Volatility plagues indices

After three consecutive sessions of gains, markets were rather volatile in today’s trading session. Alternate bouts of buying and selling across index heavyweights meant that the indices oscillated to either side of yesterday’s close. Profit booking took toll in the final trading hour as the indices closed in the red. While the BSE Sensex closed lower by around 85 points (down 0.4%), the NSE Nifty lost around 32 points (down 0.5%). The BSE Midcap and the BSE Smallcap indices were also at the receiving end as they racked up losses of 1% and 0.4% respectively. Losses were largely seen in IT and metals stocks while banking and FMCG stocks bucked the trend.

As regards global markets, most Asian indices closed in the red today while European indices have opened on a mixed note. The rupee was trading at Rs 46.17 to the dollar at the time of writing.

Auto ancillary stocks closed weak today with the key losers being Exide, NRB Bearings and Sundaram Fasteners. As per a leading business daily, Exide Industries is set to commence commercial production at its new motor-cycle battery manufacturing facility at Ahmednagar. The new plant would be able to produce 400,000 batteries per month. This would then increase the company's total production capacity of two-wheeler batteries by over 60% to 1 m per month. Until now, the company’s facility in Bawal, Haryana was supplying these batteries. But the capacity at the Bawal plant was not able to cater to the rise in demand. Plans on the anvil also include enhancing its four wheeler battery manufacturing capacity by 28% during FY11. For all these expansions, the company has outlined capex to the tune of Rs 2-2.5 bn. This is with the aim of maintaining growth levels given that the auto companies are not likely to record the same kind of robust growth that they witnessed in FY10 in the current fiscal too.

As per a leading business daily, Rural Electrification Corp. (REC) is planning to raise US$ 300-500 m via bonds by the end of November. The company is looking to finance some solar and wind power projects. It is also envisaging financing a few big-ticket power projects being set up by private players. It must be noted that the company is engaged in the financing of power generation, transmission and distribution projects throughout India. REC occupies a nodal position in the government's plans for the growth of the Indian power sector. This is particularly for developing the power infrastructure in rural areas. Moreover, the company performed strongly in 1QFY11 as advances grew by 28% YoY and net interest margins (NIMs) improved. The stock closed lower today.

As per a leading business daily, pharma major Sun Pharma has ended its tender offer for Taro’s shares. This brings the company closer to purchasing the promoters’ controlling shares of Taro. It must be noted that although Sun Pharma had announced its acquisition of Taro in 2007, the latter later terminated the agreement sparking a legal feud between the two. Recently, the US and Israeli courts ruled in favour of Sun Pharma. At the time of acquisition Taro was a loss making company but had around 90% of its sales from the US market and hence the rationale for the acquisition. Sun Pharma has already invested US$ 60 m into Taro to prevent it from going bankrupt. On purchasing the 12% stake from the promoters which controls 41% of the voting rights, Sun Pharma will be able increase its voting rights in Taro to as much as 65%, from the 36% it bought in 2007. This with an agreement to take control later for US$ 454 m. The stock closed higher today.

Sensex surges despite RBI's move
01:30 pm

Investors did not seem to be impacted by the RBI’s move as strong buying activity led the Indian indices to rise sharply above the dotted line during the previous hour of trade. Currently, stocks from the realty, banking and FMCG spaces are amongst the top gainers, whole those from the IT and metal spaces are the top losers.

The BSE-Sensex is trading higher by around 85 points (up 0.4%), while the NSE-Nifty is up by about 30 points (up 0.6%). Mid and small cap stocks have followed suit with the BSE-Midcap and BSE-Smallcap indices trading higher by 0.1% and 0.3% respectively. The rupee is trading at 46.22 to the US dollar.

In its fifth round of successive interest rate hikes, the RBI reiterated its strong stand against inflation as it hiked the repo rate by 0.25% and the reverse repo by 0.5%. These rates will now stand at 6% and 5% respectively, with immediate effect. RBI’s act comes on the back of its view that the economic recovery is now showing signs of consolidation. The Indian economy grew at an estimated 8.8% in Q1 of FY11. It has cited the examples of improving manufacturing growth through the index of industrial production (IIP), which surged 13.8% in July 2010. This improved from 5.8% in June this year.

