Power, banks gain in a choppy session

At the end of what was a very choppy session, taking cues from their peers in Asia, the indices in Indian equity markets closed the day well below the dotted line. Closing near the day's lows, the BSE-Sensex closed lower by around 79 points whereas losses on the NSE-Nifty came in at around 22 points (down 0.4%). BSE Mid Cap and BSE Small Cap indices, however, bucked the trend, edging higher by around 0.3% each. Select power, banking and auto stocks managed to find investor interest.

Asian indices across the board, except China, closed lower today with Europe too trading in the negative currently. The rupee was placed at Rs 53.46 to the dollar at the time of writing.

After reforms in diesel pricing and FDI in retail and aviation, the government is expected to address some of the reform needs of India's beleaguered power sector today. Hence, power sector stocks registered smart gains in a choppy market today on the back of expectation of restructuring of loans of state electricity boards. The Chaturvedi panel's recommendations are likely to be implemented. This will entail 50% of the short term debt of SEBs to be taken over by the respective states and the balance 50% to be restructured by banks.

The government is set to offer a bailout to its cash-strapped power distributors that would help restructure more than US$35 bn in debt but do little to reform a sector whose dysfunction has exacerbated the country's growth-sapping energy crisis. A lifeline for power distributors (SEBs) would free up cash and help them buy more power to plug their energy gaps. However, the loan restructuring cold mean additional NPA burden for PSU banks.

Meanwhile, PSU banking major, Bank of Baroda is planning to hire around 20,000 people over the next four years and will add more than 500 domestic and international branches and offices in the current fiscal. The bank has a network of 4,000 branches in India and 96 foreign branches and offices. With its net NPA (non-performing assets) at 0.5% of advances, the bank has relatively lower NPAs among peer banks. However, the share of assets restructuring stood at 5.5% of advances. The bank is also targeting loan growth of 19% in FY13.

IT, FMCG stocks not in favour today
01:30 pm

The Indian equity markets continued to trade around the dotted line during the previous two hours of trade. While stocks from IT and FMCG spaces are amongst the least favoured, those from the realty and power sectors are leading the pack of gainers. Stocks from the capital goods and metal spaces have also managed to find some interest from investors.

The Sensex today is trading lower by about 4 points, while the NSE-Nifty is trading higher by about 3 points. Stocks from the midcap and smallcap spaces continue to outperform their larger peers as the BSE Mid Cap and BSE Small Cap indices are up by over 1% each. The rupee is trading at 53.29 to the US dollar.

It may be recalled that Standard & Poor had cut the outlook on India's sovereign rating of 'BBB-' to negative from stable in April. Now, the rating agency has cut India's GDP (Gross Domestic Product) forecast to 5.5%. This is despite the slew of policy measures announced last week. This forecasted figure is lower by 100 basis points from its earlier projections of 6.5%. The latter is the growth rate that the Reserve Bank of India (RBI) has estimated. On the other hand, the Prime Minister's economic advisory council's forecast is 6.7%. In 1QFY13, the growth rate stood at 5.5%, signaling that there is a significant amount of catching up to do if one goes by the government's forecast figures.

Stocks of technology companies are trading weak with HCL Technologies, TCS, Tech Mahindra and Infosys leading the pack of losers. A leading business daily has reported that the increasing number of onsite engineers of IT majors sitting on the bench will impact their profitability in the short term. It is reported that utilization rates of such employees has fallen to 90% from 97% at the start of the year. It may be noted that IT companies continued their hiring spree pose the overall slowdown hitting the US and European economies are business and contract volumes continued to rise at a steady pace. Hiring also continued in anticipation of a bounce back in economy for these regions. However, with clients still going easy on their technology spends, the situation of lower utilization rates has occurred. As per the leading business daily, this is the situation being witnessed by all of the big four IT firms.

Mid and Small Caps in the limelight
11:30 am

Indian equity markets continue to trade flat over the last two hours of trade. Power and realty stocks witnessed maximum buying interest while FMCG and IT stocks witnessed maximum selling pressure.

The Sensex today is up by 10 points, while the NSE-Nifty today is up by 6 points. BSE Mid Cap index and the BSE Small Cap index are up by 1.10% and 1.15%. The rupee is trading at 53.26 to the US dollar.

Energy stocks are trading in the red. Gas Authority Of India Ltd. (GAIL) and Oil and Natural Gas Corporation (ONGC) are the biggest losers while Gujrat State Petronet (GSPL) and Hindustan Petroleum Corporation Ltd (HPCL) are the biggest gainers. According to a leading financial daily, Bharat Petroleum Corporation Ltd. (BPCL) has allocated Rs 400-450 bn towards capital expenditure (capex) for the next four to five years. This allocation will be spent on upstream, refinery expansion and other infrastructure development. The company has also said that raising funds of this magnitude would not be a problem as BPCL has many discoveries and is already in talks with domestic banks. A consortium of domestic banks led by State Bank of India (SBI), is ready to lend and these will be dollar-dominated borrowings. The company has many gas blocks in Mozambique, 10 oil blocks in Brazil, and some oil and gas blocks in Indonesia, Australia, Britain, East Timor, and a shale gas project.

