Earnings blues grip markets

Indian markets seem to have taken on to a rollercoaster ride as for the third consecutive day the indices showed wide fluctuation in investor sentiments. Triggered by lower than expected profit performance by IT heavyweight Infosys in 3QFY11 results, the index heavyweights shed considerable gains today. The BSE-Sensex edged lower by around 351 (down 1.8%) points today whereas NSE-Nifty closed with losses of around 111 points. The BSE Midcap and BSE Small cap indices also lost 0.9% and 0.7% respectively.

Amongst global markets, most other Asian indices closed strong today whereas Europe has opened on a cautious note. The rupee was trading at Rs 45 to the dollar at the time of writing.

Hospitality major Indian Hotels, which owns the Taj chain, plans to execute a pipeline of 43 projects over the next 36-48 months. As per the management this will result in addition of 10,000-12,000 rooms. While the expansion will be across all its properties, the emphasis would be on expanding its budget category under the Ginger brand. The company is planning to increase the number of Ginger hotels to 150-200 this decade. The management has also added that the average room rentals (ARR) had been restored to pre-2008 levels, showing the return of pricing power.

India's food inflation woes showed some signs of easing this week, albeit not enough to bring down the overall inflation numbers. India has the highest food inflation of any major Asian economy. This is while other emerging markets such as China and Brazil are also battling double-digit food price rises. India's food price index rose 16.9% this week, driven mainly by high vegetable prices. The fuel price index climbed 11.5% this week. In the previous week, annual food and fuel inflation stood at 18.3% and 11.6% respectively. Food makes up about 14% of the wholesale price index, while fuel contributes about 15%. Given the firmness in prices another round of interest rate hikes are expected to be around the corner.

As per a business daily, India will likely allow domestic refiners to utilize the government's emergency crude oil reserve facilities. This would be a change from the government's earlier position that the strategic reserves would only be used by the government to meet any supply disruptions. State-run Indian Strategic Petroleum Reserves is building 5.33 m metric tons of strategic crude oil storages at three locations in south India - 1.3 m tons at Visakhapatnam, 1.5 m tons in Mangalore and 2.5 m tons at Padur. The reserves will account for about 3% of India's annual crude import, which stood at 159.3 m tons in the year through March 2010. India currently imports around 80% of its crude oil requirement, and the emergency reserves can also serve as a buffer against fluctuations in crude oil prices.

Mkts react to disappointing Infy results
01:30 pm

Indian indices plummeted sharply during the previous two hours as profit booking in heavyweights instensified. All sectoral indices are in the red with stocks from the IT and banking space leading the losses.

The BSE-Sensex is down by 321 points while NSE-Nifty is trading 102 points below the dotted line. Both BSE Midcap and BSE Small cap index are also trading lower by 0.58% and 0.15% respectively. The rupee is trading at 45.13 to the US dollar.

IT stocks are trading weak with Infosys being the biggest loser. IT services major Infosys has announced its 3QFY11 consolidated results. The company has reported a 2.3% QoQ growth in its sales and a growth of 2.5% QoQ in its net profit. Operating margins remained flat at 30.2% as compared to the previous quarter.

On an overall basis, the growth in sales was owing to higher volumes (man-hours billed) during the quarter. The company added 40 new clients during the quarter taking the total number of active clients to 612. Utilization rates declined to 72.6% during the quarter as compared to 74.3% during the previous quarter. This was mainly on account of larger number of trainees during the quarter. The company continued its hiring spree during the current quarter as well. However, the attrition rate continued to remain high. It stood at 17.5% at the end of the third quarter, as compared to 17.1% at the end of the preceding quarter.

Stocks of capital goods companies are trading weak led by Praj Industries, Triveni Engineering and Areva T&D. After ending higher by 13% yesterday, the stock of wind turbine manufacturer Suzlon is trading marginally lower today. Anyways, yesterday’s gains were on the back of the company announcing that the Suzlon Group signing a memorandum of understanding (MoU) with the Government of Gujarat for developing 1,000 megawatt (MW) of new wind power capacity in the state. This project is expected to be done over a period of three years. This MoU was signed at the Vibrant Gujarat conference. No doubt, this is a massive order for the company. In fact, the past quarter was good for the company with the order inflow being about 400 MW during Q2FY11. Order backlog at the end of the quarter ended September 2010 stood at 693 MW (from the India business). At the end of Q2FY11, the group order book of Suzlon was at US$ 5.4 bn as compared to US$ 4.9 bn at the end of Q1FY11. However, execution will remain the key going forward. Suzlon is currently going through a rough phase on the back of poor market conditions, a factor that even led to it reporting losses at the operating level.  Not to mention the huge debt that the company has piled up on its books.

Midcaps, smallcaps in the limelight
11:30 am

Indian indices continued their journey south on profit booking in heavy weights over the previous two hours of trade. Stocks from the IT and banking space are trading weak, while stocks from the capital goods and realty space are trading firm.

The BSE-Sensex is down by 127 points while NSE-Nifty is trading 39 points below the dotted line. BSE-Midcap is trading up by 0.3%, while BSE Small cap index is trading 0.6% above yesterday’s closing. The rupee is trading at 45.13 to the US dollar.

