IT, banking take toll

A strong bout of profit booking took the markets deep into the red during the closing hours of trade. Having failed to recover much from those levels, the indices closed the day significantly in the negative. The BSE Sensex lost in the region of around 120 points (down 0.8%) today whereas NSE Nifty was down around 50 points (down 1%). BSE Midcap and small cap indices however bucked the trend and closed with marginal gains today. Four stocks declined for every one that gained on the Sensex today. IT and banking heavyweights like ICICI Bank, Infosys and TCS traded particularly weak today.

While most Asian indices closed in the red today, Europe is also trading weak currently. The rupee was placed at 46.6 to the dollar at the time of writing.

While corporate India is not exactly proving to be a big disappointment during the ongoing results season, we believe that most of the growth is already priced in and the markets are already looking elsewhere to take their cues from. Sadly, there isn’t much happening in India and globally as well for them to look particularly buoyant. While the US and Europe remained mired in the usual deflation dilemma, growth in India too might get stifled a bit on account of the recent measures by the country’s central bank. Thus, it continues to look like it’s going to be a stock picker’s market for quite some time to come.

Tyre major Apollo Tyres had a good day today as it closed with a gain. This was despite a poor set of numbers announced by the company. On a consolidated basis, its first quarter profits were almost flat. While the topline came in higher by 11%, it was the fall in operating margins that affected its bottomline. Results on a standalone basis were even more disappointing. Bottomline suffered a fall of 57% as extreme movement in rubber prices and a lockout in one of its factories in Kerala impacted growth. The company is hoping that things get sorted out soon on the Kerala plant front so that revenue growth can be given a momentum.

Indian Hotels was another of the major companies that came out with its results. Thanks to an uptick in the hotel sector, the company has managed to grow its standalone operating profits by 55% on the back of a 15% growth in topline. Net profits however fell by a huge 80% as an extraordinary item that was present last year was not there this year. Excluding the same, net loss has come down sharply from Rs 269 m in 1QFY10 to around Rs 9 m during the quarter gone by. The company also suffered on account of the closure of its flagship property, Taj Mahal Palace and Towers for renovation. The stock experienced a decline today.

A volatile noon session
01:30 pm

The Indian indices witnessed a volatile trading session during the previous two hours of trade. While strong buying activity led the BSE-Sensex to rise above the dotted line, the positive trend was short-lived as the index nosedived into the red thereafter. Barring stocks from the consumer durables space, weakness is being witnessed in stocks across sectors led by those from the realty, IT and power spaces. However, the market sentiments seem to be positive as the overall advance to decline ratio is poised at 1.2 to 1 on the BSE.

The BSE-Sensex is trading down by around 70 points (down 0.4%), while the NSE-Nifty is down by about 20 points (down 0.3%). However, buying interest is being seen in stocks from the mid and small cap spaces as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.6% and 0.7% respectively. The rupee is trading at 46.54 to the US dollar

Cement stocks are currently trading weak led by Ambuja Cement, ACC and Dalmia Cement. The stock of cement major, UltraTech Cement is trading lower on the back it announcing poor results. The decline in revenues was mainly due to lower off take and shortage of wagons in South India, which accounts for nearly 33% of the company’s total sales. While the company’s revenues declined by 8% YoY, it took a major beating at the operating level as operating profits declined by 42% YoY. Operating expenses on the whole increased by 12% YoY leading to a sharp decline in operating margins. During the quarter ended June 2010, UltraTech’s operating margins stood at 23.5%, lower by 13.7% YoY as compared to last year. All the company’s cost heads rose as a percentage of sales during the quarter.

At the profit level, the company reported a 42% YoY decline. The decline would have been sharper had it not been for the lower interest costs, lower tax expenses and higher other income during the quarter. Further, the company has approved an additional capex spend of Rs 56 bn for adding plants in Chhattisgarh and Karnataka. The total capex plan for the next 3 years is Rs 100 bn. This will be funded through debt and internal cash accruals.

Auto stocks are trading mixed with TVS Motors and M&M trading firm and Hero Honda and Tata Motors trading weak. As per a leading financial daily, commercial vehicle major Ashok Leyland Limited (ALL), has picked up a 26% stake in Optare, a UK based bus manufacturer. ALL has the option of raising its stake in Optare in the future. The deal which is a long-term strategic co-operation will involve an investment of US$ 7.5 m in Optare.

Optare, is a specialist in low-floor, midsized buses as well as modern range of city buses. The company has a market share of almost 34% in UK and has a capacity to produce 1,100 units per annum. The company besides UK has presence in mainland Europe and North America.

This tie up is very important for ALL as it will be a critical part of ALL’s global bus programme which is currently under development. Under this tie-up the two companies are expected to share intellectual property rights in co-developed products and share components in various areas like those related to climate control or drive train systems.

Maruti plans motor insurance venture
11:30 am

After starting today's session on a weak note Indian indices continue to trade in the negative territory. Other key Asian markets too are trading in the red. Stocks from consumer durables and banking space are witnessing some buying interest while stocks from IT and real estate space are trading in the red.

The BSE-Sensex is trading down by around 33 points, while the NSE-Nifty is down by about 12 points. However, buying interest is visible amongst the mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.8% and 0.7% respectively. The rupee is trading at 46.44 to the US dollar

Auto stocks are trading mixed with Tata Motors and Hero Honda leading the pack of losers. However, M&M and Maruti are trading in the green. As per a leading news daily, Maruti, the country's largest passenger car maker, is planning to float a general insurance company with along with another local partner. The company has been selling motor insurance under its brand, Maruti Insurance, since 2002. However, the company won't be able to sell more policies as the regulator cancelled its agency licence, recently. The move came after insurance companies alleging that Maruti service stations used to inflate bills pushing them into losses. It should be noted that in FY10 Maruti sold 2.5 m policies. Now Maruti is planning to float new insurance company in JV with an Indian counterpart. Globally there have been instances where car makers have entered into the motor insurance business to cater to their customers. And Maruti has followed that global tradition. Considering the scale of Maruti's operations, the move is likely to benefit both Maruti and its customers.

