Volatile start to the week

Indian equity markets started the day on a positive note but turned volatile after the release of inflation data. Markets dropped after rising to over 1% intra-day on back of selling pressure witnessed in realty and IT makers amid caution ahead of key global and local events this week and finally closed flat for the day. Auto, Banking and PSU sectors were the leading pack of gainers. While the BSE Sensex closed higher by 9 points, the NSE-Nifty closed lower by 10 points. BSE Mid Cap and the BSE Small Cap closed on a negative note.

As regards global markets, Asian indices closed in the green. European indices have opened in the green. The rupee was trading at Rs 62.7 to the dollar at the time of writing.

Wholesale price index (WPI) inflation rose at the fastest pace for six months in August, driven by an 18% jump in food prices. WPI based inflation rose to a six-month high of 6.1% in August against 5.79 in July, according to the data released by Ministry of Commerce and Industry. Food inflation stood at a massive 18.1% in August against 11.9% in July. The inflation in vegetables soared to 77.8% in August against 46.5% in the previous month. Onion prices rose by a mammoth 244.6% against 144.9%. The inflation for manufactured products eased to 1.9% against 2.8% in July. Inflation in fuel and power rose marginally to 11.3% in August from 11.3% in the previous month.

According to a leading financial daily, L&T's construction wing has received new orders worth Rs 17.9 bn across various business segments in the last two and a half months. The metallurgical and material handling business got a Rs 5.5 bn order from Northern Coalfields, a subsidiary of Coal India, for engineering, procurement and construction of coal handling package at Singrauli in Madhya Pradesh. The power transmission and distribution business secured orders worth Rs 1.2 bn from Power Grid Corporation for supply, erection, testing and commissioning of transmission towers. Additional orders worth Rs 11.2 bn have also been received from various ongoing projects of heavy civil and water and renewable energy businesses.

Inflation data disappoints markets
01:30 pm

Indian equity markets have fallen in the last 2 hours of trade and are trading in red. This seems to be largely attributable to disappointing wholesale price inflation (WPI) number which was up at 6.1% from 5.8% in July 2013. The headline inflation rose at the fastest pace in last six months, this was largely driven by the surge in food prices. Most sectors are trading in red barring the stocks from Banking, Auto and FMCG space.

BSE-Sensex is down by 13 points and NSE-Nifty is trading down by 16 points. While BSE Mid Cap is trading down by 0.83%, BSE Small Cap index is trading down by 0.73%. The rupee is trading at 62.75 to the US dollar.

Majority of the steel stocks are trading in the green with JSW Steel and Maharashtra Seamless being the biggest gainers. As per a leading financial daily, Steel Authority of India Ltd (SAIL) is contemplating setting up a special steel venture with Japan's Kobe Steel. The steel thus manufactured would be utilized in the defence sector or automobiles. This will be SAIL's second joint venture with Kobe which is a pioneer in special steel. SAIL had signed a Memorandum of Understanding (MOU) with Kobe last year for 0.5 m tonne iron nugget plant using the ITMK3 technology. This project will come up at the company's alloy steel plant in Durgapur. SAIL is on an expansion and modernization drive and is expected to have an installed steel capacity of 19 m tonnes by the end of FY14. As per the company, expansion of its Bhilai plant will take place in FY15 and raise its capacity to 23.5 m tonnes. However, the company has deferred its long term target of 50 m tonnes hot metal capacity from 2020 to 2025. This is in line with the government's target of 300 m tonnes of installed capacity by 2025. Reportedly, the installed capacity in the country stands around 90 m tonnes. SAIL has said that project financing is the biggest challenge in realizing the target set and has sought government aid in this regard. The stock is currently trading flat.

