Profit booking leads to a weak closing

Profit booking took its toll, with the Sensex being amongst the top losers in Asia. FMCG and oil and gas stocks rallied. But, banking and realty stocks saw significant selling pressure. The BSE-Sensex closed the session lower by around 62 points (down 0.3%), whereas NSE-Nifty saw an 11 points drop (down 0.2%). The BSE BSE Midcap Index was down 0.3%, while the BSE Small cap index remained flat with a negative bias.

Most of the Asian indices closed positive today. China and Japan saw strong gains post their Christmas break. Europe is currently trading positive. The rupee was trading at Rs 44.95 to the dollar at the time of writing.

With economies in the developed world still facing a slow recovery, FDI inflows to India are also facing a slowdown. They fell by around 7% MoM (month on month) to US$ 1.6 bn in November, 2010, falling for the seventh consecutive month. Overall, for the past 8 months FDI inflows have declined by 27%, over the previous year to US$ 14 bn. But, the government is now trying to increase the attractiveness of India as a destination for FDI. It is considering liberalizing FDI in defence and multi-brand retail.

Soon after it announced a formal split of its Indian Joint Venture, Japanese auto major Honda Motor Co. has already formed plans to make strong inroads into the Indian 2-wheeler market. This will probably affect Hero Honda's current stronghold on the market.

Honda plans to increase sales by three times in India to 5 m units annually in the next five years. It plans to boost capacity from 1.6 m units annually currently, under its subsidiary Honda Motorcycle and Scooter India. It plans to open a second factory unit in Rajasthan by the second half of 2011, and a third plant in Andhra Pradesh thereafter. Honda's overall capital investment for increasing production in India is estimated at Rs 10 bn. It also plans on opening new sales locations in regional cities and rural areas. A strong distribution channel was one of Hero Honda's major strong points. Hero Honda closed down for the day.

India has an ambitious plan for adding 100,000 MW of power capacity in its 12th year plan. Environmental concerns have however held up this process. Delays in getting these environmental clearances have once again postponed the invitation of bids for the 4,000 MW ultra mega power project (UMPP) at Sarguja in Chhattisgarh for the fourth time. PFC, the nodal agency for UMPPs in the country had initially invited bids for the same in March, 2010. The Ministry of Environment and Forests (MOEF) is yet to approve coal mining from the blocks allotted for the project. These is still no clarity on the go and no-go areas for coal mining. A total of 203 coal blocks, with reserves of over 600 m tonnes, are believed to be stuck for lack of environment clearances. Blocks in thick forests, wildlife parks and sanctuaries fall under the 'no-go area'. These are to be rejected immediately as they will harm wild-life. 40% of India's coal reserves are estimated to be under dense forest cover. Without clarity on the same, India's power dreams may be just that.

Back in the green
01:30 pm

Strong buying activity during the previous hour of trade led the Indian markets to once again rise above the dotted line. Currently, stocks from the FMCG, oil & gas and healthcare spaces are leading the pack of gainers, while those from the banking and auto spaces are the top underperformers.

The BSE-Sensex is trading higher by about 25 points (up 0.1%), while NSE-Nifty is up by about 10 points (up 0.1%). The BSE Midcap is trading higher by 0.2%, while BSE Small cap index is trading 0.4% above yesterday’s closing. The rupee is trading at 44.88 to the US dollar.

Banking stocks are mainly trading in the red with Allahabad Bank, Indian Bank, ICICI Bank and IndusInd Bank leading the losses. However, Kotak Bank and Dhanlaxmi Bank are trading in the positive territory. Public sector lender SBI will set up a branch in Doha during the first quarter of 2011. As per a report, the bank had sought authorisation from the Qatar Financial Centre Regulatory Authority (QFCRA) to open a wholesale banking unit in Qatar in May 2010. Given the growing opportunities in Qatar and the region, the SBI has been planning to enhance its presence and business profile in the country and the Gulf region in a big way. The Doha office would not only focus on enhancing its India-related business, but also take care of global needs of the bank's existing as well as prospective customers. The services would include collecting large commercial deposits and making big loans to high net worth corporates and individuals, offering bank guarantees, counter-guarantees, Lines of Credit among others. Its operation would contribute substantially to the bank's global balance sheet.

The bank, which has set up an overseas banking unit at its headquarters in Mumbai to assess and explore its expansion activities abroad, is keen on increasing the bank's footprint globally. The SBI, which has 152 branches overseas, aims to increase the number of foreign offices to over 1,000 in the next couple of years. It also plans to open branch office in Jeddah (Saudi Arabia) soon.

Auto stocks are currently trading weak led by Bajaj Auto, Escorts, Tata Motors and Maruti Suzuki. Weakness in Maruti is presumably on the back of the company announcing a 13% decline in sales volumes on a month on month basis i.e. December 2010 over November 2010. During the month of December, the company sold 99,225 units, while volumes during the preceding month stood at over 112,000 units. However, as compared to last year, sales volumes are higher by 17% YoY. Exports seem to have disappointed this month as the company reported a 29% YoY decline in export volumes. Domestic volumes (about 90% of total volumes), on the other hand, grew by 26% YoY. Considering that the company has reported a 27% YoY increase in volumes during the year till date (including December 2010), investors seem to be disappointed with the company's sales volumes for the month of December. However, this may not be the case going forward as it is believed that the overall sales volumes were affected due to plant shutdowns.

Smallcaps in the limelight.
11:30 am

Indian indices are trading weak on profit booking in heavy weights over the previous two hours of trade. Stocks from banking and auto space are trading weak while stocks from FMCG and oil & gas space are trading firm.

