Tepid start to the New Year

In a weak start to the New Year, the BSE-Sensex was amongst the lowest gainers in Asia today. Metal and consumer durables stocks saw good buying interest. But, IT and auto stocks did not see much enthusiasm. The BSE Sensex closed the session higher by around 52 points (up 0.25%), whereas NSE-Nifty saw a 23 points gain (up 0.5%). The BSE Midcap and BSE Small cap indices performed much better gaining 0.9% and 1.8% respectively.

Most of the Asian indices closed positive today, with China and Japan not yet back from the holiday break. Europe is currently seeing some good gains, with UK still on vacation. The rupee was trading at Rs 44.7 to the dollar at the time of writing.

Due to pick up in global recovery, India's exports grew by 26.5% in November 2010 on a YoY basis to US$ 18.8 bn. This makes India well on its way to achieve its target of US$ 200 bn in exports for the fiscal. The total quantum of exports for the past 8 months now stands at US$ 140 bn compared to US$ 111 bn in the previous year. But, the widening trade gap continues to be an issue due to high oil prices, leading to an increase in the import bill. Oil imports have increased over 21% in the past 8 months. Overall imports saw a 24% hike in the period. This led to a trade deficit of US$ 81.6 bn. This is expected to increase further and be in the range of US$ 120 to US$ 125 bn.

Auto stocks were the worst performers of the day. But, it was a mixed day for Hero Honda. On one side, the company's two-wheeler sales for the month of December 2010 increased by a strong 33% YoY over the corresponding month last year. On the other hand, a leading business daily reported that the senior management of one of the holding firms of the two wheeler company was involved in the recent Citibank fraud. We'll discuss these separately. First the volumes - Hero Honda's sales volumes stood at 0.5 m units for the month of December 2010. As per the company, it has recorded sales growth of 16% YoY during CY10 with cumulative sales of over 5 m units. As for the quarter ended December 2010, the company has sold over 1.4 m units, which is higher by 29% YoY.

Coming to the news relating to the arrests, a leading business daily has reported that Sanjay Gupta, the Hero Group CFO was arrested on allegations that he was involved in the recent Rs 3 bn Citibank fraud. While this development may not have any effect on Hero Honda, it does dampen the group's clean image to a certain extent. And this especially at a time when talks of the Hero Group taking over Honda's stake in the joint venture company have recently been concluded.

2010 saw the huge buyout of Piramal Healthcare's domestic formulations business by Abbott for US$ 2.2 bn plus US$ 400 in 4 annual payments. Reckitt Benckiser also announced Rs a 32.6 bn buyout of Paras Pharmaceuticals. But, we may not see many such deals going forward, if the new government proposal goes through.

India is now exploring a proposal to cap FDI in drug-makers at 49%. It also plans to make additional stake buys subject to government approval, to dissuade foreign takeovers. As of now, foreign companies can purchase as much as 100% in a domestic drugmaker without prior approval of the Foreign Investment Promotion Board (FIPB), a government body that scrutinizes investment proposals.

Small caps in the limelight
01:30 pm

Indian indices continued to trade firmly in the green during the previous two hours on the back of strong buying in heavyweights. Currently, stocks from the metal, realty and consumer durable space are leading the gains. However, stocks from the IT space are trading flat.

Currently, the BSE-Sensex is trading up by around 103 points, while the NSE-Nifty is up by about 33 points. There has been firm buying interest amongst the mid and small cap stocks as well with the BSE Midcap and BSE Small cap indices trading higher by 1.09% and 1.71% respectively. The rupee is trading at 44.74 to the US dollar.

Banking stocks are currently trading firm led by Federal Bank, HDFC Bank and Bank of India. A leading business daily has reported that India’s largest bank SBI is looking at expanding its overseas presence. For the same, the bank is looking at setting up operations in South Korea, Sao Paulo and Botswana sometime this year. It is believed that the company is planning to open up a representative office in Sao Paulo (Brazil) and a full service branch in South Korea. At Botswana, the plans are to set up a subsidiary. As of now the bank is believed to have 151 offices across 32 countries. These include the US, UK, Singapore, Canada and Mauritius. About 16% of the bank’s total business is contributed by its overseas operations. Over the last two years, the bank has been quite aggressive in expanding its international business. For instance, the bank increased its foreign offices by more than 50% in FY10 to 142. In a move to expand its operations in Southeast Asia, SBI is believed to be on a lookout for acquiring a bank in Indonesia in cash deal not exceeding US$ 100 m (Rs 4.5 bn).

Power stocks are trading firm with GVK Power & Infra and Jaiprakash Power leading the gainers. Tata Power has terminated an agreement to raise US$ 300 mn (about Rs 13.5 bn) through selling 14-15% stake in its two coal SPVs to the private equity firm Olympus Capital Holdings Asia. In June last year, the company had entered into an agreement to sell 14-15% stake in its special purpose vehicles Bhira Investments Limited and Bhivpuri Investments Limited, through issue of shares with differential rights to Olympus Capital. The private sector power major has reported that the investment was subject to completion of certain conditions precedent, as specified in the Investment Agreement. Since the conditions were not fulfilled in due time the company and both of its coal SPVs exercised their rights and terminated the deal.

Metals lead the rally
11:30 am

After starting today’s session on a positive note, Indian indices continue to trade in the green. However, other key Asian markets are trading mixed. Currently, heavyweights in the Sensex are trading firm with stocks from the consumer durables and metals space leading the gains. However, stocks from the IT space are trading in the red.

