Mid and smallcaps find favour

Although in the positive, the Indian indices moved closer to the dotted line in the final hours and settled marginally higher today. Profit booking in index heavyweights led the indices to shed most of the early gains. While the BSE Sensex closed higher by around 32 points (up 0.2%), the NSE Nifty gained around 14 points (up 0.3%). The BSE Midcap and the BSE Smallcap indices managed to do well to notch gains of 0.8% and 1.1% respectively. Profit booking was largely seen in software, realty and oil & gas stocks.

As regards global markets, barring Indonesia most Asian indices closed in the positive today. However, European markets have also opened on a cautious note. The rupee was trading at Rs 46.78 to the dollar at the time of writing.

Indian drugmaker Sun Pharma's woes with the US drug regulator (FDA) seems to be showing no signs of reprieve. The company's US unit has received a fresh warning from the USFDA for violations of manufacturing regulations at its New Jersey manufacturing plant. During 1QFY11, the company's robust topline growth was largely due to the one-time sales that the company generated from the product 'Eloxatin', distributed by Caraco in the US market. With the court judgement going against Sun Pharma, the distribution of this product was stopped at the end of June. And so, there will be no revenues from this product in the forthcoming quarters. In the US market, Caraco is actively working with the USFDA to take corrective action at its manufacturing plant in Detroit. Despite these issues, Sun Pharma has maintained its consolidated sales growth guidance of 18-20% YoY for FY11.

Just 7 out of 10 Indians currently have bank accounts. But being habitual savers, Indian banks together hold some of the largest numbers of low cost deposit accounts in the world. And the ones that have the maximum market share in them tend to be most profitable. For it allows them to lend cheap without sacrificing margins and asset quality. IDBI Bank which has been a late competitor in this space due to its erstwhile DFI structure, seems to be doing a pretty good job. The bank which has the lowest net interest margin in the sector (less than 1.5%) has only one way to become more profitable. And that is enhancing its low cost deposit base at any cost. Even if that means depriving itself of some fee income. With this in mind, IDBI Bank has offered free services such as DDs and fund transfers on all kinds of savings accounts.

This, IDBI believes will help it cannibalize on the deposit base of its competitors who charge heavy fees. We believe that while such a strategy will certainly help IDBI in the short term, for the sector doing away with non fund revenues could be very risky.

Meanwhile, Shree Cement plans to invest Rs 36 bn on capital expenditure over the next 18 months. This is on the back of expectations of higher demand from the northern region. The demand is expected to partly come due to the forthcoming Commonwealth Games in addition to increased spending on infrastructure by the government and on account of ongoing construction activity. However, with several cement producers lining up capacity expansion plans either through the brownfield or greenfield expansion route, the demand supply gap is set to narrow. The Rajasthan-based cement maker expects margins to decline in FY11 but revenues to remain flat.

Slow August drags Hero Honda
01:30 pm

Indian indices pared some of their opening gains on selling witnessed in heavy weights over the previous two hours of trade. Stocks from the consumer durables and auto space are the top gainers while stocks from the IT space are among the top losers.

The BSE-Sensex is trading up by 58 points, while the NSE-Nifty is trading 16 points above the dotted line. BSE-Midcap index is up by 0.8% while BSE-Smallcap index is trading 1.1% above yesterday's closing. The rupee is trading at 46.81 to the US dollar.

Auto stocks are currently trading mixed with Eicher Motors and Escorts leading the gainers while Hero Honda and Force Motors are leading the losers. At the time of writing, the stock of two-wheeler major Hero Honda was the top loser amongst stocks forming part of the BSE-Sensex. The stock is under pressure on the back of announcing a slow 2% YoY increase in sales during the month of August 2010. This seems to be particularly low when compared to the sales volumes of other two-wheeler majors in the country. For instance, TVS Motor reported a 34% YoY rise in volumes, while Suzuki Motorcycle reported a 51% YoY increase in volumes during the month. India Yamaha Motor on the other hand reported a 30% YoY rise in volume sales during the month. Bajaj Auto saw its sales volumes improve by 55% YoY during the month.

However, it may be noted that Hero Honda has been selling over 400,000 units in the past three months, which is a strong sales number. Plus, we believe the numbers are not really comparable to the other companies as they seem to be reporting higher numbers on the back of a lower base. For instance, Hero Honda's sales during the month of August stand at about 14 times and 22 times when compared to Yamaha and Suzuki's sales numbers respectively. However, the gap between it and its closet player Bajaj Auto has been narrowing on the back of the good demand for the latter's entry level bikes in recent times. As compared to TVS, Hero Honda sales volumes stood at about 2.5 times during the month.

Software stocks are currently trading mixed with HCL Tech and Tech Mahindra trading firm while TCS and Patni Computers are trading weak. A leading business daily has reported that IT major Infosys is looking at various developments to cope with the recent tightened immigration norms. These developments include increasing local hiring as well as acquisition opportunities. In addition, the company's senior management also voiced its concerns on a worsening economic climate in the US. Plus it believes that if the scenario continues to worsen from here on, its clients' IT budgets could be impacted. The management however, further added that despite the volatile economy, its US clients are offshoring more projects, which is a good sign for the company. The company believes that it will be able to achieve its revenue guidance of 19% this year. However, the challenge for the short term is to manage the short term growth with long term risks. Earlier, the company's management had forecasted a decline in operating margins to the tune of 1.5% YoY. However, it believes that if the revenue growth continues then the company could perform better.

3G spectrum awarded on time
11:30 am

After starting today’s session on a positive note Indian indices have managed to hold on their gains. Other key Asian markets are trading in the positive territory as well with Nikkei (up 1.5%) leading the gainers. Currently heavyweights in the Sensex are trading strong with stocks from the consumer durables and auto space witnessing strong buying interest. However, stocks from IT space are trading weak while FMCG stocks are trading flat.