Auto stocks are trading strong led by Escorts and Maruti Suzuki. According to a leading financial daily, Hero MotoCorp Limited is planning to enter the retail finance business thereby enabling potential customers to purchase their products. The Munjal family owned company, already has a financing arm Hero FinCorp (formerly Hero Honda FinLease). Hero FinCorp supports some of its component suppliers and dealers by financing their working capital expenditure. The auto company is mulling providing dedicated easy loan options for its customers. Hero's peer Bajaj Auto too has a similar financing arm by the name of Bajaj Finance. We may note here that financing two wheeler purchases is a costly affair. Two-wheeler finance comes at a steep 22-24%, almost double that of the car segment.

Indian share markets open weak
09:30 am

The major Asian stock markets have opened the day on a mixed note with markets in China (up 0.3%) and Taiwan (up 0.2%) leading the gains in the region. However, markets in Malaysia (down 0.8%) and South Korea (down 0.3%) are witnessing losses. The Indian share market indices have opened the day in the red. The stocks in the capital goods and FMCG sector are leading the losses. However, stocks in power and realty space are witnessing gains.

The Sensex today is down by around 63 points (0.3%), while the NSE-Nifty is down by around 17 points (0.3%). Mid and small cap stocks are however trading in the green with the BSE Mid Cap and BSE Small Cap indices up by around 0.3% and 0.4% respectively. The rupee is trading at Rs 53.17 to the US dollar.

Energy stocks have opened the day on a mixed note with Gujarat Gas and Essar Oil leading the gains. However, Reliance Industries Ltd and Gas Authority of India Ltd (GAIL) are facing selling pressure. As per a leading financial daily, Reliance Industries Ltd (RIL) and its partner British Petroleum (BP) plan to surrender two more exploration blocks. This will reduce their tally to 14 from 21 a year ago when the government approved BP's US$7.2-bn deal to pick up stakes in Reliance's blocks. As per a recent letter to Directorate-General of Hydrocarbons (DGH), RIL said the contractor had spent US$309 m in the two deepwater blocks. It now wants to relinquish the blocks after completing more than the committed exploration works, including drilling four wells. The company has said that the block falls in a high risk low reward category. As per the industry sources, RIL's exploration & production (E&P) portfolio has shrunk to almost half since it announced the deal with BP in February 2011.

Auto stocks have opened the day on a firm note with Hero Motocorp and Bajaj Auto leading the pack of gainers. However, Eicher Motors and Maharashtra scooters are witnessing losses. As per a leading financial daily, Maruti Suzuki India is planning to launch a completely new version of its best selling model Alto. The move is a part of its effort to regain lost ground in small car segment. Through this, the company expects to overcome tough market conditions, especially high petrol price and interest rates that have hurt the sales of small cars. It is also offering CNG (compressed natural gas) option in the new Alto 800.The new version of Alto will be launched in October and will replace the existing Alto. The company has spent around Rs 4.7 bn in developing the new model. It is banking on Alto 800's improved fuel efficiency which is 15% higher than the previous model as a key factor for pulling customers.

Why reforms are not enough?

Under immense pressure from credit rating agencies, corporate media and international and domestic business houses, India's government has announced a series of big bang economic reforms. These reforms are aimed at reducing the budget deficit at the expense of working people, attract foreign investment, and spur the reorganization of key economic sectors so as to make them more profitable for capital.

Opening up of sectors to FDI should lead to increased capital inflows, create new capacities and jobs in the future. All of this should augur well for the economy over the medium-term. In the short-term, however, it is not clear whether the measures will make a mend in the single biggest problem facing India today: its fiscal deficit.

Consider that the diesel price hike was only a one-off measure, and that diesel subsidies continue to be uncapped and at the mercy of global oil prices, accounting for more than half of the USD $30.8 bn oil subsidy bill. In contrast, the cooking gas subsidy, which was capped, is estimated to contribute just one-sixth of the total oil subsidy bill.

The risk of substantial fiscal slippage will continue unless the government takes more concrete steps, such as further cutting diesel and fertilizer subsidies, cutting planned expenditure and increasing the stake sale target. The government should also resolve the coal issue, introduce transparent and clear policies on land acquisition, mining rights and other environmental issues, and bring in accountability of the government and public sector.

It had been so long since Delhi had announced any major reforms at all - let alone a series in such quick succession. But there remains' the lingering fear that some of the measures could be rolled back under political pressure. This time, however, Manmohan Singh and the Congress Party have indicated that they are determined to face down any opposition within the UPA. It is also important to consider that some of the reforms are basic first steps and, critically, must be followed up by sustained action for them to be effective.