Steel stocks are trading mixed with MMTC and Jindal Saw Ltd trading firm, while Tayo Rolls and Tata Steel are trading weak. As per a statement by Tata Steel, the company has registered a 4.8% YoY dip in sales for 3QFY11. Sales for the quarter stood at 5.9 MT as a result of seasonal slowdown in demand from Europe. On a standalone basis, Tata Steel’s sales in India were up by 3% YoY. On the other hand, deliveries in both Europe and South-East Asia were down by 8% YoY and 14% YoY respectively. Other than a dip in sales, Tata Steel expects its operating income to be lower due to higher raw material prices. The company as a whole produced 6.1 MT of steel during the quarter, a majority of which was produced by Tata Steel Europe (formerly known as Corus). The company also added that the pricing environment domestically was mixed during the quarter. South-East Asian operations were marginally affected in 3QFY11 due to rising scrap prices and delay in the increase in the finished steel product prices.

Real Estate stocks are trading firm with Sobha Developers and Ansal Housing leading the gains. However, Lok Housing and Mahindra Lifespace are trading weak. Amidst the liquidity crisis in the banking sector the real estate companies are facing the heat to raise funds to invest in new projects. Apart from the liquidity crunch the recent bribes-for-loan controversy has made banks all the more skeptical in lending to real estate companies. As a result developers have turned towards alternative source of financing like PE funding. But considering the corporate governance issues and overheating in the real estate markets, the PE firms are now looking at a return on capital of about 24-25%. This is significantly higher than a return of about 20% prevailing last year. Nonetheless, developers have been seen negotiating deals even at such higher rates with no other viable option in hand. Raising money at such higher cost will further increase the overall cost of capital thereby questioning the ability of the developers to repay on time.

IT stocks weigh on the markets
09:30 am

Asian markets have opened the day on a positive note. Benchmark indices in Indonesia (up 1.2%), Japan (up 0.6%) and Hong Kong (up 0.5%) are leading the pack of gainers. Indian markets, however, have opened the day in the negative. IT stocks are the biggest losers.

The BSE-Sensex is trading lower by around 63 points (0.3%), while the NSE-Nifty is down by about 24 points (0.4%). Mid and small cap stocks are however, trading in the positive, with the BSE Midcap BSE Small cap up by 0.2% each. The rupee is trading at 45.09 to the US dollar.

Telecom incumbent Bharti Airtel has announced that it plans to launch 3G services very soon. The company that has recently revamped its logo was to launch its 3G services by the end of 2010. However, due to lack of adequate preparations, the launch was postponed to early 2011. Tata Docomo was the first to launch 3G services in the country with its launch in nine circles last year. RCOM soon followed suit with its launch in four circles. Other major players like Vodafone have announced their plans to launch their services in the quarter of Jan-Mar 2011. Bharti has won 3G spectrum for 13 circles including the lucrative metro circles of Delhi and Mumbai. We just hope that Bharti launches its services soon. After all the first mover advantage in case of telecom is huge. The more it delays its launch, the more advantage its competitors will have over the company. The stock of the company is currently trading in the green. RCOM is trading in the green as well. However, Idea Cellular has opened the day in the red.

Power stocks have opened the day on a good note. PTC India, GVK Power, Reliance Power and NTPC are the major gainers. However, stocks of Tata Power and Power Grid Corp are witnessing selling pressure. India has ambitious plans for solar energy. The national solar mission has set a target of 20,000 MW and plans to achieve this target in three phases by 2022. But solar power is expensive. However, to achieve the target, thirty solar power producers had been shortlisted by the mission on the basis of the discounts that they propose to offer. The selected companies were actually offering very cheap rates. There were fears that the companies may not actually come up and sign power purchase agreements (PPAs). However, these fears were laid to rest as these companies came forward and signed the PPAs with NTPC yesterday to set up projects with capacities of 620 MW. This comes as an important milestone for the Indian solar industry. Maybe if all goes well, then India's green power plans may actually see the sun shining by 2022.

The point of no return for US is here

Ronald Reagan. The US President during whose tenure perhaps it all begun. The inevitable slide to the massive US indebtedness we mean. And what better man to apprise us of the situation in the world’s biggest economy than the one who’s seen it all from extremely close quarters.

The man in question is none other than David Stockman, a former budget director in the Ronald Reagan administration.

Speaking to a popular US portal Raw Story, Stockman pulled no punches in trying to describe the current US state of affairs.

As expected of a budget officer, he gave some very compelling statistics. Ones that will help us clearly see the bleak future that the US economy is staring at.

He opined that before 1980, it took about US$ 1.5 of new borrowing – public or private – to generate US$ 1 of GDP growth. By the mid 1990s, it was US$ 2.5 or $3 of borrowing for a US$ 1 of GDP growth.

And now comes the biggest shocker of all. By the time the year 2007 closed, US$ 7 of public and private debt was added to the national debt to get the same US$ 1 of GDP growth!

Stockman believes that when one needs to borrow seven dollars to get one dollar of GDP growth, there is no way in the world, such a system can be sustainable. Hence, as per Stockman, the US economy seems to have reached a point of no return.

He further cautioned that we may not be at the beginning of a healthy recovery. But instead, we could be at the beginning of solving a massive financial collapse that happened in 2008.

Sadly, the US policymakers, with all their stupid ideas, are only exacerbating the problem. Perhaps, they are too scared to stop all this borrowing for they fear that its end would make the whole economy collapse.

Call it stuck between the devil and the deep sea if you will. There seems to be no easy way out for the US from its current economic mess.