Currently, the BSE-Sensex is trading up by around 79 points, while the NSE-Nifty is up by about 19 points. There has been some buying interest amongst the mid and small cap stocks as well with the BSE Midcap and BSE Small cap indices trading higher by 0.97% and 1.46% respectively.

Engineering stocks are trading firm led by Bharat Bijlee and Emco Ltd. However, Kalpataru Power and Atlas Copco are trading weak. The finance ministry has decided not to impose any duty on import of power equipments used for mega power projects during the current five year plan. This is likely to upset power equipment manufacturers like BHEL and L&T which have been insisting for a level playing field since long. It may be noted that in the absence of any import duty Chinese equipments are about 20% cheaper than the ones produced by Indian manufacturers. Thus, continuing with the zero duty regime might pose a threat to the indigenous manufacturers.

However, the government decided to go ahead with the zero duty regime as most of the projects are underway and levying the duty mid way could upset the cost structure and thereby the delivery schedule. Again we believe that since most of the Indian manufacturers are facing execution issues India’s capacity addition targets have gone for a toss. And levying duty on Chinese imports at this juncture would make the equipments all the more expensive (which are facing shortage) further delaying the capacity addition plans.

Power stocks are trading firm with GVK Power & Infra and Jaiprakash Power leading the gainers. As per a leading financial daily, NPTC will be setting up another power plant in Andhra Pradesh. This plant will have a capacity of 4,000 MW and an estimated cost of Rs 230 bn. As per the agreement, the state government of Andhra Pradesh would be purchasing and availing 50% of the power generated at a tariff decided by the Central Electricity Regulatory Authority (CERC). In return, the state government will help the company get all the clearance required for the project and allocate land. It may be noted that this unit will be set up in Vishakhapatnam and will help improve the power availability in the state. For the 12th five year plan, India plans to add 65,000 mw of power.

Good start to 2011
09:30 am

Asian markets have started 2011 on a positive note. Hong Kong (up 1.5%) and Singapore (up 1.1%) are leading the pack of gainers. Markets in China and Japan are closed today. Indian markets have started the year on a positive note as well. Auto and metal stocks are driving the gains currently.

The BSE-Sensex is trading higher by around 145 points (0.7%), while the NSE-Nifty is up by about 40 points (0.7%). Mid and small cap stocks are trading in the positive as well, with the BSE Midcap and BSE Small cap indices up by 0.9% and 0.8% respectively. The rupee is trading at 44.75 to the US dollar.

Auto stocks have opened 2011 on a strong note. M&M, Tata Motors and Bajaj Auto are the key gainers as of now. India;s auto sales numbers for the month of December 2010 are out. And the broader picture looks good. Sales picked up for most companies (that released their numbers) during the said month. This was largely a result of year-end discounts and promotions apart from buyers; anticipation of price hikes in the New Year. Talking about specific companies, the passenger vehicle (PV) volumes for Tata Motors were up 28% YoY during the month. Sales of Nano were up around 60% YoY, though on a low base. M&M;s PV volumes also showed a 28% YoY growth during December. Other major auto players like Maruti, Hero Honda, and Bajaj Auto will be releasing their sales numbers later this week. Talking about price hike, most auto companies have talked about raising their product prices in January to counter the impact of rising commodity prices that has hurt their margins off late. Commodities like rubber, steel and aluminium form a major portion (almost 60%) of a vehicle;s total cost in India and thus it has become necessary for these companies to pass on the cost price hike to consumers. Apart from this, interest rates on loans are also expected to rise in the coming months. Amidst this, it would be interesting to see how auto companies perform over the short to medium term.

Metal stocks have opened in the green as well. Hindalco, Sterlite and Tata Steel are all witnessing buying interest. Tata Steel has outlined its plans to sign a joint venture (JV) agreement with Japan based Nippon Steel Corporation. The JV would be setting up a Rs 240 bn steel plant for producing auto grade steel. The facility is expected to start operations in Jamshedpur within the next two years. The JV would be set up with a 50:50 investment by both parties. The plant is being set up to cater to the ever growing demand for steel from the Indian auto industry. Nippon would be transferring its technology into the JV. The company is the second largest steel maker in the world after Arcelor-Mittal. Tata Steel is also in talks with Canada based New Millennium Capital for extending its agreement to develop iron ore mines in Canada. The agreement had expired on the last day of 2010. Tata Steel holds 27.3% stake in New Millennium.

Growing fear of rising oil prices

Curtains have been drawn on 2010 and a new year begins for the stock markets today. The year gone by was a decent one for investors, regardless of where one was invested into. Stocks rose, industrial commodities were up, and gold and silver also surged. As we stand at the start of 2011, the Indian economy seems in a better place than where it was at the end of last year.

But under these calm waters lie one tension that is taking a bigger shape day after day. And if this gets out of control as it did in the middle of 2007, the Indian economy and consumers can be in a rough spot.

We are talking about rising crude oil prices.

Global prices are already ruling at around US$ 90 per barrel. And there are more chances of the same rising from here, rather than falling. This is given that the US economy, which is the biggest guzzler of crude oil, has not seen an increase in demand as yet post the recession of last year. As such, when the demand from the US rises, and it will, global crude oil prices will rise.

The impact of rising oil prices could add to headache for Asian central bankers who are already fighting high inflation. Take the case of India. The RBI has already raised interest rates several times since the start of 2010. And this hasn't hurt the inflation demon a bit, given that the same remains above the RBI's comfort levels. Now, with oil companies asking for an upward revision in diesel prices, it would only add to the inflation fears.