Sensex falls below 20k

Sideways movement gave way to heavy profit booking during the closing stages of the day. As a consequence, the benchmark indices closed significantly in the red today. Important to note that the BSE Sensex also closed below the psychologically crucial mark of 20,000. It lost around 185 points (down 0.9%) whereas NSE Nifty lost around 65 points (down 1.1%) today. BSE Midcap and small cap indices on the other hand managed to carve out gains for themselves, closing higher by 0.2% respectively. The advance to decline ratio on the BSE stood at nearly 4 times with around 4 stocks declining for every one that gained in price.

Most Asian stocks closed strong today whereas Europe has also opened on a positive note. The rupee was trading at Rs 44.3 to the dollar at the time of writing.

FIIs appear to be considering a reshuffle of their portfolios a bit. This was evident from the fact that while India has seen some amount of declines in recent days, its Chinese counterparts have gone from strength to strength. For the record, Shanghai composite, the Chinese benchmark has gone up around 13% in the month of October and looks poised for more gains ahead. India meanwhile also seems to be bearing the brunt of its upcoming mother of all IPOs ie. Coal India. Longer term though, India's growth story remains as promising as ever.

TV broadcasting major Zee Entertainment closed strongly today. The optimism was perhaps triggered by news in a leading daily that the channel will launch 2-3 new niche channels with a focus on lifestyle segments like golf and food, by the end of the current fiscal. Infact, the company has plans to launch 6-7 new channels out of which about 2-3 would be niche. Also on the anvil is a kids channel. However, the same is likely to take some time. The company did not share any information with respect to the capex planned for the launch of new channels. It should be noted that the company has a network of around 32 channels currently with a strong offering in the regional language domain as well.

Bajaj Auto, the two-wheeler major announced its second quarter results today. Its net sales grew by 50% YoY, led by volumes growth of 46% YoY. The company sold over 1 m units during the quarter. Operating profits increased by 42% YoY on the back of a 1.4% YoY contraction in operating margins. This was on the back of higher costs of raw material and purchases. Net profits on the other hand, rose by 69% YoY on the back of a strong operating performance coupled with higher other income and an extraordinary loss during the corresponding quarter last year. On excluding this extraordinary loss, profits during the quarter rose by 52% YoY. Thus, while the topline growth was along expected lines, the fall in operating margins does point towards a bit of a caution going forward. The stock closed lower by 1% today.

Small and midcaps in favour today
01:30 pm

The Indian markets continued to trade in the neutral zone during the previous two hours of trade. Currently, stocks from the healthcare, auto and banking spaces are leading the pack of gainers, while those from the IT and metals spaces are leading the pack of losers. FMCG and power stocks are currently amongst the lowest gainers. The overall market sentiment, however, paints a different picture as the advance to decline ratio is poised at 1.8 to 1 on the overall BSE.

The BSE-Sensex and the NSE-Nifty are currently trading flat. On, the other hand, midcap and smallcap stocks are seeing some interest as the BSE-Midcap and BSE-Smallcap indices are up by about 1.1% each. The rupee is trading at 44.41 to the US dollar.

Stocks of capital goods companies are currently trading mixed with Triveni Engineering and Alstom Projects trading weak, while LMW and Suzlonare leading the pack of gainers. A leading business daily has reported that engineering and construction major L&T has received an order of Rs 15 bn from DB Power. As part of the project, the company will execute the balance of plant (BoP) work for DB Power's 2x600 MW thermal power plant in Chhattisgarh. This project is expected to be completed within a period of 31-months. As part of this project, L&T will design, engineer, supply, erect and commission the BOP equipment and systems on an engineering, procurement and construction (EPC) basis. This will be a positive for the company, as it would add to its order backlog. It may be noted that and end of the quarter ended September 2010, L&T had an order backlog of almost Rs 1.2 trillion. This is nearly 3.4 times its FY10 revenues.

Further, the company has been in the limelight today over who will take chairmanship in the company once Mr. A.M. Naik, L&T's current Chairman retires. It has been reported that he is scheduled to step down in two years. While these discussions have been ongoing for a while now, the recent induction of Mr. Ravi Uppal (who heads L&T Power) to the company's board (as a whole time director) are adding to the buzz of him taking over from Mr. Naik. What may actually happen remains to be seen.

Energy companies are trading up led by Gujarat State Petronet and BPCL. As per a leading financial daily, state run India Oil Corporation (IOC) will be coming out with a public issue even bigger than the Coal India Limited issue. The company is expected to start short listing merchant bankers next week to raise about Rs 190 bn. While half the proceeds will go to the government which will be offloading 10% of its stake in the company, the remaining money will go to the company (which will sell another 10% stake) for building new refineries. According to a government official, the issue will hit the market in January 2011. In may be noted that the government has to meet its disinvestment target of Rs 400 bn this fiscal. Post the issues of Coal India and Power Grid, the government would have mopped up about Rs 220 bn. With the issue of IOC, Hindustan Copper and Manganese Ore, the total proceeds would cross Rs 350 bn. Furthermore, with the SAIL issue of Rs 80 bn, the government would achieve its disinvestment target.

Biocon leads on deal with Pfizer
11:30 am

After starting today's session on a positive note Indian indices have moved marginally into the red. However, other key Asian markets are mainly trading positive with Hang Seng up 0.5%. Currently, heavyweights in the Sensex are trading mixed with stocks from the healthcare and auto space seeing investors' favour. However, IT stocks are trading in the negative.

Currently, the BSE-Sensex is trading down by around 3 points, while the NSE-Nifty is trading flat. Strong buying interest is being seen amongst the mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 1.3% and 1.1% respectively. The rupee is trading at 44.47 to the US dollar.