Most of the Indian pharma stocks are trading in red with Ranbaxy Ltd and Wockhardt Ltd being the top losers. Sun pharmaceuticals Ltd, has received approval for lansoprazole, delayed released capsules of strength 15mg and 30mg. The said drug is bioequivalent to Takeda's Prevacid brand. Reportedly, the US market size of this drug is $430 m per annum. Prevacid is indicated for short term treatment (4 weeks) for healing and symptoms of active duodenal ulcer. With this approval, Sun pharma now has total 320 ANDAs (Abbreviated new drug application) and approximatley 133 drugs await approval. Some Indian generic companies viz Dr Reddy's, Natco pharma, Wockhardt Ltd and Zydus healthcare are also having approval for the drug. One should also note that Prevacid 15mg is also sold by some companies as an over the counter (OTC)drug in the US market.

Indian indices remain firm
11:30 am

After a good start, the Indian stock markets have remained in the green in the morning session. All sectors except pharma and software are trading higher.

The BSE-Sensex is up 210 points while the NSE-Nifty is trading up 55 points. The BSE Mid Cap and BSE Small Cap indices are trading up by 0.5% and 0.8% respectively. The Rupee is trading at 63.63 to the US Dollar.

Most Information Technology (IT) stocks are trading lower today. HCL Technologies (HCL Tech) and Tata Consultancy Services (TCS) are among the top losers. According to a leading business daily HCL Tech is considering the possibility of merging HCL Infosystems with itself. Both companies are owned by Shiv Nadar promoted HCL Corporation. As per the daily, the sales teams of both HCL Tech and HCL Infosystems have begun to work closely with each other by coordinating their activities and presenting themselves as one united entity. They have begun jointly pitching for new technology service contracts in India and the Middle East. Two companies are said to have shared their client details with each other.

HCL Technologies is focused primarily on the US, Europe and Asia-Pacific regions and has sales of Rs 257.34 bn in the year ended June 30, 2013. Revenues come mostly from Indian and Middle Eastern clients and comprises mainly of selling computing hardware to the Indian government and by acting as a national distributor for mobile phones, computers, laptops and printers. Due to the fact that margins are lower in the IT business sourced from India, the merger, if were to go happen, could adversely affect margins of HCL Tech. However it will strengthen its domestic presence and increase its revenues.

Indian Pharma stocks are trading mixed today. Panacea Biotech and Ipca Labs leading the gainers; while Wockhardt and Ranbaxy are seeing losses. The stock of Ranbaxy is down by over 20% today owing to the US Food and Drug Administration (USFDA)'s import alert on its Mohali plant. According to a leading business daily, Form 483 was also issued to the company for its Mohali plant earlier. This indicates there were certain discrepancies in manufacturing practices which the US FDA had pointed out earlier. However, since the company failed to comply with those issues, an import alert has been issued. In November 2012 as well the USFDA had directed for the recall of its generic drug Lipitor; which was being manufactured at the same Mohali facility. It was reported that glass particles were found in certain lots of the drug. The company was supposed to be working with USFDA for the implementation of corrective measures.

Indian stock markets open firm
09:30 am

The major Asian stock markets have opened the day on a mixed note with stock markets in Singapore (up 1.6%) and Indonesia (up 1.8%) leading the gains. However, the stock markets in China (down .3%) and Malaysia (down 1.6%) were leading the losses. The Indian equity market indices have opened the day on a firm note. Barring healthcare, all sectoral indices have opened in the green with stocks in the banking and capital goods leading the gains.

The Sensex today is up by around 289 points (1.5%), while the NSE-Nifty is up by around 89 points (1.5%). Midcap and small cap stocks have opened in the green as well with the BSE Mid Cap and BSE Small Cap indices up by around 0.7% each. The rupee is trading at Rs 62.6 to the US dollar.

Energy stocks have opened the day on a firm note with Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Ltd (OIL) leading the gains. As per a leading financial daily, state run ONGC and Royal Dutch Shell intend to exercise their pre-emption rights to buy a 35 % stake in a Brazilian oil block which Petrobras was planning to sell China's Sinochem Group. Petrobras had agreed to sell the block to Sinochem Group for US$ 1.54 bn last year. The block has been in production since 2009 and has produced more than 70 million barrels of oil equivalent so far. As per Shell, the second phase development of the block is likely to start by the end of the current year. Post the second phase development, the peak production from the block is expected to be around 35,000 barrels of oil equivalent per day. ONGC currently has a 15% stake in the block. Theoretically, it entitles ONGC to a further 8% stake from the 35% stake that Petrobras is planning to sell to Sinochem. Shell is the operator in the block with 50% share. While there has been no confirmation yet, as per the daily, ONGC plans to buy between 10% to 15% share in the block (higher than its entitlement) while Shell is likely to buy between 20%-25% from Petrobras. This will be the first case of an Indian oil exploration and production company exercising its pre-emption rights to block the sale of an oil block to Chinese firm.