The RBI raised concerns on the inflation front. The published wholesale price index (WPI) inflation rate for August 2010 was based on the new series (with the base year being FY05) for the first time. The new series has a better coverage of items with manufacturing products having a slightly higher weight. Both series, however, indicated similar broad inflation trends. Average monthly WPI inflation for 1QFY11, based on either series, is in double digits, 10.6% (new series) and 11.1% (old series). July, 2010 saw some moderation in inflation. This further continued in August. WPI inflation fell to 8.5% in August from 9.8% in July 2010 as per the new series.

Engineering stocks are currently trading mixed with Alstom Projects and Alfa Laval trading firm while Thermax and Jyoti Structures are trading weak. Air-conditioning and cooling products major Voltas is reportedly looking at going slow on the bidding process for projects in the Middle East. As per the company, competition in the electromechanical space has increased in the region and as such is looking at going slow in the bidding process. It may be noted that Voltas earns a substantial portion of its international revenues from the Middle East. International revenues contribute to about 41% of revenues.

While this may seem as a concern for the company, we believe it is a positive development as the company seems to be more concerned with profitability rather than volumes. During FY10, the company earned nearly 65% of its revenues from the Electro-Mechanical Projects & Services space. In fact, in the quarter ended June 2010, the share of revenues from this segment dropped to 49% as compared to 56% during the corresponding quarter last year. Revenues from the segment dropped by 1% YoY as well. However, at the PBIT level, the company saw a slight decline in margins which stood at 8.5% as compared to 8.7% during the corresponding quarter last year. In FY10, this segment’s margins stood at 9.9%.

Flat with negative bias
11:30 am

After starting today's session on a positive note in the morning Indian indices have lost most of their gains, and are trading in the red currently. Other key Asian markets are trading weak with China down 2%. Currently heavyweights in the Sensex are trading weak with stocks from the FMCG and banking space witnessing some buying activity. However, stocks from the IT and realty space are trading in the negative.

Currently, the BSE-Sensex is trading down by around 19 points, while the NSE-Nifty is down by about 12 points. Mid and small cap stocks are trading mixed as the BSE-Midcap is down by 0.2% while the BSE-Smallcap is trading up by 0.2%. The rupee is trading at 46.35 to the US dollar.

Oil & gas stocks are trading mixed with Cairn India and HPCL leading the gains. Essar Oil and RNRL were however trading weak. Indian Oil Corporation (IOC) plans to use the funds from its public offer for expansion of its petrochemical and LNG business. These were previously put on hold due to a funding crunch. The company aims to raise Rs 100 bn through an issue of 10% fresh equity in the last quarter of FY11. The government will also be offloading 10% stake in IOC. It was earlier forced to put projects on hold including petrochemical plants at Paradip in Orissa and at Koyali refinery in Gujarat. The Orissa project is likely to cost Rs 150 bn. An LNG terminal at Ennore in Tamil Nadu was also put on hold due to stressed finances caused by losses on the sale of petrol, diesel, LPG and kerosene at regulated prices.

The share sale proceeds would help IOC revive its petrochem projects, the 2.5 m tonne LNG terminal, and an associated 1,000 MW power plant in Ennore. The projects at Tamil Nadu are likely to cost Rs 80 bn. IOC has identified petrochemicals as a prime driver of its future growth. It has been investing in projects which will help it tap rising demand for plastics and synthetic rubbers in India.

Auto stocks are trading mixed with Maruti Suzuki and Tata Motors leading the gains. However, Exide and Escorts are trading weak. Maruti expects its sales momentum to slow down in the second half of the fiscal compared to the 26% growth achieved so far in the first half. High base effect and inflationary pressures persisting in the economy are likely to impact growth in the second half. Although the company is anticipating lower growth it is hopeful of maintaining the number of units sold per month in the historical past.

Recently Maruti has also seen its market share fall below 50% for the first time. The company is losing customers to rivals because of production constraints and high waiting period for some of its cars. However, now the company is planning to increase its output by 10% to 0.11 m units every month from October. Maruti also plans to expand its production capacity to 1.75 m units per annum by 2013 from the exiting 1.2 m units.

Banking stocks lead markets higher
09:30 am

The Indian markets have started today's session on a positive note. The benchmark indices opened below the breakeven mark but soon moved into the positive territory. Other key Asian markets are in the red with China (down 1.5%) leading the pack of losers. The US markets ended higher by 0.4% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with banking majors attracting investors' interest. The BSE-Sensex is trading higher by around 35 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 0.3% and 0.4% respectively. The rupee is trading at 46.39 to the US dollar.

