RBI policy boosts bank stocks

Indian equity markets began the day's proceedings on a cautious note. But post the monetary policy of the RBI, buying activity across index heavyweights intensified causing the indices to scale higher. This momentum was maintained in the final trading hour as well and the indices closed well above the dotted line. While the BSE-Sensex today closed higher by 359 points, the NSE-Nifty closed higher by 120 points. The BSE Small Cap and the BSE Mid Cap also did well and gained around 1% each. Gains were largely seen in banking, metals and auto stocks.

As regards global markets, Asian indices closed mixed today while most European indices have opened in the green. The rupee was trading at Rs 61.39 to the dollar at the time of writing.

The Reserve Bank of India (RBI) hiked the repo rate yet again by 25 bps to 7.75% in its second quarter review of monetary policy for FY14. The repo rate is the rate at which the central bank lends money to commercial banks. Further, it left the cash reserve ratio (CRR) unchanged at 4%.

The hike is in line with the central bank's hawkish stance given high levels of both wholesale and consumer price inflation. But few things did bring respite. The initial signs of recovery and stability have been witnessed in the foreign exchange market. Steps towards curtailing current account deficit are gradually yielding results. This enabled RBI to roll back the tightening measures and enhance liquidity into the system. Hence, the MSF rate was cut down to 8.75%. With these measures, the MSF rate and the bank rate now stand recalibrated to 100 bps above the repo rate.

Most pharma stocks closed firm today with the key gainers being Biocon, Sun Pharma and Cipla. As per a leading business daily, Sun Pharma appears to have addressed the issues raised by the US FDA with respect to Caraco's manufacturing facility. It must be noted that trouble brewed at Caraco's Michigan facility in 2009 when the US FDA declared that it flouted good manufacturing practices (GMP) norms. Accordingly, in that year, Caraco entered into a consent decree with the regulator. After corrective measures were put in place, in 2012, the US FDA notified that Caraco could resume manufacturing operations at the plant. Some minor observations were made by the FDA since then. But Caraco appears to have addressed the same. This is a positive for Sun Pharma whose US revenues came under pressure when Caraco first courted trouble with the US FDA.

The US regulator in recent times has become quite stringent with respect to GMP norms followed by generic companies. Most of the domestic pharma companies have come under the US FDA scanner. While some have been able to resolve their issues speedily, others such as Ranbaxy have faced much more serious issues. What is more, the regulator has also begun to conduct surprise checks on plants. This means that domestic pharma companies will have to step up efforts to make sure their plants are compliant so that business does not get hampered going forward.

Indian share markets soar higher
01:30 pm

Backed by sustained buying interest, Indian share markets continued to climb higher in the post-noon trading session. All the sectoral indices are trading in the green with banking, metal and realty stocks being the biggest gainers.

BSE-Sensex is up 203 points and NSE-Nifty is trading 103 points up. BSE Mid Cap is trading up 0.9% and BSE Small Cap index is trading up 0.2%. The rupee is trading at 61.4 to the US dollar.

Majority of the FMCG stocks are trading in the green with Jyothy Consumer and Hindustan Unilever (HUL) being the biggest gainers.Gillette India and Lakshmi Energy are among the few stocks trading in the red. Dabur declared its second quarter results for FY14. The company posted a 14.8% YoY growth in revenues during the quarter on a strong volume growth of 11%. The domestic FMCG business grew by 14.4% YoY whereas international business grew by a faster 26% YoY during the quarter. Barring hair care, all the product segments in the consumer care business clocked double-digit growth. The company managed to expand operating margin by 1.7% to 18.8% aided by easing input costs and other expenses (both as a proportion of sales). Only the consumer care business reported incremental EBIT margin with the EBIT margin of the food business contracting by 2.6% YoY. Net profit grew by 23.4% YoY during the quarter. The company has declared an interim dividend of Rs 0.75 per equity share of face value Re. 1 each for FY14. Dabur's stock is currently trading up by 0.8%.