Real estate stocks are trading in the red with Phoenix Mills and India Bulls real estate leading the pack of losers. However, Sobha Developers and HDIL are trading in the green. DLF, a real estate major, announced its 1QFY11 results recently. Its top line grew by around 23% YoY while the bottom line registered a flattish growth during the quarter. Top line growth was aided by strong sales bookings and a good jump in realizations, particularly in the residential segment. The company booked nearly 1.9 m sq ft of area in its developmental business. Under the annuity business, DLF booked 0.98 m sq ft, significantly higher than the previous quarter. While realizations in the residential segment showed dramatic improvement, the same in the commercial space declined 32% YoY during the quarter. As for the annuity business, the average lease rates in the office segment increased by 60% YoY. However, the average lease rates in the retail segment witnessed a drop.

Margins in the residential business stood at 56% while margins in the commercial space stood at 75% during the quarter. During 1Q FY11 DLF's operating profits increased 32% YoY. Despite the strong growth in operating profits, net profits increased by meager 4% YoY mainly due to burgeoning interest and depreciation expenses. Interest and depreciation cost rose 35% YoY and 104% YoY, respectively.

Auto stocks push markets lower
09:30 am

The Indian markets have started today's session on a weak note. The benchmark indices opened below the breakeven mark, and moved further into the negative territory. These have not managed to cut their losses since then. Other key Asian markets are in the red with Japan (down 1.5%) leading the pack of losers. The US markets closed lower by 0.3% yesterday. Currently in India, heavyweights from the BSE-Sensex are trading weak with auto and banking majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 70 points, while the NSE-Nifty is down by about 25 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% each. The rupee is trading at 46.49 to the US dollar.

Pharma stocks have opened the day on a positive note. Gainers here include Sun Pharma and Ranbaxy. Lupin announced its 1QFY11 results yesterday. The company reported a topline growth of 21% YoY during the quarter, led by growth across all business segments. Formulation sales from the US and Europe registered a robust 40% YoY growth. In the US market especially, the branded generics business grew by 51% YoY, whereas the generics business grew by 45% YoY. Operating margins expanded by 2.3% during the quarter largely due to a fall in raw material costs (as percentage of sales). The company's net profits grew by a robust 40% YoY during the period led by the strong growth in operating profits, reduction in interest costs and lower tax expenses.

FMCG stocks have opened the day on a positive note. Gainers here include Dabur and Pidilite. As per a leading business daily, Dabur plans to raise Rs 20 bn for acquisitions. The amount is in addition to the funding for the recent Hobi Kozmetik deal. The company's board approved an enabling resolution for this fund-raising two weeks ago. It would be put to vote before the shareholders at the annual general meeting next month. This move comes at a time when organic growth in India is becoming very difficult and creating and building new brands is turning costly. Moreover, valuations abroad are very lucrative. As a result, the company is actively looking for acquisitions in healthcare and personal care after a gap of three years. It had acquired Fem Care Pharma in 2008 and Balsara Hygiene and Home Products in 2005.

The average Indian will live better

'Arbitrage' is an activity where you attempt to take advantage of price differences between the same commodity in two different places. So if the same oil is selling for Rs 100 in one market and Rs 105 in another, you could easily make a fortune buying from the first and selling in the second.

This process of arbitrage can extend far beyond just commodities and financial assets. In fact, this process is now more relevant than ever before. As the world is now realising, it can even extend to humans themselves.

It is common knowledge that the developed countries are now growing at a much slower rate than developing countries like India and China. One of the roots of this phenomenon is nothing but the above mentioned concept of arbitrage. Manpower, both skilled and unskilled, is currently significantly more cheaper in developing countries. It is only natural that any profit oriented company will seek to take advantage of this.

If it can make products by spending less money in India than in the US, and if it is possible to do that considering the nature of the company's product or service, it will most certainly do so. That's how a capitalist economy works. And regulations like the ones that the Obama administration has tried to put in place in the US can only postpone this phenomenon. But it certainly cannot stop it.

But that's only one side of the coin. The other side being that there will also be a tendency for people looking for employment to move from places they would get paid less to places where they would get paid more. That's why you have youth from developing countries looking to settle down in developed countries. And not the other way round.

Take the above two points together and what emerges is one distinct and inescapable global trend. The supply of jobs is increasing in developing countries. And the supply of manpower is increasing in developed countries.

That leads us to another distinct feature of the concept of arbitrage. When big price differentials exist between two similar commodities in two different markets, one particular thing is bound to happen. An increasing number of people will seek to make money out of this differential. And as more and more people jump into the band wagon, the demand supply dynamics in both markets will keep changing. And this will happen until the time the price differential between both markets comes down to zero.

Something similar is in the process of happening in the global economy today. And this process is unlikely to stop until it reaches its only logical conclusion – the convergence of average wage levels between the denizens of developing and developed countries. Consequently, the same is bound to happen to the lifestyle of the average Indian. It can go in only one way from here – up. Until it reaches closer to developed world levels that is.

The surprisingly higher GDP growth rates in the East and soaring unemployment levels in the West are only manifestations of this trend.