Power stocks have opened the day on a firm note with Satluj Jal Vidyut Ltd and National Hydroelectric Power Corporation (NHPC) Ltd leading the gains.. As per a leading financial daily, Power Grid Corporation of India Ltd (PGCIL) has drawn up an annual capital expenditure plan of Rs 200 bn for the next five years. The company plans to expand further in the transmission business. As per the management, the company has already placed orders for projects worth Rs 800 bn. Also, its capital expenditure work for projects worth around Rs 400 bn is already in progress. The company is currently working on the National Transmission Asset Management Centre (NTAMC), in which it plans to operate 192 substations from a remote location. It has already started operations in 25 substations under the system. As per the management, the company's future projects would be to set up 1,200 kilo volt lines. The company is already conducting tests on the platform in the National Test Station at Bina, Madhya Pradesh with participation of Indian manufacturers. Its first 1,200 kv lines is from Wardha to Aurangabad and is expected to start in 2015-16 or 2016-17.

Are FIIs a threat to markets?

Foreign Institutional Investors or FIIs play a very influential role in the Indian markets. As per an article printed in the Business Standard recently, FIIs have deployed close to US$ 200 bn in the Indian markets. And given the relatively lesser amount of capital deployed into the equity markets by the domestic institutions, makes the Indian markets very vulnerable to market participation of foreign investors. 'There is no domestic institution that has the firepower to handle even US$ 5 billion of foreign selling.' reports the daily.

This is essentially why their participation is considered very important, especially when taking a broader view on the markets. Any news, negative or positive from the country tends to make the markets move in a sharp manner and that too in a short span.

The concerns over the past many months were over the recovery of the US economy, which would drive foreign money out of emerging markets and back into the home country. Also, the scenario of things moving along at a slow pace back home in India has been a concern in the eyes of the foreign investors; who have the option to park their money in other emerging markets as well.

Having said that, things have not gone as expected. The slowdown in the US will seemingly be prolonged. Plus, the past two weeks seemed to have given the Indian markets a sign of hope of things improving from here on. And more importantly at a faster pace! The author of the article makes a point that while indications of reforms have been made in the recent past, there has been no real result as yet. As such, if the improvements and reforms progress do not happen soon, FIIs would eventually lose their patience. And according to him, the only reason India remains attractive is the hope of reforms in governance; especially considering that the broader economic parameters that have been moving in the not preferred directions.

'There cannot be a structural bull market in India in the absence of these reforms, and investors might give up and pull out if we do not deliver these structural improvements. If we experience three years of sub-five per cent growth, no political appetite for structural reform, and investors holding stocks that are expensive, surely at some stage someone will ask: why are we invested in this country?' he states.

Not to mention the quality stocks - in which the FIIs are significantly invested - are not really trading cheap. The chart below indicates the same.

Data Source: ACE Equity

Given the volatile earnings trend over the past few quarters, we thought gauging valuations by looking at the price to book value method would be better. Until June 2011, the BSE-500 and the frontline BSE-Sensex stocks were trading at pretty much the same valuations. However, since then one can see the huge difference that has come about. Be it the poor earnings or negative overall sentiments, majority of the stocks have moved lower.

What does this mean for investors? It basically throws up opportunities to find companies lower down the market capitalisation ladder. Whether the current valuations are justified for the bluest of blue chips is altogether another discussion which we will leave for another day.

We also believe that one should not really worry about FIIs and their views on the Indian markets. Sure, if they begin taking money out, it would lead to very volatile times. But at the same time, the 'quality' stocks would become cheaper, which is essentially what long term value investors would love. As such, one could treat such liquidity risk as his friend.