Most of the Indian pharma company stocks are trading in green with Dishman pharma and Biocon Ltd leading the pack of gainers. As per the financial daily, India's Department for Pharmaceuticals (DoP) has rejected Dr Reddy's petition against ceiling prices fixed by National Pharmaceutical Pricing Authority (NPPA. NPPA has fixed ceiling prices for various formulations that has impacted the revenues of the Indian and MNC pharma companies. However, various pharma companies have questioned regulators regarding the prices fixed on various drugs. Even Dr Reddy's had filed similar petition, where it had challenged the price fixed for omeprazole 20mg capsules under new pricing policy. However, the court rejected Dr Reddy's plea. Reportedly, there are more than 120 brands of omeprazole 20 mg available in the Indian market. The verdict is also negative for the companies who are selling the drug having omeprazole 20 mg. Various Indian pharma companies such as Cadila Healthcare, Alembic Pharmaceuticals, Cipla, Ranbaxy and others are selling this drug. Even various MNC pharma companies such as Novartis Abbott are selling these drugs. Further, Cipla and Ranbaxy have around seven brands for this formulation.

RBI Policy lifts Banks
11:30 am

After opening in the red, the Indian Indices are trading positive in the morning session after the mid-year policy announced by the RBI. The buying interest is the highest in Banking and Auto stocks.

The BSE Sensex is up 120 points and the NSE-Nifty is trading up 40 points. The BSE Mid Cap index is trading up 0.5% and the BSE Small Cap index is trading flat. The Rupee is trading at 61.52 to the US Dollar.

Information Technology (IT) stocks are trading mixed today. Wipro and HCL Tech are among the stocks leading the gainers while eClerx and MindTree are leading the losers. According to the Wall Street Journal, India's leading software firm Infosys is likely to be penalized with a record fine of US$ 35 m over an immigration dispute. The issue pertains to the alleged misuse of business visas (B1 visas) by Infosys. These visas are issued only for the purpose of short term business trips and do not allow employees from taking up employment during their stay in the US. The US Justice Department is will decide if Infosys had sent software engineers on visitor visas, rather than work visas, for onsite work at big corporate clients across the US. In a regulatory filing in June 2011, the company had admitted that any action by the US government against it in this regard would seriously affect its business prospects in the US which is its biggest market. It must be noted that Infosys, in its latest quarterly result (2QFY14), had already set aside an amount of this size as a provision for 'visa related matters' in anticipation of this particular judgment. Infosys is trading flat today.

Engineering stocks are trading mixed today. Manugraph India and KSB Pumps are leading the gainers. Suzlon Energy and Everest Kanto Cylinder are leading the losers. Blue Star is trading flat today. Blue star has delivered subdued performance for 2QFY14 on sales front. The company's revenues grew by 1.3% YoY to Rs 5.8 bn. According to the company; a slow business environment has led to poor revenue booking. The operating profit for the company was up by 12.2% YoY; and EBITDA margin improved by about 0.4% YoY to 3.9%. Improved operating performance was the result of widening distribution reach as well as localization of input costs. Net profit for the company was up by 3.4% YoY. As far as its business segments are concerned, Electromechanical and Packaged air conditioning systems and Cooling Products reported flat growth in sales. Electronics and Industrial Systems which contributes just 7% to the total sales reported 24.7% YoY growth in sales. Also, operating performance of the Electromechanical and Packaged air conditioning systems was disappointing as EBIT declined by about 24.3% YoY.

Indian share markets open weak
09:30 am

Asian stock markets have opened the day on a weak note with China (down 1.1%) and Indonesia (down 0.8%) leading the losses. The Indian share market indices have opened the day on a negative note. Stocks in the capital goods space are leading the losses. However, consumer durables stocks are trading firm.

The Sensex today is down by around 21 points (0.1%), while the NSE-Nifty is down by around 4 points (0.1%). Mid and small cap stocks are also trading in the red with the BSE Mid Cap and BSE Small Cap indices down by around 0.3% and 0.1% respectively. The rupee is currently trading at Rs 61.52 to the US dollar.