Currently, the BSE-Sensex is trading up by around 75 points, while the NSE-Nifty is up by about 20 points. Strong buying interest is witnessed amongst the mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading up by 1.1% and 1.3% respectively. The rupee is trading at 46.79 to the US dollar.

Software stocks are trading mixed with Tech Mahindra and Aptech leading the gains. Patni and TCS are however trading weak. TCS recently announced that its UK Business Process Outsourcing (BPO) subsidiary Diligenta bagged two life and pension contracts worth Pound 250 m (around Rs 18 bn). The contracts come from the Phoenix Group and Old Mutual International. This was following the transfer of Unisys Insurance Services UK life and pensions services business to Diligenta. This new contract with Phoenix Group has been extended by 6 additional years until 2018. Both contracts will generate Pound 250 m in revenues for the company over the period. This helps in reinforcing the subsidiary’s position as one of the largest BPO providers in the UK. The number of policies Diligenta administers will now rise from 3.6 m to over 5 m.

Telecom stocks are trading strong with AGC Networks and HFCL leading the gains.  However, Idea and RCom are trading weak. Sticking to the deadline of 01 September, the government has allotted 3G spectrum to all the winning bidders at the recently concluded auction. Spectrum has been allotted to all 7 winners namely Bharti Airtel, RCom, Idea Cellular, Vodafone, Aircel, STel and Tata Teleservices. It should be noted that state run telcos BSNL and MTNL were allotted the frequency prior to these private players but they had to match the winning bid prices. The 3G auction yielded Rs 677 bn from the winning players, including BSNL and MTNL. However, none of the players were able to bag Pan-India spectrum.

With the allocation of spectrum the commercial launch of 3G services is expected to happen by the end of this year or early next year. As per the regulations, the operators would be able to use the spectrum for 20 years. The government has also imposed a roll out obligation under which the service providers will have to cover at least 90% of the service areas within metros over a period of 5 years.

Realty stocks lead markets higher
09:30 am

The Indian markets have started today's session on a positive note. The benchmark indices opened above the breakeven mark and have stayed in the positive territory. Other key Asian markets are in the green with Hong Kong (up 1.3%) leading the pack of gainers. The US markets closed higher by 2.5% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with realty and banking majors attracting investors' interest. The BSE-Sensex is trading higher by around 90 points, while the NSE-Nifty is up by about 25 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 0.8% and 0.9% respectively. The rupee is trading at 46.79 to the US dollar.

Auto stocks have opened the day on a strong note. Gainers here include TVS Motor and Maruti Suzuki. As per a leading business daily, Tata Motors will launch a slew of entry-level Jaguar Land Rover (JLR) cars including a station wagon and a roadster to boost volumes across markets. The company is also looking at integrating platforms with JLR to bring in economies of scale. Further, it is ramping up its commercial vehicle capacity at its Dharwad plant, especially for the small truck Ace as well as buses. This will help the company meet the growing demand for commercial vehicles in the recent months. It plans to launch more variants of the Nano in the Indian markets which will include electric, diesel, larger engine capacity models. Some models will also be aimed at the UK and US markets. Overall it plans to invest close to Rs 29 bn over the next three years for developing new products. It is stepping up its focus on international markets such as Africa, Russia, China and the Middle East for growth.

Energy stocks have opened the day on a positive note. Gainers here include MRPL and Indian Oil. As per a leading business daily, ONGC's foreign arm ONGC Videsh Limited (OVL) is planning to acquire shale gas assets in the US. OVL will enter into partnership with experienced local players instead of going for complete buyouts. It may be noted that Reliance Industries was the first from India to show interest in shale gas assets in the US. Since then, Indian Oil, BPCL and Oil India have also expressed their desire to acquire shale gas assets in the US and Australia. The current technology of producing natural gas was first used in the US in 1990s. Shale gas now contributes to about 14% of the US natural gas basket.

The great lie no one's talking about

The mainstream media will have us believe that the US consumers have taken to austerity like a fish takes to water. It goes on about how an ordinary US citizen has indeed been hit hard by the crisis. Thus, mindful of the debt burden, he has now decided to reduce the same and also scale down his free spending habits.

However, a simple glance through the official US Federal Reserve statistics on credit outstanding paints a completely different picture.

Source: Lewrockwell.com

No doubt the total debt in the US has come down. But that number stands at a mere 1.5%. Not enough to even move the needle as far as deleveraging of debt is concerned. The above chart helps make matters clear a bit.

As is evident in the chart, the total US debt outstanding peaked at US$ 52.9 trillion in 1QCY09. The same currently stands at US$ 52.1 trillion. Let us try and put these numbers into proper perspective.

The total US debt as a percentage of GDP today stands at a whopping 360%. As is evident from the red line above, US debt as a percentage of GDP peaked at 260% during the Great Depression of the 30s. Thus, the current scenario is even worse than what was witnessed back then.

Furthermore, it is true that the US financial sector has managed to cut its debt by about US$ 2 trillion since the fourth quarter of 2010. However, the central government has shown a similar increase in total debt during the same period. This indicates that debt has not reduced on an overall basis. Instead, it has just been transferred from corrupt Wall Street banks to the Government and ultimately to the tax payer.

Thus, as we can see, the US financial crisis seems far from over. The debt based foundation that the US economy was built upon still very much persists and in fact, the situation is getting worse by the day on account of the debt still growing at a faster pace than the US GDP. How will things end? Well, our guess is as good as yours. But we would like to leave you with a quote from the famous Austrian economist Ludvig Von Mises

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."