% rise in housing prices over the past 4 quarters! The fact that it is the host to the upcoming Commonwealth Games seems to be the obvious explanation. But not enough to justify the disproportionate price rise. The price rise in low teens in Mumbai and Ahmadabad are certainly not comforting. But pale in comparison to Delhi. Bangalore on the other hand shows a negligible rise, probably reflecting the city's chocked infrastructure.

Coming to all-India numbers, the central bank itself sounds quite worried. So much so that it has no qualms about tightening liquidity further. Taking FY03 as the base, housing prices have gone up 2.5 times until the fourth quarter of FY10! The number of transactions of purchase of residential houses has gone up 4.5 times in the last 7 years.

Readers may recall that in was in FY03 that interest rates had started falling and led to a huge surge in home loan demands. The accompanying fiscal sops encouraged Indian middle class to leverage and buy homes. The presentation by HDFC does show that Indians are far better off than their global peers. However, this it recognizes is not the whole truth. There are pockets in Indian metros where buyers are making the same mistake as their peers in US and Europe did.

Non availability of jobs and poor economic prospects in the non metros bring these 4 cities at the top of the aspiration list of most Indians. At the same time limited space for expansion of housing facilities offers builders all the more reason to charge a premium. Affordable housing has so far remained a myth and only on paper. Deepak Parekh has suggested solutions like reclamation of land for cities like Mumbai to become more affordable. Is the government listening?