Auto stocks have opened the day on a mixed note with Maruti Suzuki and Bajaj Auto leading the gains. However, Ashok Leyland and Tube Investments are trading weak. India's leading passenger vehicle maker Maruti Suzuki has announced its results for the second quarter of the financial year 2013-14 (2QFY14). During the quarter, net sales stood at Rs 104,680.6 m, higher by 26% on a year-on-year (YoY) basis. The growth in the topline was driven by robust volumes. Total vehicles sold stood at 275,586 units during the quarter, higher by 19.6% YoY. While sales of domestic vehicles (87.7% of total vehicles sold) increased by 15.1% YoY to 241,562 units, export sales increased by 66.6% YoY to 34,024 (12.3% of total vehicles sold) units. Operating profits stood at Rs 13,214.3 m, reporting a sharp rise of 159.8% YoY. Operating profit margins improved from 5.4% in 2QFY13 to 11.3% in 2QFY14. Other income dipped by 35.4% YoY to Rs 1,010.2 m during the quarter. Depreciation and interest expenses increased by 43.8% YoY and 14.2% YoY, respectively. At the bottomline level, net profits increased by 194.7% YoY to Rs 6,702.3 m. Net profit margins improved from 2.4% in 2QFY13 to 5.7% in 2QFY14. It must be noted that the profits in the corresponding quarter of the previous financial year were significantly subdued on account of a month-long industrial lockout at the company's Manesar plant.

Power stocks have also opened the day on a mixed note with Power Trading Corporation (PTC), National Thermal Power Corporation (NTPC) and Tata Power leading the gains. However, Indiabulls Power, GVK Power & Infra and Torrent Power are leading the losses. As per a leading financial daily, Tata Power is expanding its renewable energy portfolio. As a part of this strategy, the company is developing wind power projects in India with a total generation capacity of over 160 megawatt (MW). Currently, the company has a total installed wind energy generation capacity of 398 MW with projects across Maharashtra, Rajasthan, Gujarat, Tamil Nadu and Karnataka. Tata Power's electricity generation from wind projects increased by 43% YoY to 813 million units during the financial year ended March 2013 (FY13). The strong growth in electricity generation was on account of Agaswadi wind farms which had an increased generation of 85 million units and Poolavadi with 140 million units. Apart from wind energy, the company also has a footprint in solar power generation and is also implementing hydro power projects.

The company has a total installed power generation capacity of 8,500 MW and aims to develop 20-25% of the total generation capacity from clean energy sources.

Does this signify end of India story?

Diwali is a festival of lights and colors. Traditionally the festive season is when most people concentrate their purchases. In fact, 30-40% of the annual sales for most retailers and consumer electronics manufacturers happen in this period. However, this time around the situation appears to be grim. Sales figures of top retail chains are faltering resulting in huge inventory pile ups. In fact, in some segments growth has even halved compared to the last year!

So, why is the urban middle class reluctant to spend this time around? Rising food inflation and interest rates has lowered the disposable income in the hands of consumers. And this is precisely the reason for slowdown in discretionary spending. Even freebies and discounts are unable to lure customers to shop.

It is important to note that a large part of the India growth story has been based on the consumption theme. However, considering that consumers have become more circumspect in spending on discretionary purchases the growth story has again come under the scanner. It should be noted that consumption is an important component of GDP growth. Hence, if consumption suffers, so will growth. Now we all know that India's FY 13 growth of 5% was decade low. With slowing consumption one would not be surprised if growth figure again comes under pressure in the coming years.

So, if the growth story has to be revived, consumption should pick up. And in order to boost consumption, disposable income should be increase. This happens when inflation is under check and there are strong employment opportunities. But unfortunately India is struggling on both counts.

The ugly truth is that inflation, especially food inflation, is hurting the common man. Also, with most businesses slowing down due to non-conducive operating environment like high interest rates and red tapism, employment opportunities have narrowed as well. All these factors have made consumers circumspect over their spending habits.

While cut in discretionary spend is a natural phenomenon during slowdown. However if it persists resulting in delayed consumption, India story is likely to suffer in the long term.