Banking stocks have opened the day on a strong note. Gainers here include Central Bank and SBI. As per a leading business daily, SBI and ICICI Bank are looking to outsource ATM management. The deals are expected to be in the range of Rs 45 bn and Rs 10 bn respectively. The banking giants are taking cue from smaller banks who have avoided the hassle of running their ATM networks by outsourcing managed services to third-party vendors. In fact, SBI has recently invited bids to manage its 20,000 ATMs and the 5,000 ATMs it plans to open in FY11. It has asked interested parties to quote a price per ATM per annum for a period of three years. ICICI is also looking to outsource the management of its 5,600 ATMs. Interestingly, Axis Bank has gone a step further and has outsourced the responsibility of setting up new ATMs, apart from managing them. It may be noted that setting up and managing ATMs has become a costly affair for banks after the RBI asked them to stop charging customers for cash withdrawals.

Steel stocks have opened the day on a positive note. Gainers here include Bhushan Steel and Tata Steel. As per a leading business daily, the Indian steel industry will increase its capacity by 32% next year. This will cost about Rs 720 bn. Given the land acquisition woes, most of this capacity addition will come from expansion of existing facilities. Most of the addition will be in flat steel, used in automobiles and white goods, while long products used in construction will account for about 30%. The highest capacity addition will be by Essar Steel at 5 m tonnes (MT), followed by Tata Steel, JSW Steel and RINL (3 MT each). It may be noted that the addition may be far short of the steel ministry's projections of 124 MT by FY12, but at least it is not going to be hit by land acquisition woes or lack of financial closure.

This could hurt India's growth story

Indian economic forecasters are a blessed lot. They don't have to fiddle around with their spread sheets a great deal when it comes to GDP forecasting. A growth in the region of 7%-8% has come to be known as India's birthright. It cannot possibly deviate too much from this number at least in the foreseeable future.

However, such complacency could well prove to be dangerous. Especially given the state of India's manufacturing. It should be noted that India's growth is not typical of other emerging nations. It indeed has some unique features to it. None so unique than the fact that India seems to have completely bypassed a revolution of sorts in manufacturing. In other words, services form a much greater percentage of its GDP than manufacturing.

And therein lies India's biggest problem. Goldman Sachs predicted a couple of months back that India will add a whopping 110 m people to global workforce by 2020. This is the highest for any nation. It will also leave China in shade whose labour force will increase by only around 15 m people.

By the looks of it, this is indeed the opportunity of a lifetime for India to take its GDP and thus the standard of living of its population to a completely different trajectory. But this does not seem possible without a credible manufacturing plan. As per the Wall Street journal, India's services sector might roughly absorb only around 40 m people out of the 110 m. Thus, it goes without saying that the rest of the job seekers will have to be either absorbed by agriculture or manufacturing.

India's agriculture sector, we believe, is already overburdened. Hence, it seems very unlikely that it could absorb still greater workforce in the coming future. Infact, we wouldn't be surprised to see people coming out of the same and moving into other sectors. The onus of absorbing the greatest percentage of India's incremental workforce will thus fall on the manufacturing sector. And this is where India's growth story will either be made or it will come apart.

Is India's manufacturing sector prepared to absorb workforce on such a large scale? Looks highly unlikely. And even if it does, it appears as if it is going to do a very poor job of it. This is because majority of India's workforce in the manufacturing space is concentrated in the small and medium enterprises (SMEs). And these are not exactly powerhouses of productivity. Furthermore, archaic labour laws and strict regulations are not allowing these SMEs to grow big enough and take advantage of India's huge demographic dividend.

This sorry state of affairs has left Indian manufacturing in a very uncomfortable position. Here, the middle layer is hugely conspicuous by its absence. We either have capital intensive and technologically very sophisticated large manufacturing firms or we have low productivity harbouring SMEs.

It is obvious that in order to have more equitable and sustainable growth, Indian manufacturing will have to undergo a sea change. Unfortunately though, there are very few signs that such a change is indeed coming. If it doesn't soon enough then we risk underutilising the tremendous power of our demographic dividend. And achieve only a pale shadow of what we possibly could have.