Pharma stocks are trading positive with Biocon leading the gains by a wide margin. IPCA Labs and Apollo Hospitals are also trading in the positive. Indian biotechnology major Biocon and global giant Pfizer have entered into a strategic agreement for the commercialisation of four of Biocon's insulin products. The products include biosimilar versions of insulin and insulin products such as Recombinant human insulin, Glargine, Aspart and Lispro.

Under the terms of the deal, Pfizer will make an upfront payment of US $200 m to Biocon. The biotech major will also be eligible to receive additional development and regulatory milestone payments of up to US $150 m. It will also receive payments linked to Pfizer's global sales of the four products. Pfizer will have exclusive rights to commercialisation globally, with certain exceptions. This is a positive for Biocon and will strengthen its biotech portfolio worldwide. The market for diabetic drugs and devices in 2010 is estimated at US $40 bn (insulin contributes 35% of the segment). By 2015, a number of insulin products are expected to lose patents, resulting in a huge opportunity in the global biosimilar market.

Telecom stocks are trading strong with MTNL and Tata Tele Maharashtra leading the gains. As per a leading news daily, RCOM plans to merge the domestic enterprise business with its global operations. Accordingly, the newly formed division will comprise of overseas cable network assets and domestic corporate business. The division will also include data centers. Later it may be converted to a subsidiary and sold to strategic and financial investors. Merging the two business units will ensure synergistic benefits to RCOM as a single team will handle all the services in India and abroad. Post the merger the newly formed business enterprise will account for 35% of RCOM's revenue. It may be noted that enterprise business is a high margin venture as companies shell out higher amounts for managed services. It is also an important source of revenue for telecom players which have been bleeding of late.

IT stocks lead markets lower
09:30 am

Led by selling in stocks from the IT and FMCG sectors, the Indian markets have opened today's session marginally in the red. Pharma and energy stocks are however trading strong currently. On the broader BSE, almost two stocks are up for every one that is trading in the negative.

The BSE Sensex and NSE Nifty are currently trading with losses of around 30 points (0.1%) and 5 points (0.1%) respectively. Midcap and smallcap stocks are however trading strong, as the BSE Midcap and BSE Smallcap indices are up by around 0.6% and 0.5% respectively. The rupee is trading at 44.48 to the US dollar.

Software stocks have opened the day on a weak note. Leading the pack of losers are stocks like HCL Tech, Infosys, and TCS. That the recovery for the Indian IT sector has started to take wings was seen from the latest quarterly result of Infosys a few days back. Yesterday, the results announced by the midsize IT firm NIIT Tech validated this fact. The company reported 11% QoQ growth in its net sales during the second quarter ended September 2010. For the first half (1HFY11), sales were up 39% YoY. The company's growth during the quarter was led by good performances across all its key business segments and geographies. The company's fresh order intake stood at US$ 60 m during the quarter, a 50% growth over the intake in 1QFY11. Based on segments, while growth in BFSI stood at 11% QoQ, sales from the Travel and Transportation segment grew by a stronger 15%, and those from Retail and Distribution grew by 11% QoQ.

Indian markets, like most of its peers in the developing world, have been at the forefront of receiving a huge liquidity boost provided by the central bankers in the west. Led by the US Federal reserve, these central banks have been releasing loads of cheap money into the global financial system. This money, in search for high returns, its finding its way into emerging market stocks, including India's. Indian stocks, for instance, have already received around US$ 23.5 bn in net FII inflows in the current year till date. And the momentum doesn't seem to be slowing down at all. While market participants here are happy to see these inflows coming in and taking stocks prices higher, we maintain our concerns regarding the short term nature of these inflows and the bubble like situation these are likely to create if things were to continue the way they are going as of now.

These balance sheets are worth a look

Central bankers have never had it easy. But the last three years have been particularly taxing. Coming in and moving out of economic stimuli, managing inflation and reviving growth. Each one of them has had its plate full. The latest reports on currency wars between economies have once again put them in the spotlight. It would thus be appropriate to evaluate how these entities have managed their operations in the past.

The central banks carry out the task of ensuring that their currencies do not hurt trades. At times even at the cost of economic stability. The central bank of China being a case in point. The central banks of developed economies in particular deserve kudos for doing all that it takes to pull the economies out of recession. The results are for all to see.

As seen in the adjacent chart, the balance sheets of the central banks in developed economies have seen a very rapid expansion in recent past. Until October 2008 most of the additional liquidity was balanced through asset sales. However, thereafter the liquidity seems to have been pumped in thoughtlessly. In case of the Fed and the ECB, the desire to aid economic revival has induced the central banks to nearly double balance sheet sizes. ECB, however, was a little quick to mend its ways after the sovereign default risks. But the Fed is yet to realize its mistake.

Source: RBI

Back here in India, we have had more than a sensible central bank. The economic slowdown in India was relatively less malignant. Being less export dependant, impact of global economic woes was felt only in selective cases. Banks' financials were far more stable and did not require government bailouts. Strict regulation of currency movements helped prevent unforeseen leverage risks. And to top it all, negligible presence of risky securities along with prohibitive provisioning kept the risks at bay.

The result is that the RBI's balance sheet expanded not more than 40% from the base of August 2007 any time in last 36 months. On the contrary the central bank sucked up significant liquidity in recent months. In its effort to protect growth, the central bank has not taken unmindful decisions. And even this time, when exporters are looking for the central bank to bail them out of the currency trouble, the RBI is unwilling to relent in a hurry.

The balance sheets of central banks have not been considered as key indicators of economic prospects in the past. Probably it is time that they are taken more seriously.