The BSE-Sensex is down by 74 points while NSE-Nifty is trading 25 points below the dotted line. BSE Midcap is trading flat while BSE Small cap index is trading 0.2% above yesterday’s closing. The rupee is trading at 44.82 to the US dollar.

Consumer Goods stocks are trading firm led by HUL and Marico. As per a leading financial daily, Dabur has completed the acquisition of the US based personal care firm, Namaste Group for US$ 100 m (approximately Rs 4.5 bn) in an all cash deal. It may be recalled that Dabur had announced in November its acquisition of Namaste Laboratories LLC and its three subsidiary companies -- Hair Rejuvenation & Revitalisation Nigeria Limited, Healing Hair Laboratories International, LLC, and Urban Laboratories International, LLC along with its South African arm. The acquisition marks Dabur's entry into the fast-growing US$ 1.5 bn ethnic hair care products market in the US, Europe and Africa. This acquisition is expected to help the company consolidate its position in the African markets. At the time of writing this, Dabur India is trading up by 1.84%.

Steel stocks are trading mixed with Tata Sponge and Bhushan Steel leading the gains. However, Hindustan Zinc and Adhunik Metaliks are trading weak. Amidst rising input cost, major steel players like SAIL, JSW Steel and Uttam Galva have decided to hike steel prices in the range of 4-5%. Increase in coking coal and iron ore prices have led to a surge in steel prices. Prices of coking coal have increased by 8% to US $225 per ton during the quarter and are further expected to increase to US$250 per ton in the next few quarters. Following a hike in steel prices, cars and consumer durables are set to get dearer this year. However, considering there is strong demand for both cars and white goods in India, the price rise can be passed on to the customers. Majority of the auto makers have already geared up to increase prices by 1-3% across models. In fact some like Tata Motors have already done so. Even the consumer goods manufacturers are considering a price rise in ACs, refrigerators, washing machines and micro wave ovens, as steel is the key ingredient used to make cabinets, frames and compressors.

India up on strong global cues
09:30 am

Asian markets have opened on a positive note today. Benchmark indices of China (up 0.6%) and Japan (up 1.4%) are leading the gainers' pack. The US markets had a good opening to 2011 yesterday, and closed with gains of 0.8%, at their fresh two-year highs. As for the Indian markets, these have also opened in the positive today. Metal and realty stocks are witnessing buying interest currently. Auto and banking stocks are however trading with some losses.

The BSE-Sensex is trading higher by around 70 points (0.3%), while the NSE-Nifty is up about 20 points (0.3%). Mid and small cap stocks are also trading with gains, with the BSE Midcap and BSE Small cap indices up by 0.6% apiece. The rupee is trading at 44.70 to the US dollar.

The inflation demon is just not showing any signs of retreat. And now it's the chance of higher borrowing costs to spoil the show for consumers. As per a leading business daily, financing a vehicle purchase is soon going to get expensive. This is given that financiers (banks) are looking set to raise interest rates of vehicle loans. Automobile prices in India are already expected to rise this month as companies expect to pass on the input cost hike to buyers. Now higher interest rates will act as a double whammy. It won't be surprising then that India's car sales numbers, which grew by a robust 25-30% during December 2010, come off sharply in January 2011. As per reports, while banks have not raised interest rates per se, they are pulling back their discounts thereby effectively increasing the costs for the borrowers by around 0.25% to 1%. Anyways, auto stocks have opened today on a mixed note. While gains are seen in Eicher Motor and Ashok Leyland, selling pressure marks trading in M&M and Hero Honda.

Energy stocks are trading with gains currently. Gujarat Gas and Castrol are leading the gainers' pack. As per reports, India's largest oil & gas exploration and production company ONGC has signed a deal with gas marketing major GAIL. As per the agreement, GAIL will get the first right on all gas that ONGC will produce from any of its fields in future. But if GAIL is unable to get a good price (as per ONGC's requirements) within a 30 day period, the latter will take back the marketing rights. This agreement is valid for three years, and is extendable based on the mutual agreement of the two companies. This comes as a major boost for GAIL in growing its gas trading volumes. But the issue here is that it will all depend on the level of output from ONGC's fields. And given that the output from its old fields is on a decline and new sources are hard to come by, the actual benefit for GAIL will be seen only as time progresses.

Are your stocks covering inflation risk?

The desire to buy stocks stems from the need for higher returns. But in the quest for higher returns, it is easy for most investors to sidestep objectivity. That is whether or not the returns expected are commensurate with the risks. Stocks feature very high on the risk parameter amongst the investing options that a typical investor has. But so should be the 'real' returns. Real returns here refer to the return on the stock after adjusting for inflation.

At times as these when inflation is a major worry, it is the minimal risk that stocks should cover. Simply put, the average annual returns from the stocks should comfortably exceed inflation at the consumer level. However, not all is achieved by measuring the inflation risk. The impact of price rise on the company's earnings also needs to be factored in adequately. Only then can one arrive at the correct risk return scenario.

Nevertheless, investors often mistake high return stocks to be sacred. That is the biggest gainers in their portfolio tend to remain despite offering very little upside in the medium term. For investors fail to check their inflation covering potential. The fact that the stock is too over priced to deliver returns higher than the inflation rate fails their notice. And here their either end up losing money with correction in the stock price. Or keeping their funds invested earning negative real returns.

Thus at times as these when even the risk free rates are competing with stock returns, it helps to keep a closer eye on both. It would probably be advisable to at times choose the risk free return (on FDs etc) instead of staying invested in sacred stock.